In 1992, when Tom Fallenstein was 12, his sisters started a side hustle renting out Halloween costumes their mom made for the family as the kids were growing up. The girls, who were in college at the time, ran the seasonal business out of their parents’ home in Minnesota. Over the years, the siblings got involved in trade shows and started creating costumes of their own, amassing 500 rental pieces.
And the pumpkin seed was planted.
Now Fallenstein, CEO of HalloweenCostumes.com, plans to close 2019 with 180 full-time staff members, 2,000 seasonal workers and nearly $100 million in sales. He attributes much of the company’s success to the wide selection of 30,000 SKUs—many of them officially licensed characters like from movies “Back to the Future,” “Star Wars” and “The Princess Bride”—a shift toward manufacturing exclusive designs and using data to manage stock counts during peak season.
From early on, Fallenstein placed a premium on offering a deep inventory of niche costumes, and he says the approach has served him well. While he was studying computer science, Fallenstein built a website for the rental business he ran with his sisters but also bought a few costumes to sell, starting up FlapperCostumes.com. The retail site offered one outfit in three colors and featured his sisters as models.
He soon built a couple more sites such as WizardOfOzCostumes.com. All of the products fit into Fallenstein’s walk-in closet, but by December 2004, he had raked in $40,000 in sales and hit $15,000 in profit.
Fallenstein found himself at a professional crossroads and had to choose whether to pursue a full-time career with his computer science degree or try out entrepreneurship, and he decided to give himself a year to see if he could gain a foothold in the Halloween industry. After moving his stock into his parents’ garage and commandeering the dining room as his office, Fallenstein hired a part-time employee, and when October 2005 arrived, “everything kind of exploded,” he says.
By that point, Fallenstein expanded and was running six niche sites, including StarWarsCostumes.com and PirateCostumes.com, and sales ballooned to $250,000. His family members were moonlighting for the business, pitching in outside of their full-time jobs to fulfill orders.
“I would try to recruit my friends after the bar at 2 a.m. to come over and ship out packages because we couldn’t keep up. We had to unplug the phone because we just couldn’t help any more people,” he says. “That’s when we knew we had something bigger happening. We’ve kind of been on this crazy trip ever since.”
Fallenstein’s two sisters soon came on full time, and in 2006, they incorporated the company before purchasing their first facility—a 10,000-square-foot space—and achieved $1.7 million in revenue. Within two years, the costume retailer acquired the HalloweenCostumes.com URL, outgrew the original facility and upgraded to a 50,000-square-foot area. After another three years, Fallenstein needed even more space and moved the company into its current 200,000-square-foot home.
HalloweenCostumes.com has become the primary brand for the company, which is ranked No. 560 in the Internet Retailer 2019 Top 1000, and drives the vast majority of sales for parent FUN.com. The retailer claims to be the largest online-only costume shop in the world and focuses on catering to all demographics.
“Six pirate costumes might seem like enough until you start realizing OK, three of these are sexy and they’re maybe only for college students, only one of these is for a mom, and then you’ve got one plus size” Fallenstein says. “We give mom 30 different options that can make sense.”
Staying ahead of the competition
HalloweenCostumes.com considers Party City Holdings (No. 319), and Spirit Halloween Inc. (parent Spencer Gifts LLC is No. 815) its main competitors. But mass merchants Walmart Inc. (No. 3) and Target Corp. (No. 16) also take a significant market share in the Halloween costume segment. Yet bricks-and-mortar stores are limited in the physical space they can devote to seasonal products, so chains typically opt for the most popular characters and sizes.
Not so for Fallenstein’s online shops. He says his niche sites often came up high in search results as shoppers looking for a specific costume stumbled upon one of his URLs devoted entirely to one movie or theme, which gave the company momentum. But bigger size ranges and more types of products are initially what kept shoppers from navigating away from the sites before HalloweenCostumes.com earned some brand cachet.
His team regularly studies keyword data through Google searches as well as his own site searches, which has allowed HalloweenCostumes.com to fill holes in the market. Fallenstein says the company noticed a lot of shoppers were looking for plus-size gangster costumes but there weren’t really options out there. So they designed one and brought it to market. After the orange and blue “Dumb and Dumber” tuxedos became a perennial top seller and he realized no one made the matching shoes, the retailer produced those, too.
Fallenstein began seeing the value in manufacturing their own concepts, and now 30% of the products on HalloweenCostumes.com are items in the “Made by Us” line that’s exclusive to the company.
“We’re constantly looking at what’s trending since people are looking for unique stuff,” Fallenstein says. “Maybe it’s a squid or sheep or llama costume, which isn’t a big enough character that Walmart would ever pick them up, but it has allowed us to cultivate a reputation for being a comprehensive costume destination.”
In addition to mining keyword data for ideas, Fallenstein says the retailer scrutinizes costumes from vendors with higher return rates or negative reviews to see if in-house designs can fix fit or quality issues with new alternative costumes.
HalloweenCostumes.com has a 15-person, in-house team that works with its overseas group in China to design and manufacture costumes. To create a new dinosaur suit, graphic designers may work on designing a digital print while costume designers are sketching and figuring out the fit and proportions of the feet. Costumes can go to market within three or four months. So far, the team has already designed 400 costumes for the 2020 season.
According to Fallenstein, transitioning the business model to making their own products from buying all wholesale has helped HalloweenCostumes.com stay ahead of the curve against the backdrop of a tough economy and the threat of Amazon.com Inc. (No. 1), which is now a prominent costume seller.
Jacquelyn Cooley, a market research analyst from data analytics provider 1010data, says growth in costume sales online may be starting to plateau. According to the firm’s ecommerce benchmark report, September Halloween costume sales grew a modest 6% year over year. This category grew 8% in 2018 for the overall September through October period.
Still, 1010data says big box retailers, such as Target and Walmart, generated $408 million in online costume sales in the trailing 12 months ending in September. This excludes online sales of specialty stores like Party City and Spirit Halloween.
Fallenstein declines to comment on whether he sees sales leveling off or share the 2019 Halloween season’s gains over 2018. But the retailer says it will hit nearly $100 million by year end, and Internet Retailer projects HalloweenCostumes.com’s 2019 sales will reach $95 million, up 11.8% from an Internet Retailer-estimated $85 million last year. The merchant sells its items on Amazon, eBay Inc. and other marketplaces, which represent a “good and growing portion” of its revenue but still is less than half of sales.
Playing the numbers game during peak season
HalloweenCostumes.com’s peak season begins the day after Labor Day, when retailers switch out back-to-school items for fall and Halloween products, which gets shoppers primed for the holiday. From then on, each week ramps up, doubling sales until around the week of Oct. 20. Children’s costumes sell earlier in the season since parents know dressing up for trick-or-treating is a given, but Fallenstein says adult costumes move a bit later once they’ve committed to attending parties.
According to Fallenstein, the company does three-quarters of its annual revenue in the months of September and October, so it’s crucial that his team accurately manages inventory to capitalize on seasonal shopping sprees.
Here, too, data analysis and early trend spotting is essential.
“It’s all about figuring out if we are on pace by tracking everything we can,” Fallenstein says. “If I bought a hundred Darth Vaders in a specific kids’ size, I know by Oct. 1, we should be sold through 30% and by the 15th, we should be at 60%. With an adult size, we know that goes slightly later.”
The stock counts and projections help HalloweenCostumes.com decide whether a costume should be reordered to meet demand, although products are coming from China, so there’s not always enough time for a replenishment delivery. But the inventory checks are instrumental in guiding marketing efforts.
“It might mean that we quit marketing that item as much and pull back because we know we’re pacing what we should sell for it, and another item might need more pushing, so we would give it more visibility on the website,” Fallenstein says. “This helps us set our path.”
Since 100% of HalloweenCostumes.com’s goods come from China, product pacing is even more important this year given the trade war. While Fallenstein says the tariffs haven’t impacted the retailer much yet because the vast majority of its stock was imported before the levies went into effect, it will be hard hit in 2020. To help offset the added costs the merchant will incur, HalloweenCostumes.com has been more conservative with discounting this fall. Rather than cutting prices to sell outfits that might be surplus items, Fallenstein says he’ll carry over the inventory to next year since buying the same products will cost 15% more by then.Favorite