The Long Reach of A Direct-Marketer Federated Eyed Marketing and Fulfillment Expertise in Its Acquisition of Fingerhut Cos.

Federated Department Stores Inc., the Cincinnati-based parent of upscale department stores like Macy’s and Bloomingdale’s, acquired Minneapolis-based direct-marketer Fingerhut Cos. for $1.7 billion last February. Early critics of the deal questioned the rationale behind Federated’s acquisition of the catalog marketer of lower-end merchandise and wondered how the retailer would bridge the gap between the two companies’ diverse customer bases – Fingerhut’s lower-income customers and Federated’s core customer base of middle- to upper-middle-income households. Although Fingerhut’s core catalog business accounts for most of the company’s approximately $2 billion in annual sales, Federated was eyeing Fingerhut’s state-of-the-art infrastructure for catalog and Internet order fulfillment, along with its skill in data base management and direct-marketing. The company believes that the acquisition provides it with an excellent platform for growth of its strong retail brands and the back-end operations it needs to support its non-store businesses, including its Macy’s By Mail and Bloomingdale’s By Mail catalog businesses and its macys.com web site. Federated, with annual sales of more than $15.8 billion, operates more than 400 department stores in 33 states under the names of Bloomingdale’s, The Bon Marche, Burdines, Goldsmith’s, Lazarus, Macy’s, Rich’s, and Stern’s. Ronald Tysoe, Federated’s Vice Chairman of Finance and Real Estate, acknowledges that the deal broadens his company’s customer base beyond the high-end shoppers who visit Federated’s stores and that over time many Fingerhut customers may graduate into the higher demographic profile that his company currently serves. “But that was not a key part of the economic or strategic rationale; it’s just more of a consequence,” he notes. Beyond catalog and Internet merchandising, Fingerhut’s wide range of businesses include telemarketing, direct-marketing, information management, warehousing, product fulfillment and distribution, order and returns processing, and customer service. As traditional retailers like Federated begin to think more about e-commerce and its implications, businesses that have the infrastructure to take orders and distribute product are becoming attractive candidates for acquisition. “Unlike many other catalog companies, which would have provided more of a pure-play acquisition, we viewed this deal as a multi-faceted acquisition.” Tysoe says that as his company grew its catalog businesses, it discovered that as part of that expansion it would need to add fulfillment and logistics capabilities to support those businesses. The alternatives, he says, were either to build on the infrastructure that it already had in place or to go out and buy the infrastructure that it needed. Switching Gears From Potential Fingerhut Customer to Acquirer Federated had originally approached Fingerhut as a potential client so that it could use its infrastructure. But as Federated learned more about Fingerhut’s impressive array of marketing and data base capabilities, Tysoe comments, it became more attracted to Fingerhut for many reasons, including its data base of nearly 31 million current and former customers, its ability to track up to 3,500 characteristics per customer, and its assortment of new vehicles with which to explore online retailing. By joining forces with Fingerhut, Federated can leverage its core retailing strengths in new, rapidly expanding channels of distribution. In addition, Federated believes that the catalog industry, which is very fragmented, is ripe for consolidation and that Fingerhut has the scale to be a leader in consolidating the industry, as it has been doing with its Popular Club, Arizona Mail Order, and Bedford Fair catalog acquisitions. “That was something that was very attractive to us, and we believe that the Fingerhut acquisition has the ability to be accretive to earnings as the company drives that consolidation effort,” says Tysoe. Federated is extremely interested in Fingerhut’s data collection and data base management capabilities, a skill set that is not one of Federated’s core competencies, Tysoe notes, but is one that will be vital to being successful in catalog retailing and e-commerce in the future. “Fingerhut is primarily a marketing company and it extensively gathers and processes information on its customers and then uses that information and the results of its analytical work to market to its customers individually, which is not something that we have done traditionally in our bricks-and-mortar retailing,” he says. Federated intends to tap Fingerhut’s data base management skills in marketing directly to its customers. Tysoe adds that Fingerhut has a significant amount of excess capacity in its warehousing and distribution area which was created as a result of an aborted venture in home shopping several years ago. He notes that Fingerhut has about 3 million square feet of distribution capability, and that even during peak periods the company does not use much more than half of that for its own businesses. A Fingerhut Unit Provides Back-End Services to Many Firms In order to capitalize on its excess capacity, Fingerhut created a separate business unit, Fingerhut Business Services, which supports direct-marketing businesses, primarily Internet companies that don’t have back-end operations. The company has taken advantage of the tremendous growth of e-commerce to create that separate business and market it to clients. “So far, it has secured several clients and is in discussions with several other Internet companies that recognize that Fingerhut has unique skills in this area. We think that should become a high-growth, profitable business,” Tysoe says. A Vehicle for Acquiring Stakes In Start-Up Internet Retailers Fingerhut has developed its own web sites and has used its Fingerhut Business Services unit as a vehicle for acquiring minority equity stakes in a number of start-up Internet retailers, such as PC Flowers & Gifts, an online provider of flowers, gift baskets, and gourmet food; The Zone Network, the parent company of mountainzone.com; FreeShop.com, an online provider of free merchandise and links to other e-commerce sites; and Roxy Systems Inc., an Internet marketer of digital communication and entertainment services. “These start-up companies believe that Fingerhut can offer them a lot in terms of reach. Fingerhut sends out 500 million pieces of mail per year and has the ability to promote all these various Internet companies on its own web site,” notes Tysoe. He adds: “Because of all of Fingerhut’s unique capabilities, it has been described as the hidden jewel of the catalog industry.'” Traditional department stores have suffered in recent years from changing shopping patterns: Many consumers don’t have time anymore to browse in large department stores. Instead, they are shopping more frequently in specialty stores, which are smaller and more focused, or they are choosing to stay at home and shop on the Internet. Also, discount retailers and specialty stores with modestly priced goods are taking sales away from some department stores. During the past Christmas season, sales at discount stores and on the Internet boosted an otherwise lackluster shopping season. In a survey on Internet retailing during the past Christmas season done by Boston Consulting Group, the results show that year-over-year revenue for the holiday season more than tripled last holiday season, growing by 230%. The number of year-over-year orders grew by 225% for the same period, and the size of the average order was $55, up 6% over the average order placed during the 1997 Christmas shopping period. Tysoe says that his company spent a considerable amount of money last year to reengineer its macys.com web site so that it would be in place for the past Christmas season. He says that the company was very encouraged by the results it saw on the Internet last Christmas. “Every passing year seems to add credibility to the potential strength of the Internet in terms of a channel of distribution,” he adds. Branding Is a Crucial Issue in The Success of Online Retailing And what will happen to traditional retailing as a result of the rise of e-commerce? Some traditional retailers seem reluctant to embrace e-commerce for fear that online retailing can grow only by “cannibalizing” sales in their stores. However, according to Boston Consulting Group’s first report on online retailing, The State of Online Retailing, which was released last November by shop.org, the online retailers association, research shows that online marketing should lead to an expansion in total revenues across retail categories. The study cites the example of “big box” retailers in the 1970s and 1980s, and more recently book superstores. The study found that since those superstores have opened, book sales have grown more than what was predicted by demographic projections and historical buying patterns. Many survey respondents believe that the Internet is a channel of commerce that will expand demand by improving the shopping experience. Retailers surveyed see strong brand identification as a critical element to the success of online retailing. Respondents said that effective branding dramatically influences a retailer’s ability to tap the Internet’s key revenue drivers: traffic (numbers of visitors), conversion (turning browsers into buyers), and loyalty (retaining customers). Most retailers emphasized that “offline” presence is critical to building online brands. Tysoe says that his company believes that it has extremely strong brands and strong customer loyalty, and that in the long run it must be able to offer all channels of distribution to its customers and deliver a high-quality experience in each channel. “That’s really what we are positioning ourselves for with this acquisition,” he says. “There has been a lot of talk about how e-commerce disintermediates,’ which means that our customers can bypass our stores and go directly to the Internet. We are looking for ways to re-intermediate,’ so that we can strengthen our relationship with our customers. The other challenge we face is to re-energize our stores and to put some excitement back into them, so that when customers do come in, it’s a rewarding experience for them.”