West Point grads' new battle zone: The baby biz

    Our Makeover team visits a baby-bedding business gearing up for growth.

    By Patricia B. Gray

    (Fortune Small Business) -- As cadets at West Point, Jonathan Hartley and Allan Sicat spent four years studying the art of war and learning how to lead troops into battle. More than a decade later they're using that training to sell blue gingham baby blankets and pink polka-dot crib sheets.

    Well, business is combat -- even at Carousel Designs, tucked into this sweetly rural outpost west of Atlanta. In 2007 Hartley bought his parents' nursery-supply company, invested about $1 million from the sale of an earlier business and asked Sicat to help him transform the small operation into a national online retailer of premium and custom baby bedding. Hartley's parents, who are retired, started the company in 1988.

    Today Sicat, 33, and Hartley, 34, are winning on most fronts. The company, which designs, manufactures and sells bedding that ranges from traditional pastels to funkier sock-monkey motifs, employs 24. Revenues doubled to $1.1 million in 2008. In January, Carousel posted record sales of $149,000. Thanks to savvy Web marketing, musical mobiles are flying out of the warehouse. After two years in the trenches, the partners closed their first profitable quarter in March and believe they are poised for exponential growth.

    They aren't quite business novices, of course. With two other West Point classmates, CEO Hartley launched a Web site that advertised rental properties and then sold it to publishing powerhouse Primedia in 2006. Sicat, Carousel's president, spent three years in various finance jobs at General Electric (GE, Fortune 500) and graduated from its rigorous management-training program.

    Still, both men have questions about their latest venture. How can they boost sales on a limited marketing budget? Should they expand the product line to include cribs? And how can they best compete with such retail giants as Pottery Barn Kids and Babies "R" Us?

    Win-win-win

    To help them craft a battle plan, Fortune Small Business parachuted three seasoned experts into Carousel for a Makeover. First up is David Nies, a marketing and branding consultant with Atlanta staffing firm Flexible Executives. Nies, 38, arrives armed with pages of analytics and a long list of recommendations.

    "Guys, you're missing a great opportunity," he says bluntly. "You should be selling gift certificates."

    Carousel's competitors showcase elegantly designed gift cards, often on their home pages. "They're instant cash," Nies says. "Some are never redeemed for merchandise. And customers who do use them typically spend far more than the value of the card. They're a win-win-win."

    Talk back: Share your advice

    Nies praises Hartley and Sicat for two Web site innovations. The first, launched last year, is a registry for expectant parents. To date 552 moms-to-be have signed up, and the site is adding, on average, four customers a day. Total sales per registrant can reach $400, nearly double the average order. The second innovation is a feature that allows shoppers to customize and even monogram their bedding.

    Yet Carousel's branding strikes a few wrong notes, Nies says. He rips into the company's generic motto: Quality Baby Bedding.

    "Baby bedding is about comfort, safety and security for babies," he tells Hartley. "Your family has been making baby bedding for 20 years. You've earned the trust of hundreds of thousands of moms. That's the message."

    Nies then trains his sights on a Web site video that shows the factory where muscular workers stuff bedding into shipping boxes. "A mom-to-be doesn't want to see the factory floor," he explains. "She wants to see your mom -- now a grandma -- talking about raising her kids while designing beautiful nurseries. She wants to see you, your wife and your children discussing the importance of a safe, comfortable nursery."

    Nies suggests a bedtime-story scene with soft music that tugs at the heartstrings. "You have a great opportunity to become a trusted resource for expectant moms," he says. "They can't get that at Pottery Barn Kids."

    Financial discipline

    FSB's next expert, Rob Barnett, is a managing director of the consultancy Hays Financial in Atlanta. He congratulates Hartley and Sicat for having no bank debt. "Your military training has served you well in building your business," he says. "You have more financial and operational discipline than most entrepreneurs."

    In fact, Carousel is largely debt-free. (The business partners make modest monthly payments on a note held by Hartley's parents.) Until recently Carousel saved money by keeping enough fabric in inventory for only one to two months; the partners made a tough decision and shelled out an additional $120,000 to have a six-month supply at the ready.

    They are worried, however, that Carousel will outgrow Intuit (INTU)'s QuickBooks, a low-cost, easy-to-use accounting software package popular with many small business owners. They aren't sure QuickBooks can handle complex inventory and order management, both vital services for their fast-growing company. But Sicat frets that upgrading will be expensive and time-consuming.

    Barnett, 40, advises the partners to seek a modular software package made for specialty textile companies engaged in e-commerce. But he steers them away from packages loaded with costly and unnecessary software modules, such as automated payroll, that are better suited to businesses with more employees.

    Barnett warns Sicat and Hartley that their growth may soon outstrip their ability to self-fund. "Or you may come across an irresistible opportunity that will require significant capital," he says. Barnett suggests they hire an accredited accounting firm to look over their books and produce a review -- less extensive than an audit but signed by the accounting firm. For a company the size of Carousel, a signed review would cost roughly $15,000 and help banks approve a loan request, he explains.

    Target the right buyers

    FSB then mobilized business strategist Debra Ellis, co-founder of Wilson & Ellis Consultants in Barnardsville, N.C. and former chief operating officer of catalogue retailer Ballard Designs. One of the first items Ellis, 51, discusses with Hartley and Sicat is cribs. Online crib sales are dominated by Cribs.com, J.C. Penney and Babies "R" Us.

    "You are thriving in your premium bedding niche," adds Ellis. "Don't try to compete with giants on a commodity product like cribs."

    Building relationships with first-time moms-to-be is crucial to the company's success, Ellis says. Hartley agrees. Most of his customers are mothers or grandmothers who are thrilled to be decorating a nursery for a first baby, and they spend significantly less during subsequent pregnancies.

    Ellis urges the partners to maintain ties with existing customers through regular e-mails, showcasing new items, for example, or nursery decorating tips, and to develop bonds with potential new customers, especially expecting moms who blog about pregnancy. "Invite them to create their own bedding on your site," she says. "Offer them discounts -- say, 5% -- if they refer a friend." One mention of Carousel on a popular blog, she notes, could drive thousands of prospects to the site.

    Two months after the Makeover, Carousel is still growing at a rapid clip. Hartley and Sicat scored big with their new custom design tool. Introduced last December, it was soon generating an order a day. They're upgrading the feature to allow customers to save their designs in the registry so that friends and family can view them and buy complementary items for new parents. Once the upgrades are in place, Hartley says, they'll add gift certificates and start crafting an e-mail and social-media marketing campaign.

    We'll check in on Carousel and report on its progress.