F&G: What Went Wrong?

Payments on a $70 million loan contributed to F&G’s downfall

On July 2, Foster & Gallagher (F&G) made it official: The multititle mailer filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. Now all that’s left for the one-time horticultural giant is to finish liquidating its gardening books, sell its gifts catalogs — and to figure out what went wrong.

The bankruptcy filing followed the June 29 layoffs of nearly all of 3,000 workers at F&G’s horticultural catalogs and the June 13 resignation of CEO Bob Ostertag. The company closed its Spring Hill Group, Michigan Bulb Group, and Gurney’s Group and subsidiaries, which included the Breck’s, Stark Bros., and Henry Fields gardening catalogs. At press time, the Gift Group, which includes the Walter Drake and The Home Marketplace catalogs, was still in operation and still for sale.

Of ESOPs and sweepstakes

Some industry observers blame F&G’s demise on the Michigan Bulb catalog’s reliance on sweepstakes as a prospecting tool. Sweepstakes marketing came under fire in the late 1990s, and in April 2000, Congress passed the Deceptive Mail Prevention and Enforcement Act, which severely restricted the use of sweepstakes. According to an F&G employee newsletter obtained by Catalog Age, Michigan Bulb’s gross revenue between 1999 and 2000 tumbled 44%, from $116 million to $65 million.

The Michigan Bulb downturn came at an especially difficult time for F&G. Sources say the company had been counting on Michigan Bulb to help it repay the $70 million it borrowed in 1995 to establish an employee-owned stock program (ESOP).

Even as F&G was grappling with the sweepstakes-related sales decline and the loan repayments, its gardening books, which made up the core of its business, faced increasing competition from “big box” retailers. On top of the Michigan Bulb problems, this led sales to fall from a high of $476 million in 1997 to $337 million last year. At the same time, F&G was heavily investing in its gardening Website, MySeasons, which it launched in 1998 and which some sources say caused it to lose sight of its core catalog business.

All these factors combined to drive F&G into the red. According to the newsletter, F&G’s last profitable year was ’98, when earnings were $1.6 million. F&G posted a $7.7 million operating loss last year, although that was an improvement on its reported $24.9 million operating loss in ’99.

Searching for a remedy

Ostertag began to trim overhead in the late 1990s by outsourcing the company’s IT operations and consolidating operations to Grand Rapids, MI (the home of Michigan Bulb), from Peoria, IL. F&G also began divesting noncore businesses. It sold food gifts title Popcorn Factory to Wand Partners in July 1999 and its children’s group, including HearthSong and Magic Cabin Dolls, to 1-800-Flowers this past June. But the funds raised and expenditures saved weren’t enough to rescue F&G.

“The news is sad for both the many long-term employees and vendors and for our industry,” says Mark Swedlund, partner at W.A. Dean & Associates and a former F&G senior vice president. “Throughout the ’80s and most of the ’90s, F&G was known as one of the most profitable, most stable, and most shrewdly operated catalog consolidators in the business. The company’s hard times are good for no one.”

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