Is Martin Zaepfel Spiegel’s Mr. Right?

Say you’re the head of a company that has seen sales drop 25% in two years, from $3.06 billion in 2000 to $2.28 billion in 2002. Nasdaq delists your company as an over-the-counter stock for failing to report annual earnings on time. Your company’s credit-card division, which has been for sale for more than a year now, lost nearly $86 million in 2001. And an analyst describes the company as “a slow-motion train wreck that’s been going on for years.” What do you do?

If you’re Martin Zaepfel, vice chairman/president/CEO of Spiegel Group — which includes apparel cataloger/retail chain Eddie Bauer and budget-price women’s fashions and home goods mailer Newport News — you counsel patience. “We think we have three good brands,” Zaepfel says, “which is motivation for us being more patient than we would be.”

Luckily for Spiegel, Germany’s Otto family, which has owned most of the company since 1982, professes to be willing to bankroll whatever adjustments are needed to turn Spiegel around. In fact, the Ottos have stuck with the company through tough times in the ’80s and early ’90s.

Nonetheless, you’ve got to wonder if the Otto family’s patience truly is limitless.

One look at Zaepfel and the posh Spiegel headquarters in the Chicago suburb of Downers Grove, IL, hardly suggests a company in such dire straits. When Catalog Age visits in mid-December, Zaepfel, 59, resembles a European banker in his tidy dark suit; public relations vice president Debbie Koopman, who has weathered assorted Spiegel executive turnovers in her 10-plus years with the company, is smartly attired as well. And though Koopman is quick to point out that “dress down” is the dress code in Downers Grove, there are no blue jeans to be found.

Indeed, Zaepfel — a tall impressive figure who speaks with a heavy German accent — appears to be all business. A Spiegel board member since 1996, Zaepfel worked at Otto (formerly Otto-Versand, of which the Otto family is a stakeholder) in Hamburg, Germany, for 17 years. He rose to deputy chairman of the board of directors and director of marketing and advertising before being transferred to the U.S. in July 2001 to run Spiegel Group. He replaced Michael Moran and James Sievers, who headed an office of the president overseeing the three brands.

Clearly Zaepfel’s mission was to steer Spiegel back on course. From 1997 through 2000, The Spiegel Group improved upon its year-earlier earnings performance for 12 consecutive quarters, from fourth quarter 1997 through the third quarter of 2000. (The fourth quarter of 2000 was profitable although earnings fell.) But after 2000, the black ink turned to red, and it stayed red.

Moving Bauer away from Brooks Brothers

Within six months of taking charge, Zaepfel had ordered brand-equity studies for Eddie Bauer and Newport News, put the credit-card division on the market, and forced out Eddie Bauer CEO Richard Fersch — or “sent the CEO into retirement,” as Zaepfel puts it.

Fersch had headed Bauer during its growth run throughout much of the 1990s, but he also took the fall for the unit’s shift in 1999 and 2000 to “dress casual” clothing — “merchandise you’d usually buy from Brooks Brothers, not Bauer,” Zaepfel says.

The transition from Bauer’s traditionally outdoorsy wear was “a big mistake,” Zaepfel adds, “because it’s too small a category to foster future growth.” Bauer’s combined catalog and retail sales fell from a high of $1.8 billion in 1999 to $1.5 billion in 2002. And what’s bad for Bauer is bad for Spiegel Group, because Bauer accounts for nearly 60% of the company’s sales.

This past summer, Fabian Mansson — a former chief executive at hot Swedish retailer Hennes & Mauritz (H&M) — was named president/CEO of Eddie Bauer. But in speaking with Zaepfel, you’d never know someone else is directly responsible for running Bauer.

Zaepfel feels that the brand, which has often been viewed as an L.L. Bean or Lands’ End wannabe, needs “to stand for something. It has to be very strong in details. For instance, pants were one of Bauer’s strongest segments in the past. So we need all variations in pants — different fabrics, styles, sizes — we have to be a powerhouse. Our objective for 2003 is to define which other product categories we want to be very strong in.”

To that end, Zaepfel intends to increase Bauer’s selection of hard goods, such as watches, sunglasses, and luggage, during the coming months, as those are areas in which Bauer has done well in the past.

At the same time, he’s determined to bring Bauer closer to its roots as a sporting-goods store. Referring to the brand equity study conducted by New York consulting firm McKinsey & Co., Zaepfel says, “the outcome more or less didn’t surprise us that Bauer’s reputation is for outdoor merchandise, that it represents outdoor.”

This redirection has so far manifested itself in a greater emphasis on suede jackets and ski sweaters than on button-down shirts and tailored skirts. Whereas 25% of the styles offered in the holiday 2001 Bauer catalog were dress casual, in the holiday ’02 book just 9% were.

Although he doesn’t offer any quantifiable results, since the Bauer revamp is ongoing, Zaepfel says he’s happy so far. “We’ve started to rebuild what Bauer stands for, so when customers read our catalogs and go into our stores, they can at least get an idea of which direction we’re going,” he says.

Thanks to the Website, the direct division of Bauer is in better shape than the retail side. Still, an emphasis on profits over growth will keep catalog circulation flat this year.

And while Zaepfel won’t reveal specifics, he’d like to scale the Eddie Bauer retail chain back. “By nearly doubling the number of Bauer stores between 1995 and ’98, we moved too fast,” he says. “But we closed about 40 stores in 2002 as leases expired, and will continue this in 2003 and after with any opportunities when leases expire.” Bauer ended 2002 with 546 stores.

Zaepfel adds that though the company will open additional Bauer stores as real estate opportunities arise, those stores will be smaller than most of the existing ones, “which are too big,” ranging in size from 5,000 sq. ft. to 25,000 sq. ft.

But as a whole, Bauer remains very much a work in progress, with a merchandising makeover crucial to the unit’s rebound. “Like L.L. Bean, Bauer has to come up with some new ideas to appeal to a broader audience,” says Ed Bjorncrantz, a partner with the Evanston, IL-based direct marketing consulting firm The Callahan Group.

New at Newport News

Eddie Bauer isn’t the only Spiegel brand being revamped. Newport News’ brand equity study, which was launched in January 2001, led to a redesign of the catalog, which was unveiled last month.

Newport News, whose primary focus has been on women’s casual wear and swimwear, added new merchandise segments, such as cosmetics and office apparel — structured businesswear, business casual, and clothing for casual Fridays. The creative has an editorial feel, says Newport president/chief operating officer Geralynn Madonna: “We’re actually telling [the customer], If you work in this setting, this is what you wear.”

According to its data card, Newport News’ nearly 2.6 million 12-month buyers have income in the $35,000-$75,000 range. Clearly the redesigned, remerchandised catalog aims to win more customers at the higher end of the scale — customers attacted by the products rather than by the easy availability of credit.

Between 1998 and 2001, Newport’s sales rose from $345.5 million to $448.9 million. But much of that growth resulted from Newport — like the Spiegel catalog — loosening its credit criteria and offering credit cards to less-than-prime borrowers.

Indeed, Spiegel Group “let the credit-card business drive the marketing strategy a bit,” says Kevin Silverman, a retail analyst at Chicago-based ABN AMRO Asset Management (and the analyst who refers to Spiegel as a “train wreck.”) “It eased up on credit scoring, sending a lot of credit cards to people who didn’t pay.”

Like Silverman, Zaepfel says that strategy was a mistake. “Both Newport and Spiegel had extensive growth between 1998 and 2000,” Zaepfel points out, referring to Newport’s 37% gain and Spiegel’s 42% increase. “But the growth levels were supported by credit. And because of the change in the credit market, we stopped our credit-driven activities and new customer acquisition.”

So in addition to its rebranding, Newport is scaling back circulation this year, mainly to “purge off the credit-needy customer from the file,” Madonna says. Newport mailed 266 million catalogs last year; Madonna won’t reveal the circulation figures for this year.

Subtle changes for Spiegel

As for the flagship Spiegel catalog, Zaepfel has ordered more-subtle changes than for the other brands — even though sales for the Spiegel catalog tumbled 37% between 2000 and 2002, from $833.4 million $522.0 million.

Whereas previous Spiegel catalogs were cool in tone, with many of its models posed in unsmiling, unapproachable attitudes, this year’s catalogs offer a warmer, more relaxed look. “Our customer is a busy, 44-year-old woman who’s very much on her own and wants to look good,” Zaepfel says. “We want to be much more consistent in that look, with less of a cold atmosphere in the page spreads.”

But there’s no question of modifying the concept of the so-called big books — Spiegel’s core, 500-plus-page catalogs, which sell everything from designer apparel and fine jewelry to consumer electronics and kitchen clocks. “We’ll keep the big book going,” Zaepfel explains, “because according to our research in Europe — although we’ve not researched it here in the U.S. — people use big books for planning and what they may buy in the next couple of months.”

But Europeans and Americans have different attitudes toward shopping, and assuming otherwise may be a mistake, says ABN AMRO’s Silverman. “Spiegel sends big books where it knows in advance that half of the people have no interest in one category or the other,” he says. “It’s not an optimum mailing strategy.” Spiegel mails 4.5 million-5 million copies of its spring and fall big books each year.

Zaepfel may view the core catalog as a key means of enticing prospects with Spiegel’s full range of wares. And converting new customers is critical for Spiegel, says Callahan Group’s Bjorncrantz. “If Spiegel doesn’t add new names, it’s just going to be going around in a circle to the same customers.”

Make that an ever-decreasing circle. From a high of 4.4 million 18-month buyers in 1997, the Spiegel catalog fell to 3.4 million 18-month buyers in 2001. But even adding new customers isn’t enough; the catalog has to add new buyers with strong credit. Which brings us back to Spiegel’s credit-card woes.

The company’s credit card division services more than $3 billion in credit card receivables. Spiegel initially took a $310.5 million charge (the estimated net loss on the sale of the credit card business) at the end of 2001 when it put the credit-card unit on the block. Since then losses have mounted as, at press time, Spiegel had yet to sell the division.

“But we’re optimistic we’ll find a solution in the first quarter of 2003,” Zaepfel says. “We’ve learned how to structure this deal differently over the past year.”

Instead of selling the unit off altogether, Zaepfel wants to find a buyer who’ll operate it in partnership with Spiegel Group, taking the financial burden of owning it off Spiegel without eliminating it from the picture altogether. “The credit business should stay as an important element of our business development,” Zaepfel says, “but not the main driver. We’re using credit as a marketing tool, just not our primary one.”

That’s hardly a revolutionary change. In fact, none of Zaepfel’s tactics or goals appear revolutionary. But maybe this conservative approach is what will end up righting Spiegel Group. “My first initiative has been to be in a small, stable position and grow slower,” Zaepfel says. “The very strong moves up and down in sales and profits endangers any efficient long-term decisions and ruins the confidence of investors and shareholders.”
Additional research by Mark Del Franco

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