How the Digital Shift Checked Catalina Into Chapter 11

Catalina Marketing was a pioneer of point-of-sale promotion and data-driven marketing whose cash-register coupon network at one time included more than 30,000 U.S. grocery stores and drugstores. But it was unprepared for the consumer shift to digital alternatives that upended its business model, along with the subsequent reallocation of marketing budgets from its retail and CPG partners.

These factors were key developments leading to Catalina’s recent Chapter 11 bankruptcy, according to a declaration filed in U.S. Bankruptcy Court in Delaware by Robert A. Del Genio, a senior managing director for FTI Consulting. Catalina engaged FTI earlier this year as it sought to restructure debt and ensure it could invest to reinvent its business for a digitally influenced world; those discussions led to Catalina filing a “prepackaged” Chapter 11 on Dec. 12.

Catalina’s plan contemplates reducing debts by $1.6 billion by turning its lenders into its new owners; the plan has the support of more than 90% of its first lien holders and more than 75% of its second lien holders. The former group has committed $125 million in new debtor-in-possession financing and a $40 million exit facility. The company is seeking an expeditious trip through the process with an eye on plan confirmation by Jan. 30, in part to head off any additional retail defections. Del Genio said Catalina’s store base has declined by 7% since last December, although it maintains agreements with 61 retailer partners representing 24,000 stores, or approximately 60% of the all U.S. grocery stores and drugstores.

“Any market perception that Catalina will not be able to sustain itself through the bankruptcy process may result in the loss of key customers and business partners, especially considering the growing competitive market,” Del Genio said.

Digital Shift Flips Couponing Model

Catalina Marketing was founded in 1983, when point-of-sale scanner technology had swept the retail industry. It grew behind collecting consumer purchase data through networked servers and printers in stores, then providing targeted checkout coupons that drove sales more efficiently than traditional retail promotional vehicles. Its offers were generated on analysis of the combination of items purchased during each shopping trip, along with the date, time and location of the purchase to make accurate predictions of future purchases.

“Catalina was ‘big data’ before the rest of the world had recognized the value of information as a resource in driving consumer behavior,” Del Genio said.

But as consumers embraced digital shopping and technology allowing for digital couponing, retailers and CPGs followed suit and Catalina did not adequately capitalize on the shift, Del Genio said, citing limitations of existing software and hardware platforms and a decrease in the number of retailers employing the system.

“Retailers and CPGs have increasingly focused on digital promotions, with their wide reach and relatively low cost per impression, disrupting Catalina’s traditional business model,” Del Genio said. After acquiring the digital couponer Cellfire in 2014, which provided Catalina the ability for consumers to load coupons directly to retailer loyalty cards, retailers have increasingly turned to coupon “aggregators” that consumers search; in effect, it turned a service that Catalina used to be paid to execute into something it had to pay to participate in.

“As a consequence of the rise of these promotional delivery channels, rather than generating revenue through the delivery of digital coupons, when executing digital campaigns for customers, Catalina must typically pay a fee to such aggregator sites to have its digital promotions available to consumers,” Del Genio said.

Joint Venture With Nielsen Could End

Catalina also hopes to use Chapter 11 to amend terms of a joint venture with Nielsen that has since become a financial burden. Those companies founded Nielsen Catalina Ventures in 2009 as a means of linking Catalina’s purchase data with Nielsen’s media panels, enabling marketers and media companies to understand how well media campaigns were driving consumer buying behavior.

Catalina sold a portion of the 50-50 joint venture to Nielsen in 2015 and now controls 36.5% of the business. Catalina has been in negotiations with Nielsen to make unspecified changes to the agreement and said it would use its Chapter 11 protections to reject the deal if necessary. Many of Catalina’s financing agreements are contingent upon a resolution of that deal.

Catalina was founded by a group of CPG and retailer executives, including Lucky Stores’ George Off, who according to a company history discussed the idea of a boat trip to California’s Catalina Island. It went public in 1992 but is currently owned by private equity firms Berkshire Partners and Hellman & Friedman.

From 1983 through 2014, Catalina experienced relatively steady growth and healthy margins, enabling it to grow its retailer network to more than 30,000 retail locations, the company said. Starting in 2017, revenues and margins began to contract as a result of competitive pressures in the retail sector and a “sea change” in overall media consumption, with engagement largely driven by an industrywide shift to digital, Del Genio said.

CEO Andy Heyman stepped down earlier this year after two years on the job. In October, the board appointed turnaround specialist Jerry Sokol Jr. as CEO. Sokol said he was committed to creating an environment that could support new innovation, saying the company would invest behind shopper identification in stores and online, and use artificial intelligence to aid its analytics.

Jerry Sokol Jr. photograph courtesy of Catalina Marketing