Success Was in the Cards : Burbank: Tiny Custom Expressions, a maker of personalized greetings, could go big-time now that it has been acquired by an industry giant.

The history of Custom Expressions Inc. reads like the proverbial entrepreneur-makes-good story.

Started in a garage five years ago, Custom Expressions targeted an overlooked segment of the $5-billion-a-year greeting card market--personalized greeting cards. Working with artists and computer programmers, co-founders H. Matt Russell and Len Davidson developed a vending-machine-size unit that enables customers to touch a computer screen to choose graphics from thousands of card designs and add names, dates and personal messages.

The company now generates about $1 million in annual sales and has 12 employees. Its computerized card-making machines have been going out the door so fast that its showroom is empty.

Two weeks ago, in a step that could turn the tiny Burbank firm into a big business, Custom was acquired by Cleveland-based American Greetings Corp., the world’s second-largest greeting card company with $1.6 billion in sales in its latest fiscal year. The terms of the deal were not disclosed.

That’s not to say that Custom Expressions hasn’t run into snags. Hallmark Cards Inc. of Kansas City, the world’s largest greeting card company, launched its own line of customized cards in 1990, and recently revealed that it filed a patent-interference claim against Custom Expressions in January.

However, analysts don’t view the patent case as a major threat to Custom. And American Greetings executives brashly predict that their newly acquired business will produce $25 million to $35 million in sales during the first year, and up to $500 million annually in a decade. American expects the venture to become profitable in its fiscal year ending Feb. 28, 1994.

Those projections have been met with some skepticism. Sheldon Grodsky, director of research at Grodsky Associates, a securities brokerage in South Orange, N.J., called the sales forecast “excessively optimistic.” Grodsky added, “I’m not factoring $500 million into my revenue projections just yet,” because the sales generated by the custom card business could cannibalize the sales of American Greetings’ traditional cards.

However, another analyst shared American’s high hopes.

“We consider American Greetings a very conservative company, and their enthusiasm for this acquisition was very apparent,” said Charles Cerankosky, an analyst at Kemper Securities Inc. in Cleveland. “It sends a message.”

Russell said that sales from the 150 “CreataCard” kiosks that Custom Expressions has placed at card shops, drugstores and mass merchants in California and the East have so far met or exceeded expectations. They also tend to draw in customers for more sales, he said.

At $3.50 apiece, customized cards “are not going to replace greeting cards,” said Russell, 42, now vice president of business development for American Greetings’ CreataCard division. “I think it’s the basis for a lot of incremental sales.”

There’s good reason to believe the custom card business will expand American Greetings’ sales, Russell said. One piece of evidence is that 30% to 40% of sales from the machines come from men, compared to just 10% for sales of cards off the rack. What’s more, the kiosks can be placed in all sorts of non-traditional locations, including airports, resorts, cruise ships and factories--lending themselves to impulse buying.

Customized cards also do something that traditional cards can’t: cater to current events and regional interests.

The time it takes for a card to go from the concept stage to the sales floor is typically about two years. But Custom Expressions can introduce new card designs in a matter of hours by making changes in its computer software and sending them via modem to the units.

During the Persian Gulf conflict, for instance, Custom Expressions created Desert Shield-themed card designs. The day the war began, Desert Storm designs were out. “Welcome Home Hero” cards were ready before the withdrawal was announced.

Russell foresees making card designs even more specialized. Lakers and Dodgers cards could be sold in Los Angeles, he said, while Mets cards would go to the New York market.

In reaching these new markets, American Greetings still has its archrival, Hallmark, to deal with. Officials at Hallmark declined to discuss details of its patent claim, but a company spokeswoman said it centers on a technology used in the CreataCard kiosks.

John Barker, an American Greetings spokesman, denied that there has been any interference with a Hallmark patent.

“The response by the competition is just a technique that’s pretty common in business when a company feels threatened by a competitor’s innovative product,” he said.

Analyst Maureen P. Lentz at Roulston & Co., a Cleveland securities firm, said the Hallmark action poses little threat to American Greetings.

“I don’t think Hallmark will prevail,” she said, reasoning that it is doubtful American Greetings would have acquired Custom Expressions without a secure patent position and because the CreataCard units offer greater variety and personalization than Hallmark’s machines.

Hallmark currently has 900 of its customized card units at retail outlets across the country, six times as many as Custom Expressions. But American hopes to leapfrog past its rival by shipping an additional 2,000 CreataCard units between October and December to such retailers as Wal-Mart, Kmart, Target, Longs Drug Stores and various card and gift shops. The stores will receive a percentage of sales, but that amount has yet to be determined, Barker said.

Earlier in his career, Russell worked in real estate, oil and broadcasting. And whether Custom Expressions is a big hit for American Greetings, the company has come a long way from the garage where Russell started it with his friend Davidson. (Davidson has not taken a position at American Greetings.)

During the first three years, the pair had to pool their savings to build their first card machine for about $25,000. That kiosk was installed in May, 1990, at Rexall Square Drugs across from the Beverly Center in Los Angeles, and the pair hung out at the drugstore to gauge reactions. When the response was favorable, they raised additional funds from private investors to build more units. The machines now cost about $6,000 to $7,000 apiece to make, and are assembled in the stores with components built by independent manufacturers.

Russell expects that he and most of Custom Expressions’ employees will move to Cleveland within a year. Since he started the company, Russell said, he has known that “someday, we wanted to align ourselves with the right partner.” Perhaps he has.