Bagging the Right Customers
Timbuk2 has prospered by exploiting a sweet spot between niche obscurity and mass-market dullness.
By Andrew Tilin

(Business 2.0) – Two years ago Mark Dwight closed a deal that looked like a dream come true. The 45-year-old CEO was attempting a turnaround of tiny Timbuk2, a $4 million San Francisco-based manufacturer of urban shoulder bags, when opportunity knocked: CompUSA agreed to carry his product. "I thought it was our big break," Dwight recalls.

Yet within four months, Dwight realized he'd made a mistake. The problem wasn't disappointing sales--on a volume basis, business was booming. Financially, however, Timbuk2 was being squeezed by CompUSA's slim margins and harried by the big retailer's high-volume demand for product. So he canceled the deal, pulled his company's bags from CompUSA stores, and refocused.

Timbuk2 was no longer a niche business catering to bike messengers. On the other hand, it would lose its quirkiness by appearing in mainstream stores. Dwight decided to pursue a path between the two extremes. "Look at Coach. It's a billion-dollar company, and it's not mass-market," he explains. "We're a specialty brand."

Lots of companies are discovering that the best way to market their wares is through specialty retailers. (Think the Discovery Channel Store, Urban Outfitters, or Williams-Sonoma.) Specialty retailers may be chains, but unlike their big-box cousins, they attract customers who prioritize qualities like brand and design over cost when making purchase decisions. With higher margins, deeper selection, and more experiential store environments, these alternative retailers are ideal for companies like Timbuk2, which creates products that are synonymous with urban style rather than a bargain price.

"Niche products get more attention in a specialty retailer than a big-box store," says Dale Achabal, director of the Retail Management Institute at Santa Clara University. "The salespeople are more knowledgeable, and specialty stores naturally draw customers who are looking for unique things."

Indeed, Timbuk2's products are flying off the shelves of specialty retailers like REI and the Apple stores. Sales have more than doubled since 2003, hitting $10 million last year, and the company expects them to climb by another 50 percent in 2005. "Customers identify with Timbuk2," says Nathan Pund of Silver Steep Partners, an El Cerrito, Calif., investment-banking firm focused on the outdoor industry. "Its image says it's larger than a $10 million business."

Dwight had big ambitions when he took over Timbuk2 in 2002. A cycling enthusiast who ran a design firm before doing corporate stints as head of product design at computer accessory maker Kensington and as a marketing executive at Cisco, he was between jobs when a friend mentioned that Timbuk2 was for sale. Founded in 1989 by a bike messenger who set out to create the perfect delivery bag, Timbuk2 developed a cult following among messengers and young professionals in the San Francisco Bay Area during the 1990s. But by 2002 it was nearly bankrupt. Along with eight private investors and a San Francisco-based venture capital firm, Dwight bought the company with an eye toward growing the business.

He moved quickly to bring discipline to an organization that had been operated like, well, a company run by bike messengers. A controller and a product developer were brought in, and manufacturing at Timbuk2's graffiti-covered San Francisco warehouse/factory was streamlined. Within nine months, productivity doubled at Timbuk2's plant and Dwight relaunched a slow-selling messenger-style laptop bag to offer more features at a lower price--in part by outsourcing its manufacture to China, where costs were 30 percent lower.

But success also begat overconfidence. Ignoring one of the key tenets of a specialty manufacturer--always get "keystone" markups, the generous, 50 percent gross margins that compensate for lower-volume sales--Timbuk2 began selling in CompUSA stores in time for the 2003 holiday season. The catch? CompUSA's reduced markups meant Timbuk2 had to bundle extra accessories with each bag to avoid undercutting the final sales prices of Timbuk2's other retailers. With employees working overtime to prepare the bundles, Timbuk2 pulled out a few months later, $50,000 poorer for the experience.

Things went much better when Dwight approached Apple's fledgling chain of retail stores. After Timbuk2's $99 laptop bag appeared in the stores in July 2003, it became an instant hit, boosting the company's overall sales 130 percent virtually overnight.

That momentum has fueled the creation of more than 30 new products, including iPod holsters, tote bags, and yoga mat carriers. The merchandise has provided the backbone for expansion into new markets, so Dwight now pours most of his resources into expanding his network of 1,200 specialty retailers. Timbuk2 is building elaborate point-of-purchase displays for its biggest accounts, including EMS sporting goods stores. Its Marina handbag for women has been a hit at fashion boutiques. The diversified product lineup has given the company extra traction, even in New York, the hometown of rival bag manufacturer Manhattan Portage. "People ask for Timbuk2 by name," says Jim Laros, a buyer at Paragon Sports, New York City's biggest outdoor sporting goods retailer. "The brand is on fire."

Yet Dwight thinks Timbuk2 still has more potential, and there's talk of getting into footwear. "I want the Timbuk2 swirl to be as recognizable as the Nike swoosh," he says. Just don't expect to buy your first pair of Timbuk2 shoes at Target.

Selling Outside the Box