Pca International, Inc. Business Information, Profile, and History

Company Perspectives:

In portrait photography, PCA International has staked out a position as a provider of high-quality family portraits at affordable prices. That strategy has led to successful partnerships with major retailers, notably Wal-Mart Stores, Inc. Industry changes and digital technology have enabled us to expand our retail portrait business and explore new and exciting venues for photography.

History of Pca International, Inc.

PCA International, Inc. operates photography studios in roughly 2,500 retail stores, primarily those owned by Wal-Mart Stores, Inc. PCA takes portraits, processing its prints at a 121,000-square-foot laboratory and customer care center in Matthews, North Carolina. The company targets children, schools, the military, and churches. PCA also operates stand-alone retail stores operating under the name Go Portraits Digital Destination, which sell digital photography equipment and portraits and prints on both film and CD-ROM.

Origins

In the early 1960s, PCA's founder, Bud Davis, designed a camera that helped launch a quarter-billion-dollars-in-sales company. Davis's so-called "Framatic" camera greatly increased the number of exposures a photographer could take without changing a roll of film, yielding cost advantages that his company would exploit. Davis incorporated his company, originally named Photo Corporation of America, in Charlotte in May 1967. The company began by offering photographic portrait services in a single S.S. Kresge store, where 5x7-inch color portraits were sold for 38 cents. The company employed a small group of itinerant photographers who set up shop inside a store for a week or so before moving on to a different location, with the number of the company's traveling photographers increasing as the number of its retail accounts increased. Although PCA allied itself with numerous discount chains and department stores during its formative years, no business tie was more important than the company's relationship with the discount chain Kmart. PCA operated its first temporary studio in a Kmart store in Atlanta, Georgia, in 1968, taking portraits of 1,200 children within a five-day period. The popularity of the service led to other temporary studios in Kmart stores and prompted other chains to sign up with PCA, fueling the company's early growth.

PCA expanded rapidly during the 1970s. The company spread its presence geographically at a robust pace, dispatching its roving photographers throughout the country to take portraits of children. Annual sales eclipsed $10 million by 1972. By 1975, the company's revenue had swelled to $53 million. In December 1976, the company completed an initial public offering (IPO) of stock and began trading on the NASDAQ, using the proceeds from the IPO to finance its expansion. In 1978, the company opened a processing center in Matthews, North Carolina, the same year it posted a record $6 million in profit. By the end of the decade, the company operated more than 8,000 temporary studios, pushing sales past the $100-million mark, but the years of dramatic growth soon ended. PCA maintained a presence throughout the United States and had branched out into Canada and Mexico, as well as into Europe and Japan, but it began to suffer from the extent of its expansion. Evidence of the problems stemming from over-expansion began to become apparent at the end of the 1979, as PCA concluded a decade of dramatic growth.

Problems in the 1980s

The halcyon years of the 1970s gave way to the gradual deterioration of PCA's financial health during the 1980s. The company's forays abroad met with a lukewarm reception from retailers and a diversification into family portraits in the United States failed. It soon became apparent that the company's problems were rooted in its own success. In a September 1997 interview with Business North Carolina, a former PCA chief financial officer explained the situation. "PCA grew by just expanding the market," he said, "but after you grow so far geographically, you've covered the market, and then you've saturated it." From a high of $6 million in 1978, profits began a downward spiral, falling to $3.5 million the following year. In 1982, when the company was forced to lay off 110 employees, it posted a profit of $1.2 million. In 1986, the company lost money, recording a deficit of nearly $5 million. Shareholders, once gleeful about their investment in the company's robust growth, grew disgruntled.

Waning profitability and shareholder dissatisfaction led to a management change. In 1987, the company hired John Grosso as its new president and chief executive officer. A graduate of George Washington University, Grosso spent ten years working for Polaroid Corp., eventually serving as the company's director of marketing. After leaving Polaroid in 1981, Grosso joined Atlanta, Georgia-based Nimslo International Ltd., which owned a portrait business that operated out of Sears, Roebuck & Co. stores in the northeastern United States. When Grosso was hired by PCA's board of directors in 1987, the company's escalating costs had saddled it with debt, as had the ill-fated expansion overseas. Grosso restructured PCA's debt and reduced costs once he took the helm, which began to relieve the company's financial predicament. Grosso retreated from PCA's position overseas, and, domestically, he decided to winnow the company's focus as well. By the late 1980s, PCA had allied itself with more than 100 retail chains, but Grosso felt the company's best interests would be served by focusing on one client. He severed ties with many of PCA's retail accounts and focused on making Kmart the company's primary client. The changes worked, enabling PCA to post a $2.5 million profit in 1989, a year that saw the company generate $123.7 million in sales. The revenue total was substantially less than the nearly $180 million in sales produced at the beginning of the decade, but the changes directed by Grosso had restored profitability, a paramount concern of any commercial enterprise.

As PCA entered the 1990s, Grosso's salubrious touch led to greater and greater gains for the company. Aping the practices of his closest rivals, Grosso started converting to permanent studios within Kmart stores, replacing his network of roving photographers with fixed locations attended by ever-present photographers and salespeople. The quick conversion to permanent studios--PCA had 461 fixed locations in Kmart stores by the end of 1990--produced positive results. By 1992, profits swelled to more than $7 million, exhibiting the same luster of the late 1980s before the strains of too-rapid expansion manifested themselves. The greatest contribution to PCA's financial well-being occurred in 1992 as well, with an innovation that helped the company decimate one of its rivals and marked the highlight of the Grosso era.

Innovation and a Merger in the 1990s

As part of its operations, PCA employed a 25-member research and development team. In 1992, the group developed a digital-proofing system that greatly reduced the costs of unwanted prints and sped up delivery to customers. Between 1992 and 1994, PCA invested $64 million into incorporating its digital system into its network of 1,350 studios located in Kmart stores. The transition in technology delivered profound results, proving to be the death knell of a competitor with incestuous ties to the Matthews-based company. Buoyed by the introduction of a digital-proofing system, the operating profit of PCA's studios nearly tripled between 1991 and 1995, the leap arising from a decline in costs and a surge in sales. For American Studios, a company founded by three former PCA employees, the success of the digital-proofing system proved devastating.

In 1970, when PCA was just beginning to expand rapidly, three new employees arrived, Randy Bates, Kent Smith, and Norman Swenson, Jr. Bates and Swenson worked as salesmen, while Smith traveled the country as one of PCA's roving photographers. The trio eventually grew dissatisfied at PCA and, in 1982, with a $50,000 Small Business Administration loan, founded American Studios. Patterned after PCA, American Studios flourished during the 1980s, aided greatly by its affiliation with Bentonville, Arkansas-based Wal-Mart Stores, Inc., Smith's account while at PCA. At the time, PCA was reeling, which prompted Wal-Mart to give the new start-up a chance to distinguish itself at 19 stores. Within five years, American Studios was operating in more than 500 Wal-Mart stores, its resounding success in sharp contrast to PCA's beleaguered condition at the time.

After Grosso implemented the changes that gave PCA renewed vitality for the 1990s, he set his sights on beating back the threat posed by American Studios. The introduction of the digital-proofing system in 1992 served as Grosso's weapon, delivering a blow American Studios was unable to counter. In a September 1997 interview with Business North Carolina, an analyst explained what happened. "Obviously," he said, "American Studios had the premier retailer, but they didn't have the technology. They made a decision, initially, to wait it out, let technology prices drop. That didn't work. By then, they started having some difficulties. Their later stores weren't matching the success of earlier stores. PCA, with good technology, had shot ahead."

After American Studios began to falter, Grosso was able to pursue a prize he coveted. American Studios lost nearly $6 million in 1995, igniting shareholder furor similar to the anger expressed by PCA shareholders a decade earlier. Grosso approached American Studios in November 1996, offering to buy the company and thereby secure its enviable association with Wal-Mart. Negotiations ensued, leading to the completion of the deal in February 1997, when PCA acquired American Studios for $66 million. The merger gave PCA 2,200 Wal-Mart locations, 850 of which operated as permanent studios. In the wake of the transaction, PCA began to close its Kmart locations, shuttering more than 400 of its 1,350 outlets during the first six months of 1997 and ending the year as a $240 million-in-sales company.

The next significant event in PCA's history occurred a year after the American Studios acquisition. In April 1998, PCA's board of directors agreed to a buyout led by a New York-based investment firm named Jupiter Partners II and a group of PCA managers that included Grosso. The $276 million buyout returned PCA to private ownership, ending the company's 22-year-long status as a publicly traded concern.

After the buyout was completed, Grosso's 11-year tenure as PCA's chief executive officer ended. The company's new owners hired Barry Feld in August 1999 as PCA's new president and chief executive officer. A Baltimore native, Feld was a graduate of Essex College in 1976 who spent ten years as an acquisition and turnaround specialist for acquired optical retail companies for Pearle Health Services. After leaving Pearle in 1987, Feld helped build a chain of retail eye-care stores in California that operated under the name Frame-n-Lens Optical, Inc. In a June 8, 2001 interview with The Business Journal Serving Charlotte and Metropolitan Area, Feld described his arrival at PCA. "It was a legacy business that had to be reinvented," he stated. "I was brought in by a capital group to revamp it and look for ways to transform it into something more appropriate for the future."

Under Feld's stewardship, PCA began to diversify it product offerings. The company started adding portrait work for schools, churches, and the military. The most significant addition to PCA's business scope was the company's expansion into stand-alone retail sales, a move that for the first time took the company out of the shelter of another retailer. In 2001, PCA opened its first prototype outlet at a mall in North Carolina, a store named Go Portraits Digital Destination. Inside the store, the company sold digital photography equipment and portraits and prints on both film and CD-ROM.

As PCA prepared for the future, the company expected to greatly expand its stand-alone retail business. Feld was excited about Go Portraits Digital Destination's potential, envisioning the opening of hundreds of new stores each year. If successful, the addition of the stand-alone stores promised to add to PCA's already considerable strength. The company served more than five million customers nationwide through roughly 2,500 retail locations in the United States, Canada, and Mexico, producing more than 100 million prints annually. In the years ahead, further expansion was expected, as PCA promised to build on its leadership position in the portrait business.

Principal Subsidiaries: Wal-Mart Portrait Studio.

Principal Competitors: CPI Corporation; Lifetouch Inc.; Olan Mills, Inc.

Chronology

• Key Dates:
• 1967: Photo Corporation of America (PCA) is founded.
• 1976: PCA completes its initial public offering of stock.
• 1987: John Grosso is hired as PCA's chief executive officer.
• 1992: PCA introduces a digital-proofing system.
• 1997: PCA acquires American Studios.
• 1998: PCA is taken private through a buyout led by Jupiter Partners II.
• 2001: PCA opens its first stand-alone retail store.