Hanover Direct turns a page, leveraging catalog expertise into a fulfillment factory
By Mary Wagner
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.
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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