Seeking Deliverance

Surviving The Web Call it what you will: a tsunami or an oversold hype machine. There is no denying that the Internet changes everything. To witness its harsher effects, check out these three tales of established firms with a lot to lose from the Web ‘ s onset. Hanover Direct got online early but found the going costlier than planned; Western Union was slow to find the Web and is now struggling to catch up with new rivals; Bell & Howell is still learning how to straddle new digital ventures without sacrificing yesterday ‘ s businesses.

RAKESH KAUL HAS AN ENVIABLE view from his corner office at Weehawken, N.J.-based Hanover Direct, one of the nation’s largest catalog companies, with $550 million in sales. Across the Hudson River, Manhattan towers stand like sentries in the morning haze. But lurking within that pretty cityscape is Kaul’s nemesis: Wall Street.
At 31 cents a share, down 90% this year and a sliver of its high 17 years ago, Hanover stock costs less than a cup of coffee. The catalog business has always been tough, with 5% to 7% operating margins and steep costs for labor and publishing, and Hanover has run losses in the past few years. The rise of the Web threatened to make things even tougher. “The Internet was like a tsunami,” says Kaul, a soft-spoken 49-year-old.
“There wasn’t one aspect of our business that wasn’t threatened by it.” So he countered early, launching an aggressive Web strategy three years ago, before many companies had even addressed the Internet. He put his catalogs online, a stable of 14 titles including Gump’s and the Company Store. Web-based sales could reap an extra $45 million this year. He also hatched an Internet services division, anchored by a “third-party fulfillment” unit called Keystone, which processes and ships orders for online retailers.
It will bring in $25 million in new revenue this year. Investors have shown their appreciation for his foresight by whacking the stock further. “Wall Street didn’t care,” Kaul says. Wall Street wants earnings, and in three years Kaul has spent an estimated $120 million to turn Hanover from an old-line direct marketer into a force on the Web. In the meantime Hanover lost $26 million in 1998 and $16 million in 1999. It continues to mail out 250 million copies of its catalogs every year.
A trained problem solver, Kaul studied electrical engineering in India and discovered a passion for direct marketing in business school at the University of Chicago. After building brands for 12 years at Norton Simon, he helped turn around Shaklee’s Harry & David gourmet-food subsidiary. In 1991 he went to Fingerhut, a cataloger now owned by Federated Department Stores. In 1996 he joined Hanover as chief executive.
The firm had started out in 1934 as Hanover House Industries, then was sold in 1972 to conglomerate Horn & Hardart, a casino owner and operator of the Automat restaurants. It was reborn as Hanover Direct in 1993 and later picked up ven-erable brands like Gump’s (founded in 1861). When Kaul arrived, Hanover, with 3,000 employees and 23 catalogs, had just lost $104 million on $700 million in sales. He immediately shed six ailing titles, consolidated four computer platforms and five databases into one system and crammed a handful of shipping centers into a 530,000-square-foot warehouse in Roanoke, Va.

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