Tumultuous Times at F&G

A CEO resignation, falling sales, and a lawsuit have Foster & Gallagher in a state of flux

Few industry watchers were surprised when multititle mailer Foster & Gallagher (F&G) finally sold its children’s division on June 8, to 1-800-Flowers.com. After all, the Peoria, IL-based company had had the kids’ unit on the block for more than a year.

But many were shocked when F&G president/CEO Robert A. Ostertag Jr. announced his resignation on June 13. At press time, a successor had not been named, but Ostertag will remain a corporate director. Ostertag joined the company as president of the Michigan Bulb Co. (MBC) catalog and its affiliates in 1992 and took the top spot in 1996. During Ostertag’s nine years with the company, F&G’s annual revenue grew from $170 million to a high of $476 million in 1997.

But sales began falling, to $471 million in 1998, $368 million in 1999, and $337 million last year. Earnings also tumbled. According to the spring edition of an F&G employee newsletter, the company’s last profitable year was 1998, when earnings were $1.6 million. F&G posted a $7.7 million loss in 2000, although that was an improvement on its reported $24.9 million loss in 1999.

The sales slide in part prompted F&G to sell off its nongardening catalogs. In July 1999, F&G sold food gifts title The Popcorn Factory to Wand Partners. In April 2000, the company put the children’s division, which includes wood toys book HearthSong and dolls title Magic Cabin Dolls, and its gifts group, which includes Walter Drake and the Home Marketplace, on the selling block.

After more than a year, Westbury, NY-based flower and gifts marketer 1-800-Flowers.com bought the $30 million children’s division. Terms were not disclosed, but as part of the deal, the $437 million 1-800-Flowers acquires the brands’ 2 million customer names and a 200,000-sq.-ft. distribution center in Vandalia, OH. Sydney R. Klevatt will remain president of the children’s group. At the same time, the books fall under Peter G. Rice Sr., president/CEO of Madison, VA-based Plow & Hearth, which is also owned by 1-800-Flowers.

But F&G’s decision to focus on its horticultural catalog titles — MBC, Stark Bros., Breck’s, and Gurney’s Seed & Nursery Co. and Henry Field’s, both of which it bought in 1999 — may not be a cure-all. The year has been a tough one for most gardening catalogers.

According to consultant and F&G board member Dick Hodgson, “The horticultural segment is down across the board, not just at F&G. We think that buyers have started to shift their buying focus toward companies like Lowe’s, Home Depot, and Wal-Mart.”

Will Raap, president of Burlington, VT-based gardening products cataloger Gardener’s Supply Co., agrees. “We’ve seen a significant softening in sales since late February,” he says.

Consumers buy horticultural items in anticipation of the spring, but due to heavy snowfall in parts of the East this winter, “sales took a hit,” Raap says.

Other problems abound

F&G’s problems extend beyond softening sales in the gardening market. For one, MBC heavily used sweepstakes marketing to prospect and was therefore hit hard by the Deceptive Mail Prevention and Enforcement Act passed in April 2000. According to the F&G employee newsletter, between 1999 and 2000, MBC’s gross revenue tumbled 44%, from $116 million to $65 million. And in November, the Peoria Journal Star reported that F&G laid off up to 15 of its 555 Peoria employees.

Compounding F&G’s woes, in April attorney Dean Rhoads filed a class action lawsuit on behalf of the company’s employee stock ownership plan (ESOP) in the U.S. District Court in Peoria. The value of F&G’s retirement accounts declined 91% between December ’97 and December ’98, from $82 million to $7 million, which Rhoads alleges was due to improper administration. (F&G declined to be interviewed for this story, and Rhoads would not comment.)

So what does this all mean for F&G’s long-term outlook? Although sources would not speculate on the record, several expressed concern about the cataloger’s future. But nobody wants to see the horticultural giant fall from grace. As Raap points out, “A healthy F&G is good for mail order because it is the leader.”

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