December 26, 2000, 9:55 AM

Hanover Direct turns a page, leveraging catalog expertise into a fulfillment factory

It had been a dismal few years for Hanover Direct Inc. when Rakesh Kaul arrived as CEO in March 1996. The Weehawken, N.J.-based catalog company, whose properties include The Company Store, Improvements and Silhouettes, had last posted a profitable quarter two years earlier. A number of catalogs acquired in the early ’90s drained capital without producing profits. Supply lines were squeezed as disgruntled vendors began to withhold merchandise shipments. Fill rates dropped and back orders rose, compounded by problems at the warehouse.

Fresh off a stint as vice chairman and chief operating officer at Fingerhut, Kaul rolled up his sleeves and got busy, trimming costs, restructuring management and integrating operations more tightly among the company’s core brands. Around the same time, Hanover’s brands shrunk in number from 20 to 13 as non-performers were dumped. Telemarketing and fulfillment facilities were consolidated. The brands were regrouped into new merchandise category-based business units to better capture synergies.

Back in the black

In the fourth quarter of 1997, Hanover reported its first profitable quarter since 1994. A happy ending? Nope. It’s just the beginning of an aggressive turnaround strategy for the 65-year-old direct marketing company. Simply put, Kaul has set his sights on transforming Hanover Direct, cataloger, into Hanover Direct, e-commerce leader, in a bid to not only regain profitability but ensure the company’s future. “To us, e-commerce was not a risky opportunity, but a necessity for business survival,” he declares.

E-commerce, a mere blip on the company radar until this year, has emerged as the make-or-break factor in Hanover’s future. With losses of $25.6 million on revenues of $546 million last year and a recent softening in the catalog shopping market, there’s rough terrain ahead, but Kaul’s Internet strategy could put his company in four-wheel drive.

Under its new business model announced in March, Hanover aims to nudge its paper catalog customers to the Web, while extending its services as a soup-to-nuts provider of e-commerce solutions to other merchants such as The Dress Barn. Based in Suffern, N.Y., The Dress Barn recently added a new direct marketing division to complement its 683 stores.

So far, Kaul has plunked down $30 million on a state-of-the-art technology platform that makes it all work, and says he will spend up to $40 million more over the next three years.

Mining a mother lode

By pursuing not only online sales for its own brands, but third-party service contracts with other Internet retailers, Hanover is mining a potential mother lode in the rush to e-commerce gold. Some industry observers, however, wonder if the company can work both claims with equal success. “Rakesh is a hugely proficient numbers guy who’s got the strong management skills needed to stop the hemorrhaging at Hanover,” says Michael Petsky of Winterberry Group LLC, a direct marketing consultant based in New York. “The big question is, can he make the marketing and merchandising component successful?”

Internet sales are a small part of Hanover’s overall sales, but that’s changing fast. Each of the company’s catalogs was on the Web by the middle of 1998, where they offered a combined total of more than 80,000 items for sale. That year, e-commerce accounted for sales of $8.3 million-a tenfold jump from 1997.

That’s a number the company wants to grow, and grow quickly. It costs Hanover between 35 and 70 cents to print and mail a catalog. Multiply that figure by even a portion of the 240 million catalogs that Hanover mails each year, subtract it from the cost structure and savings start to add up. With no operator needed to take an order by phone, telemarketing costs go down.

Talking ‘bout an evolution

To woo its 4 million catalog-customer base to the Internet, Hanover uses a mix of Web-based and conventional tactics, an approach one consultant calls “evolution, not revolution.” For starters, it lists the brand’s Web site address on every catalog, slips package inserts promoting the sites into customer shipments and targets segments of its customer base with special e-mail promotions containing an easy link back to the brand’s site. Several brands offer catalog customers savings of $5-10 off their next online purchase.

Hanover initially anted up to $300,000 to put up each of its Web sites, accounting for some of its recent net losses. While the cataloger won’t divulge how much more it’s spending to draw customers online, it expects its Internet sales to hit between $30 million and $50 million this year, with a healthy chunk of that growth coming from new customers. To make sure that happens, it’s forged new alliances to boost exposure of its brands online. Those include a joint marketing partnership with ArtSelect, an online art print and customer frame shop, and portal deals with Excite and Xoom.com. There’s also a portal deal for the Gumps brand with gift registry Dellajames.com.

With technology and partnerships on track to harness the selling power of the Internet, Kaul’s biggest remaining challenge may be to leverage marketing synergy out of the mix-and-match acquisitions now clustered under the Hanover banner. (A new upscale home fashions brand, Turiya, was launched in September, bringing Hanover’s brands up to 14.) “You can gravitate customers to online purchase and be a robust e-marketer, but the businesses have to work together,” says one observer. “The customer that’s buying out of International Male isn’t buying out of The Company Store.”

That’s an issue the marketing teams are addressing, but in Kaul’s strategy, the Web is much more than just a way to turbo-charge numbers in the core businesses. In March, the company said it would split the reporting of financial results between two newly created, Internet-driven divisions. The Hanover Brands division oversees the company’s own catalogs, including both paper catalog and e-commerce sales. The Web services division offers a range of fulfillment, order management and Web marketing services to would-be online retailers.

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