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Federated Department Stores’ $1.7 billion buyout of Fingerhut Companies Inc. strikes some analysts as a marriage of odd partners, but that deal could also swiftly transform Federated into an electronic commerce powerhouse. Cincinnati-based Federated, which owns and operates such upscale chains as Bloomingdale’s, Macy’s and The Bon Marche, was among the first national retail chains to move aggressively into Web selling. The company launched its first transaction-capable Web store, macys.com, four years ago and, in June 1998, spun macys.com off into a separate electronic commerce subsidiary. And now Federated is using its Internet retailing expertise, and its acquisition of Fingerhut, to make an even bigger splash in the business-to-consumer electronic commerce market. Minneapolis-based Fingerhut is a database marketing and retailing company that sells directly to about 31 million moderate-income consumers via the telephone, paper catalogs and the Internet. Federated bought Fingerhut for its advanced order fulfillment system and for its Web selling and direct marketing capability.
Today, Internet sales account for less than 2% of Fingerhut’s annual revenues of $1.6 billion and Fingerhut is actively investing in a range of electronic commerce activities. In 1998, Fingerhut acquired a 20% stake in The Z Network, parent company of MountainZone.com, a site for mountain sports information and merchandise, and purchased similar equity in Freeshop.com., an online discount shopping network that offers 500,000 consumer goods to about 1.2 million Web shoppers.
In addition, Fingerhut also owns equity in Roxy Systems Inc., an Internet digital communications and entertainment services marketing firm, and a small stake in PC Flowers and Gifts, an online specialty retailer that sells flowers, gift baskets and gourmet foods.
The odd couple
“This is an odd couple marriage that was a surprise to a lot of people because Federated and Fingerhut have no similarity in product,” says Sid Doolittle, founding partner, McMillan/Doolittle, a Chicago retail consulting company. “But Federated bought Fingerhut because they want to become educated in the direct marketing and Internet sales business and Fingerhut is a master at developing and maintaining individual customer relationships.”
Federated acquired Fingerhut in February and expected the transaction to be completed by March. When the deal closes, Federated will operate Fingerhut as a wholly owned subsidiary and separate from macys.com. But over time industry analysts expect the two Federated units to work more closely together, especially on fulfillment and specialty gift issues.
Analysts say macys.com is still refining its order fulfillment systems, but Fingerhut is already adept at handling and shipping individual Web orders, which is a key component of any successful Internet selling plan.
“Macy’s big challenge is fulfillment and Fingerhut can certainly help them with that,” says Ira Victor, president, 452 degrees, a San Francisco Internet retailing consulting company. “They both have synergies to build upon.”