Fingerhut Corp. Dr. Barbara A. Ribbens Department of Management Western Illinois University 1 University Circle Macomb, IL 61455 Phone: (309) 298-1159 Email: BA-Ribbens@wiu.edu FAX: (309) 298-1019 Fingerhut Corporation 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 away. Fingerhut Corp. 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 other establishments. 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 merchandise ordering. Vicki’s concerns 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 been rewarded. 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 million. Bibliography 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.
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