Dr. Barbara A. Ribbens
Department of Management
Western Illinois University
1 University Circle
Macomb, IL 61455
Phone: (309) 298-1159
FAX: (309) 298-1019
The House of Cards (A)
As she drove to her MBA night class for her final exam in December 1997, Vicki
Johnston wondered about her career choices and what the future would hold for herself
and her employer. She had an accounting degree from State University and was just
beyond midway through her MBA. Rumors were circulating about the possible purchase
of her employer, Fingerhut, and Vicki was uncertain about what the future would hold.
Besides, as one of the internal analysts, she realized that Fingerhut was a house of cards.
Vicki had begun working for Fingerhut as a college student. First, she worked in
fulfillment and pulled orders for shipping. Soon she was applying her courses to her
work and becoming an emergent leader of her work group. When her superiors noticed
her initiative and motivating personality, she was given the role of team leader and
eventually promoted to supervisor. After the completion of her degree, she was offered a
full time analyst position at corporate headquarters. Since her family and boyfriend (now
husband) were nearby, she took the job rather than risk only being offered jobs farther
Fingerhut Corporation is a database marketing company which sells a broad range
of products directly to consumers. The company had been in business for almost 50
years and was headquartered in Minnetonka, MN. Fingerhut began as a partnership in
1948 and became publicly held in 1970.
Historically Fingerhut operated mainly through catalogs to current or prospective
customers and postcards placed in other company’s mailings or deliveries. Fingerhut had
successfully added television as a medium and then later, the Internet to its repertoire of
media channels to reach prospective customers and maintain contact with current
customers. Fingerhut has developed a complex proprietary system for monitoring their
customer databases and managing the credit process. No information from this database
is allowed to leave Fingerhut except for mailing lists which are regularly rented to many
Total revenue for the corporation was $1.8 billion for 1997 and the Fingerhut
division accounted for $1.4 billion of that total. Figi’s, a division that is a specialty food
and gift direct mail retailer, accounted for almost $98 million in revenues. Another
division, FNB, provides credit for the customer’s purchases of Fingerhut and Figi’s
products. Figi’s tends to attract a somewhat higher socioeconomic category of consumer
than does the Fingerhut business.
One observer described Fingerhut as the place that makes out like a bandit when
low income people can buy things on credit and pay extremely high interest charges over
the life of the purchase agreement. About 84% of Fingerhut’s sales came from repeat
customers because relationship marketing was the norm at Fingerhut long before it was a
common business practice. Fingerhut had indeed focused on lower income customers
and the desire of these customers to obtain goods on a long term payment system.
Fingerhut used a five tier system to slowly increase the credit allowed to these customers.
In essence, customers had to make faithful on time payments to get their credit allowance
increased and be allowed to purchase more expensive goods.
This niche has proven very successful for Fingerhut since many of the lower
income people want to make good, but also Fingerhut has used coupon books for their
preferred payment method. When a customer makes a purchase, they receive a coupon
book for their payment plan. Each month the customer removes a coupon and sends in a
payment with the coupon. This coupon serves as a reminder to the customer to make the
payment. Providing credit to those other companies will not has enabled Fingerhut to
develop a very loyal following among lower socioeconomic segments of the market.
Changes in the Direct Marketing Industry
The rise of the Internet has altered the direct marketing industry over the past
decade. Following years of increasing marketing costs due to postage and printing cost
increases, the Internet has produced a new more cost-effective means of direct marketing.
Some companies have struggled to incorporate Internet usage with their traditional
methods of reaching consumers. Many direct mail marketers were also still basking in
the glory of previous increases. For example, the number of American buying from
catalogs increased 38% from 1994 to 1995.
Others have hesitated due to beliefs that their core customer base will not be
Internet users. However, the real bottom line is that web sites can reduce transaction
costs if the correct target market will access the web page. While some companies
believed that lower income people will not use the Internet, Fingerhut included the
Internet through a webpage which enables customer service contact, catalog requests and
As an internal analyst, Vicki had found, based on her data for this year, the sales
per mailing seemed to be falling. The active customer list had shrunk in the previous
fiscal year. She suspected from her analyses that this year’s active customer base would
be lower as well. She also knew that Fingerhut needed to maintain a high sales volume to
help cover credit losses and merchandise returns. She wondered if the Internet was
providing too many alternatives for their target market and their niche was being invaded.
Was the Fingerhut house of cards threatened by the Internet?
Table 1: Sales and Mailing Statistics For The Previous Years
For the fiscal year ending: 12/27/96 12/29/95 12/30/94
Sales per mailing – $ 3.43 $ 3. 02 $ 2.91
Existing customer list
Existing customer mailings 339,377 404,894 402,476
(In the 000’s)
Active customer list 4,706 5,174 5,104
(In the 000’s)*
* Customers who have made a purchase from Fingerhut in the last 12 months
Selected Historical Financial Data (In thousands except per share data)
For the fiscal year ending: 12/27/96 12/29/95 12/30/94
Revenue $ 1,762,865 1,814,853 1,699,772
Net earnings 40,159 50,858 45,925
Per Share Earnings:
Basic .87 1.11 .99
Diluted .83 1.05 .91
Financial Position Data At Fiscal Year End
Total Assets $ 1,389,698 1,281,077 1,097,933
Total Current Debt 73,084 215,099 336
Total Long Term Debt
And capitalized leases 271,481 146,564 246,516
Total Stakeholder’s Equity 605,401 547,490 500,950
Net Earnings from the Retail Segment of Fingerhut in Millions
For the fiscal year ending: 12/27/96 12/29/95 12/30/94
Catalog Operations $ 19.5 37.4 69.9
Television Sales 1.6 8.9 (26.2)
Total Segment Earnings 21.1 46.3 43.7
Note: All financials are based on restated numbers in the 1997 SEC 10-K filing.
The House of Cards is Shaking (B)
As Laura left her office on a cold February evening in 1999 and headed to the
daycare to pick up her 2 year old daughter, she reflected on all that had happened in the
past fourteen months. As she had worried, the fiscal year 1997 numbers were pretty
dismal. Net sales had dropped 7%. The sales per customer had dropped to $3.19. While
the overall mailings to existing customers increased slightly to $342.6 million, the active
customer list dropped below 4.3 million. While printing and processing of mailings was
internal (thus overhead), the cost of mailing promotional materials alone was $120.5
million in fiscal year 1997.
Laura had faced a lot of questions about how the customer list was dropping and
about the methods of developing the numbers. Clearly management was frustrated with
the direction the company had begun heading. Catalog sales earnings had bounced back
up to $36.7 million, but television sales continued to decline to $1.0 million. The credit
delinquency ratio had increased to 6.6% from 5.5% for 1996. In fiscal 1995 the
delinquency ratio had only been 4%. It had been a frustrating time since she didn’t
control the numbers, only aggregate and analyze them.
Then in March she’d had supper with an old college friend who worked in
marketing information management. The previous time she’d been around George
Anderson he had been so optimistic about the future of Fingerhut and eager to move on
some exciting new projects. This time she had left their dinner a bit depressed. He
confided in her about his concerns with the narrow focus of the target market and his
worries about how other companies were expanding into Fingerhut’s lower
socioeconomic segments. He was very nervous about the rise of the Internet and the
implications for Fingerhut. She was confused by this because it seemed to her that
Fingerhut had jumped into the Internet at the right time. She wondered what he knew
that he wasn’t sharing with her.
He told Laura that he had begun networking and was planning to revise his
resume. George encouraged her to take more MBA classes and complete her degree soon
so that she would have more qualifications to get another job. Laura felt that her 7.5
years of increasing responsibilities at Fingerhut should be enough for other companies to
view her favorably. Even though it was her only work experience, other employers
would always hold Fingerhut in high esteem and her increasing levels of expertise had
She shared with her husband George’s concerns, but he seemed skeptical. He
commented that the city had increased the tax incentives to Fingerhut to build more
facilities locally and the city council wouldn’t do that to a failing company. Still, Laura
knew that George was very wise so she had taken George’s advice and done two summer
courses and two fall courses so that she completed her MBA the past fall.
Then the 1998 numbers began coming together and they weren’t much better.
The overall revenue had gone up about 5.6% to $1.6 billion, but net income had lost
substantial ground to $45.3 million from $69.3 million in 1997. She had thought 1997
looked bad, but things seemed to be getting worse.
Now the rumors of other companies wanting to buy Fingerhut seemed to be
coming true. She had just left a due diligence meeting monitored by Fingerhut managers
and had found it all very uncomfortable. She answered all the questions honestly but
didn’t feel like either side were happy with her answers.
The guests from Federated Dept. Stores made Laura very uncomfortable. By the
questions they were asking her, she felt that they had mistaken ideas about the business,
but she was unsure how to correct their impressions given her financial focus. It just
seemed that they didn’t understand what made Fingerhut succeed; they were missing
things like how to appeal to lower socioeconomic markets, how to manage a customer
base of credit-risky people, or the financial implications of needing to manage cash flow
to ensure a regular payment even if the payments are spread over a long period of time.
From what these visitors had said, Laura was beginning to wonder about what George
had known and what the sale to Federated would mean to her job and career.
Federated Dept. Stores
Federated Dept. Stores owns upscale and mid-scale department stores such
as Bloomingdale’s, Macy’s, and Bon Marche. Federated is the United States #1 upscale
department store operator with almost 460 stores in 34 states, Puerto Rica, and Guam.
Federated began in 1929 when Fred Lazarus, owner of two major department stores met
with three other major retailers on a yacht and agreed to form a loose federation. The
stores remained a loose federation of elite stores in major cities until the chain was
purchased by Campeau Corporation in 1988 and merged with Allied Stores, a national
leader of mainly more middle class stores in smaller cities. The entire firm declared
bankruptcy in 1990 and two years later reemerged as Federated Department Stores led by
Allen Questrom. While Federated has dabbled in both catalogs and online ventures, the
main thrust of the company remains effective management of bricks and mortar
operations. Federated had sales of $15.7 billion in 1998 with a net income of $536
Anonymous, 2002, Federated to drop Fingerhut, Logistics Management &
Distribution Report, 26 41, No. 2 p. 26.
Barbagallo, P. Hindsight is 20/20: How Federated watched a once-profitable asset slip
away, Target Marketing, 15-16 25, No. 4, p 15-16.
Chiger, S. Miller, P. Del Franco, M., Catalog Age, 5 19, no. 8, p. 5.
Girard, P. Good times will still roll, Catalog Age, v15n7, p. 7.
Miller, P. 2001. Fingerhut fixing credit mess, Catalog Age 5 2018, No. 3, p. 5, 20.
Orr, A. 2002. A fallen house of cards, Target Marketing, 5 25, no. 4, p. 5.