"No more stubble. No more trouble" ran the Epilady ad. But for the Kroks, the 1990s have been all trouble. Matthew Heller reports.
"They don't want to get married when I tell them," Solly Krok once complained about his daughters. The millionaire South African businessman seemed to have better luck influencing the girls' professional lives. After Arlene, Sharon and Loren emigrated to the United States, he set them up in 1987 to market Epilady, a novel device for wrenching hair from women's legs. For two Christmas seasons it was one of the hottest-selling products of the nation.
As sales soared towards $100 million, the Kroks diversified into other personal care items and formed EPI Products. "What Nancy Reagan and Imelda Marcos are to buying, the Krok sisters are to selling - goddesses of the art," gushed New York magazine. If EPI "continues its relentless growth ... it could well become a Harvard Business School case study on the birth of a new brand name."
These days Solly Krok may be wishing that he had restricted his paternal advice to the matrimonial area. After one of the most startling collapses in recent US consumer marketing history, EPI Products is languishing in a Chapter 11 bankruptcy proceeding. The remnant of the firm had only about $3 million in sales last Christmas. Like other '80s entrepreneurial heroes such as Donald Trump and Michael Milken, the family has become a '90s embarrassment. They might now become another case study of how much was wrong with US business in the go-go '80s.
Some say that the Kroks were victims of economic forces largely beyond their control; others that they looted and pillaged EPI Products as if it was their "personal piggy bank". What is clear is that they neglected to implement the most basic of systems for running a business. Moreover, Solly only has himself to blame. Far from being a Lear-like figure unable to control his daughters, he encouraged their worst excesses. "Business is in our blood," Arlene used to say. The trouble was that management was not.
Solly Krok, who is of Russian-Jewish descent, has always made business a family affair. With his twin brother, Abe, he built a business empire in South Africa that includes pharmaceuticals, supermarkets, amusement parks and real estate.
Solly instilled a work ethic into his seven children - four daughters and three sons - from an early age. "I was lolling around the house after high school," Loren told People magazine, "and Dad said 'Get up. I don't care if you have to rent cars. You're not doing nothing.'"
"I'm a workaholic," Arlene said in a recent legal deposition. "I love what I do ... Sharon's the same."
Arlene led the family charge to America. Soon after she came to Los Angeles in her late teens, Solly set her up in 1981 with a device for bathing infants and formed a company called A-Plus Products to sell it. Sharon, the eldest of the sisters, who had only eight months' experience at a South African advertising agency, came on board to supervise marketing. A-Plus enjoyed modest success. In the year ended March 1988 sales reached around $3.5 million.
Solly kept on scouting for other business opportunities for his girls. In 1987 he stumbled on an Israeli-made gadget with a revolving electric coil that could remove hair from legs by the root. It seemed like an answer to a perennial female problem and Solly snapped up the North American distribution rights. With a $3.8 million loan from Solly, Epilady USA was formed and several South African friends were recruited to help the girls to run it. Arlene - "a born leader," according to Harper's Bazaar - took charge of operations; Sharon, advertising and marketing; and Loren dropped out of college to manage the New York office and store liaison. It was time to unleash Epilady on the American public.
The launch in the summer of 1987 could hardly have been more dramatic. In the first week of the trial run at the famous Bloomingdale's store in midtown Manhattan, 1,500 Epiladies were sold at $70 a piece. By the end of the year 100,000 had been sold in department stores across the country.
By the middle of 1988 Epilady and its glamorous marketers appeared to be everywhere. The Kroks had started to implement a two-tier marketing strategy for the product. The original device was now being sold in downmarket mass outlets such as K Mart, Sears, and JC Penney; department stores were getting the more expensive, value-added versions such as the Epilady Ultra.
With an advertising budget that was huge by the standards of start-up companies, the Kroks bought national magazine ads, even a provocative billboard on Los Angeles' Sunset Strip. "No more stubble. No more trouble" trumpeted their ad copy. They got free publicity from trade and general reporters latching onto this new entrepreneurial phenomenon. "In the war against unwanted hair, Epilady is a screaming success," yelled the gossipy People magazine, which posed Arlene, bare-legged, with Epilady in one hand, and the family having Sunday brunch at Solly's Beverly Hills mansion. The product even got a plug in the British film "Nuns on the Run".
There seemed to be no limit to the potential market, to the money pouring in. The product's packaging costs more than its manufacture so its margins were substantial. In its first nine months Epilady USA netted $353,620 on sales of $9.6 million. In March 1989 Arlene and Sharon paid themselves bonuses of $1.1 million. Loren got $900,000.
"They had probably one of the most absolutely fantastic opportunities I've seen come down the pike in many, many years," says a former employee who, like most of those interviewed, asked not to be identified. "It was the kind of thing that dreams are made of - a product that just took off and made millions and millions of dollars."
The Kroks started widening their focus. In November 1988 they changed the company's name to EPI (Essential Personal Items) Products. Epilady was joined by EpiPed for pampering tired feet, EpiSsage for a massaging shower, even EpiSmile for shining teeth. There was talk of a public stock offering, of selling EPI products in upmarket European stores such as Harrods, of starting a unisex line. "Arlene, Sharon and Loren began to believe they had the Midas touch," says a former employee. In fiscal 1989 - only the company's second year in business - sales reached $155 million.
But beneath all the hype and euphoria, it is clear that as early as the third quarter of 1989, something was awry at EPI. According to an affidavit, Thomas McNeil, vice-president of sales for the mass market, started warning Arlene in August that the sales projections for the upcoming holiday season were too optimistic and urged her to cut back on staff. Employee numbers had swollen from 16 in 1988 to about 117 in the autumn of 1989.
The company was getting unfavourable publicity following reports of women returning Epilady to stores complaining of suffering pain after using the product. In one liability suit a model and former beauty queen alleged that Epilady had turned her legs into a mass of permanent red scars. The comedienne Joan Rivers joked to to her audiences: "I walk down the hotel corridor and when I hear screams I say: is it a murder - or is it an Epilady?"
During the diversification binge, the Kroks had also squandered millions of dollars researching products that had little if anything to do with Essential Personal Items. Some $14 million was invested in Quickwheel, a skateboard-like device that supposedly enabled a car with a flat tyre to keep moving. "That was an absolute disaster from any perspective," admits William Pennell, EPI's new chief executive. But most mystifying of all was the Kroks' involvement in a business proposition almost as risky these days as launching a high cholesterol restaurant chain - a Broadway musical. According to legal documents, EPI lost $7 million on a revival of "Meet Me in St Louis" which Loren Krok co-produced.
The warnings were not heeded. The Kroks plunged into a massively ambitious sales push for the 1989 holiday season, concentrating on their major mass-market accounts. "They said there was going to be a $40 million advertising campaign and they probably actually did 10 or 12," says a former associate. Based on the optimistic sales projections, the stores went ahead and ordered vast amounts of stock. When the actual sales turned out to be disastrously low, the Kroks were in a hole. Some $25 million worth of goods was returned to EPI. "They just virtually fell off the table," says Pennell.
Worse still, the company's banks, which had made EPI an asset-based loan of $25 million, were not going to put the company back on the table. They cut off the loan, leaving EPI with no working capital to implement further sales programmes.
In July 1990, in a lawsuit seeking recovery of the loan, a trio of banks charged that "EPI's officers and controlling shareholders used EPI as their personal piggy bank" to pay for everything from parking tickets to the mortgage on Solly's Beverly Hills mansion. The following month EPI filed for Chapter 11 bankruptcy protection, which allows a company to continue operating while it negotiates a reorganisation plan with its creditors.
Pennell, an experienced crisis manager, believes that EPI has a good chance of emerging revitalised from Chapter 11. But if it does, it will be a drastically scaled-down enterprise selling only the dental products - EpiSmile and EpiDent - and the Kroks will likely be forced by the creditors to give up the equity control.
The Krok sisters, who are not talking to the media these days, have issued statements denying the banks' allegations. In a countersuit, they accused their lenders of waging a "smut campaign" to "bring them to their knees".
Whatever the truth may be about the "piggy bank" allegations, the banks' opinion of EPI's managerial performance is widely supported. "It is patently clear that the company was completely without management control and that the little control there was was being exercised by Mr Solly Krok," said one officer at the Bank of New York.
"On a typical day at the office there would be a meeting going on in the conference room and the Krok family would get up and leave," recalls a former employee. It was "almost as if you were at a cocktail party ... If a decision was ever made, it came out of the cloakroom."
Another source close to the company paints a similar picture: "You'd go through a product and say 'OK, this is what we're going to do'. Everybody at the meeting would agree ... two weeks later everything was changed. Then you'd call the product manager and say 'Who changed this?' He'd say 'They changed it.' They were a small clique ... it was always being managed off the cuff."
Out in the field, EPI failed to implement basic systems to monitor sales trends and keep its representatives informed. "The rudimentary reports a sales organisation should have, we did not have," says a former sales employee. "We got a report once a month which was basically a commission statement that was very, very inadequate for tracking sales." The company "was run from a very superficial viewpoint", he adds. "The gut issues of organisation, the gut issues of management information and systems, of computers, of accounts receivable, of accounts payable, of marketing, of product development were ignored."
Pennell agrees to an extent: "There was a structure. But in terms of depth of people and financial control and some of the other areas that are absolutely necessary for the long-term success of the corporation - it just wasn't there." As an example of the chaos, the new CEO admits that when he took over at EPI in October 1990 he discovered that thousands of Epilady warranty cards, dutifully sent in by customers, had not been processed.
It is easy to understand the inexperienced Krok sisters being swept away by all of the sales success, believing their own publicity and neglecting the more mundane aspects of managing a business. The central mystery is what was their tycoon father doing the whole time?
Solly did not respond to requests for an interview for this article. Relying on other sources and his own statements, he appears to be a no-nonsense, tough-talking businessman. While giving a deposition in a lawsuit filed by a former partner of his daughters, he yelled at the plaintiff's lawyer: "I'm getting pissed off with all this shit ... She's a bloody thief trying to muscle in." (Earlier this summer they lost the lawsuit, the plaintiff being awarded $13 million.)
One theory is that Solly, restricted by immigration laws to spending only half of the year in the US, adopted a hands-off policy towards his daughters. According to one associate, Solly would say: "How can I control my daughters? Look, they are young, they want to run with this stuff. I can't control them, therefore let 'em go."
But when asked about the management of A-Plus, Solly also said in a deposition: "I called the shots because I owned the franchise." The facts suggest that the case was the same at EPI Products. Though the daughters were portrayed as the EPI managers, Solly was in carefully concealed control. He was the organising shareholder of the original company but signed the papers with his Hebrew name. He continued to maintain control through a Luxembourg holiday company, EPY International. In fact EPY received a royalty of 7% of the retail price of each Epilady unit. On top of that, Solly got an annual consulting fee of $2 million.
"I don't think any important decision was made without the counsel of Solly, who was the papa," says a former employee. "Papa was the guiding light. When you went to the mountain, you went to talk to papa."
Another former associate believes that Solly may have been lost without his brother: "What they had was a basic business empire. Solly found the stuff, brought it in and his brother was the administrative manager ... Solly comes to the US, brings things through the door but has no management and refuses to allow good management to run the business. He had his daughters. They were being trained to inherit the family fortune. Instead of inheriting the family fortune, they blew it."
(Matthew Heller is a Los Angeles based writer.)