For years, Weehawken, NJ-based Hanover Direct was one of the more acquisitive catalog companies in the business, having bought six titles since 1993 alone. But while Hanover was growing through consolidation, it wasn’t making any money-its last profitable fiscal year was 1994. After that, it did not report a quarterly profit until the fourth quarter of 1997-and then immediately returned to posting losses each quarter. For the quarter ended Dec. 26, 1998, it lost $13.4 million.

But sensing an opportunity to capitalize on the near-hysteria surrounding the Internet, $546.1 million Hanover announced on March 30 that it has repositioned its business into two “Internet driven” divisions: brand marketing and Web services.

So far, the brand marketing group, which consists of Hanover’s 12 catalog titles and their Websites, plus the Gump’s gift store in San Francisco, is far and away the backbone of the company, accounting for nearly $538 million in revenue last year. The Internet services-Web hosting, fulfillment, and credit card processing-that Hanover provides for outside companies via its Keystone Fulfillment group accounted for only $8.3 million of the company’s revenue-though that represents a ten-fold increase over 1997, when the division was established.

But Hanover Direct president/CEO Rakesh Kaul says it is the Web services division that represents the greatest growth potential for the company. “We took the position 15 months ago that the Internet was not just a bubble, but a wave,” Kaul says. “And with this repositioning, we are well situated for that wave.”

Still a print cataloger Hanover’s announcement regarding the repositioning emphasized the Internet to such an extent that some observers wondered whether the company planned to stop mailing catalogs altogether. But the company flatly denies that this will be the case. “Catalogs will always be a part of our brand,” says chief financial officer Larry Svoboda.

Kaul equates the advent of the Internet to the introduction of television: “When television came along, people did not stop reading books,” nor will shoppers stop buying from print catalogs merely because online shopping is now available, he says.

But at the same time, Hanover Direct does want to convert its 4 million 12-month buyers into online shoppers. The company has found that its catalog customers, when they buy online, spend more than other online buyers.

Moreover, maintaining a Web catalog is typically less expensive than printing and mailing paper catalogs. “With the Internet, it doesn’t cost you anything to provide an entire merchandise selection online,” Kaul notes. “In the future, the marketing role in the multichannel environment may result in less frequent mailings,” he says, or production of print catalogs that offer only a sampling of the total product line.

A gradual shift Already Hanover plans to reposition three of its struggling print catalogs-golf equipment and apparel book Austad’s, women’s apparel catalog Tweeds, and housewares mailer Colonial Garden Kitchens-as primarily e-commerce brands. The three catalogs suffered a combined $18 million drop in annual sales last year. “But the shift toward e-commerce will be gradual,” Svoboda insists, and the three titles will continue to mail, at least for this year.

Hanover is wise to proceed slowly. According to New York-based market researcher Jupiter Communications, only 25% of U.S. households have Internet access. So Hanover’s efforts to convert a sizable share of its house file to online shopping may not pay off immediately.

“There has to be a natural evolution for taking catalogs on the Web. It’ll take time,” says San Francisco-based catalog consultant John Lenser. “But the Internet has proved to be an effective selling tool for commodities products and niche businesses, such as gifts and gadgets, and Hanover has some of those products.” The company’s Gump’s By Mail catalog, for instance, sells high-end gifts and home accessories, while the Improvements and Safety Zone titles sell household gadgets and tools.

A fulfilling opportunity On the Web services side, Hanover has already won 13 clients, including women’s apparel mailer United Retail Group, nonprofit organization National Geographic Society, and L.L. Knickerbocker, which sells dolls and jewelry. And with nearly 1 million sq. ft. of warehouse space in Hanover, PA, and Roanoke, VA, the company’s Keystone Fulfillment group has the physical space to take on even more clients. What’s more, Kaul says, Hanover is committed to making “significant investments”-about $50 million-in its computer platform and warehouse for both the brand marketing and Web services divisions over the next three years.

Hanover expects the investments to pay off sooner rather than later, thanks largely to Internet shopping’s “coming of age” this past holiday season; some research companies estimate that online holiday sales reached as high as $7 billion. Such soaring revenue figures should spur more companies to ready their e-commerce sites for holiday ’99-which Kaul hopes means more fulfillment business for Keystone.

A number of industry observers feel that Kaul is right to invest in Keystone’s Web fulfillment capacity. “To the extent that it’s the highest and best use of Hanover’s infrastructure, I think it’s a good move,” says Kevin Silverman, managing director at Chicago-based investment bank ABN Amro. “The demand right now is very high for fulfillment services, and it’s a good time for a company to be out there offering those services.”

“E-commerce has blown the doors wide open in the fulfillment industry,” says Bill Kuipers, a partner in Haskell, NJ-based operations consultancy Spaide, Kuipers & Co. “I think Hanover is positioned nicely because it has the capacity and the expertise in the direct channel, and a level of sophistication that a lot of other fulfillment sources don’t have.”

But Kuipers does have reservations regarding Hanover’s ability to stay ahead of fulfilling orders for multiple clients. “If you have backlogs in your fulfillment stream to begin with, you’re going to get slammed,” he notes. “And Hanover has been both ahead of and behind in the production stream at different times.”

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