December 26, 2000, 9:55 AM

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

(Page 2 of 2)

Second quarter results for the Hanover Brands division hint at an upward trend. The unit posted operating income of $1.7 million on revenues of $130 million for the quarter that ended June 26, compared with an operating loss of $2.2 million on revenues of $134 million for second quarter 1998.

Meanwhile, the Web services division posted a $5 million operating loss on revenues of $1 million for the quarter. Yet company officials are sanguine, saying the loss represents the cost of strategic investments. They’re pinning high hopes on the division’s centerpiece, two year-old Keystone Fulfillment. Keystone, which provides back-office functions to Internet retailers, is the centerpiece of the Web services division-and a key building block in the architecture of Hanover Direct’s turnaround.

From back office to front burner

According to a 1998 Internet shopping survey by Ernst & Young, 61% of retailers still didn’t sell online. Many are holdouts simply because they don’t have the technology platform or distribution system to support Internet sales. “If you’ve never sold direct, trying to build an operation from scratch is expensive,” says Scott Silverman, director of Internet marketing for the National Retail Federation. A Web site and back-office fulfillment operation can cost millions, and marketers that are new to the game either have to make a big investment or find a partner.

That thinking led to the creation of Keystone. “In many cases, the companies that have the brands don’t have a world-class e-commerce platform that will enable them to take advantage of it,” says Kaul.

Under Kaul’s leadership, Hanover has been putting together the goods to back up its foray into third-party service. In 1997, Hanover got $40 million from a shareholder rights offering, plus $5 million from a private-issue placement. More cash followed last year when the company’s largest shareholder, Richmemont Finance S.A. of Switzerland, ponied up for additional shares. Keystone Fulfillment president Dick Metzler, who joined last year from GE Capital, says Hanover “has the ability to finance whatever we need to do.”

Plug and play

When Kaul came on board, Hanover had three independent technology systems platforms that weren’t integrated. Today, the fully integrated platform performs high-volume, front-end logistical services critical to fulfillment, such as telemarketing, order processing and customer database management, for third-party service customers as well as the company’s own brands. “The information technology system is the big ‘wow’ when I talk to customers. No one else has what we have now,” says Metzler. Such “plug and play” installation allows Keystone Fulfillment to have new customers up and running online in as little as 60 days, he adds.

Kaul is also using the new brand-building alliances at Hanover to build third-party business for Keystone. Under the agreement with Excite, for example, the portal promotes Keystone Fulfillment exclusively as a back-office service provider to other merchants on its online Shopping Channel. Keystone Fulfillment has signed up 18 outside customers so far, and talks are ongoing with at least two dozen other prospects. Keystone revenues are expected to hit between $10-15 million for 1999.

One satisfied customer, the National Geographic Society, expects to sell up to $70 million in merchandise from its educational and consumer catalogs and online store this year.

Rather than chasing after pure-play catalog companies, many of which already are selling online, Keystone is targeting retailers and manufacturers with sales of $200 million to $2 billion, or with “the potential to get there quick,” according to Metzler.

“This is the No. 1 topic among retailers because it’s the thing that’s most foreign to them,” says Elaine Rubin, chairman of Shop.org. The third-party fulfillment opportunity, she adds, is “enormous over the next few years.”

Competing with themselves

Enormous, yes, but wrought with significant challenges. Hanover isn’t the only player pursuing fulfillment services for e-commerce. While still at Fingerhut, Kaul helped develop Fingerhut Business Services, which launched two years ago to provide back-office services to online merchants. And Metzler launched a new catalog business, targeting top direct marketing and catalog companies, during his stint at Federal Express.

But when it comes to serving up technology to e-commerce, can a home furnishing, apparel and gift cataloger compete with the folks who invented the medium-the IBMs and Microsofts of the world? “We offer hands-on experience in retail and direct marketing,” says Metzler. “At times we’ve even partnered with some of the other provider companies, offering our expertise to pick up where theirs leaves off.”

With demand for outsourcing services exceeding available supply-for the short term, anyway-competition from whatever quarter may not matter. “There is such a pipeline of demand that frankly, we couldn’t even cope with it all,” says Kaul. Industry sources agree. “Just how much demand there’s going to be is an unknown, but chances are there will be more than enough to go around,” says Harry Chevan of Gruppo, Levey & Co., a New York investment banking adviser.

Though it’s too early to tell if Keystone will turn opportunity into profits, industry sources speculate that Hanover may spin off Keystone quicker than you can you can say “Visa or MasterCard accepted.”

While Kaul won’t confirm such talk, Hanover has retained Bear Stearns as financial advisers for the company, a logical step toward an IPO or spinoff. Whatever the case, Kaul agrees that Hanover now has its feet in two different camps: “Certainly, the competency one needs on the branded merchandising side is different from what’s needed on the fulfillment and back-office side.” And if Kaul has his way, you’ll find both camps in Hanover’s corporate catalog.

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