Photo Processor Using Net to Enlarge Its Base

What do mail-order photo finishing and the Internet have in common?

At top-rated Seattle Filmworks, the future.

For years, Seattle Filmworks has been a leader in mail-order photo finishing. Every day, people from throughout the United States and Canada send 20,000 rolls of film to be processed at the company’s crowded lab on Elliott Bay.

Seattle Filmworks, using motion picture film, was the first to offer both slides and negatives off the same roll. The company gets people hooked by sending them two free rolls of the film out of the blue.

In 1994, Seattle Filmworks was the first photo processor to offer pictures on computer disk. And now Seattle Filmworks uses the Internet to deliver photographs to its customers, to post its customers’ photographs on a customized Internet page, and to help customers track their orders.

“It helps us get a percentage of our customers better, faster service. It helps us learn what our customers want faster, and it helps us differentiate our products,” said Bruce Ericson, the company’s vice president for marketing.

Seattle Filmworks is an anomaly in the photo finishing market. While the market has remained flat for the last half-dozen years, Seattle Filmworks has grown at a phenomenal rate.

It has averaged 25% earnings growth in every year since 1990. Its revenue was up $33 million, to $84 million, in fiscal 1996, and it was recently listed on Forbes magazine’s list of 200 Best Small Companies in America.

Seattle Filmworks didn’t achieve those numbers by being the low-cost leader. At $8.50 to develop a 24-print roll, plus $1.45 for shipping, it’s well above low-price leader Costco or the nearest drug store.

Analysts said Seattle Filmworks built its success on excellent service and marketing savvy.

“I don’t think you’ll find a better-run company for what they do, especially that size,” said Mark Corcoran, analyst with Red Chip Review. The Portland-based newsletter tracks small companies.

“They’re growing by delivering high-quality products at a good price for what they deliver and it’s service, service, service,” he said.

Ragen MacKenzie analyst Paul Latta said Seattle Filmworks has grown through creative marketing.

“They’re creative people who come up with ideas that work,” he said.

Look, for example, at photos on disk.

In 1994, Kodak was offering customers photos on a CD-ROM, the high-capacity multimedia computer disk. But CD-ROMs were too expensive for the average consumer and didn’t reach mass-market appeal.

Seattle Filmworks developed the first process to put a roll of film onto a simple floppy disk. For $3.95 above the cost of having a roll of film processed into negatives and prints, customers could have their photos on disk and get the Seattle Filmworks software needed to manipulate those photos.

“Even though the whole industry was on the wane, they saw significant growth in revenue and earnings,” Latta said. “Out of nowhere they came up with the idea for pictures on disk. . . . It may not appeal to the average consumer, but they redirected their marketing efforts to people who use [computers]. They ended up with a very high response rate.”

Seattle Filmworks isn’t trying to turn into a computer or Internet company, Ericson said. The company has simply recognized that as an area it can tap into to grow its main business--film and paper photo processing.

The idea is to get computer users hooked on having their photographs put on a disk. Then they’ll pay Seattle Filmworks to do the rest of their photo processing.

But as computers and the Internet have opened markets for Seattle Filmworks, they also pose a tremendous threat.

Digital cameras, which allow people to load photographs directly from a camera into a computer, could render Seattle Filmworks’ processing obsolete.

“The biggest threat is digital photography, which threatens to do to film developers what CDs did to record players,” Forbes magazine’s Scott Wooley wrote in a January article. “Instead of chemical images on film, digital cameras store photos on bytes of information on computer chips. No film, no film developer. PC owners plug their camera into computers and download pictures for free.”

Wooley’s article, and questions about Seattle Filmworks accounting practices, sent the stock down.

But Seattle Filmworks officials say the digital camera won’t mean the company’s demise.

They argue that the picture quality of digital cameras isn’t as good as that of traditional cameras.

And, they say, what people really want are paper snapshots they can send to grandma.

But Seattle Filmworks isn’t taking any chances. Instead of letting digital cameras threaten its business, the company is developing a process for people to send their digital images to Seattle Filmworks for printing.

The company next month also plans to introduce new software, called Composer, that allows people to put their photos onto a template to print them as a newsletter or brochure. And the company is constantly working to develop ways to improve picture quality on computer disk.

Ericson notes that his 650-employee company still has only about 1% of the nation’s photo processing market.

His job is to grow that market. And he’ll use every means available--from direct marketing to the Internet--to do it.

“We’re asking people all day long what else they want,” he said, holding up a binder full of market research.

Analyst Corcoran says that approach pays off.

“I think you could buy Seattle Filmworks [stock] forever,” he said. “If you look at how they’ve done over the last six to seven years and ask what has made them be successful, it’s management and high-quality service in a low-growth industry. Unless something major happens to this company, they’re going to continue to do what they do.”