Hanover Direct: Domestications and Company Store Harness the Internet

April 3, 2001

Weehawken NJ (USA) – When The Company Store opened its doors in 1911 in Wisconsin, the personal computer had not even been invented yet, let alone the Internet. But in 1999, it owed a growing percentage of its sales to digital shopping. In fact, Hanover Direct, which bought The Company Store as a catalog in 1993, has pioneered the latest trek called d-commerce to the frontier of direct sales and has sent back word that the wilderness is rich with possibilities. Last year, online activity accounted for more than 11 percent of the total sales of its merchandise.

Profits in the home decorating industry are decidedly not sagging for Hanover Direct, whose loss of $12.7 million in 1998 grew into a healthy profit of $10.4 million in 1999.

Hanover, a publicly held direct marketing company, attributed its turnaround to the development of strong proprietary brands and a strong way to present them – namely, d-commerce, a combination of Internet and catalog sales. It ventured into the d-commerce model as a struggling company that was closing catalogs in 1998, and in 1999 emerged as a direct marketing powerhouse.

During that year, Hanover had added approximately one million e-mail addresses to its active customer files and Internet sales soared nearly fourfold to $32.8 million, compared to $8.3 million the previous year.

Fifty percent of the Internet customers were new to the company.

Despite this digital success, Hanover will never rely solely on the Web for business, said Steve Goldberg, president of Domestications, one of Hanover's outlets for home textiles and decorating.

"Ours is not a Web-driven business. The Web is a viable leg, but just one leg, of our sales effort," he said. "We've driven our customers to the internet by our catalog presence."

The catalog presence, organized under Hanover Direct's B2C merchandising subsidiary, Hanover Brands, now encompasses eleven catalogs – three of which are new since the company went to d-commerce. The company showcases its brands via 235 million catalogs distributed each year to targeted customers, who are then directed to the Internet, where they can choose from a menu of options for shopping, e-mail or e-care (a live operator on the telephone while the shopper is at the Website).

The $85 billion direct commerce universe in which the company now competes will multiply to four times the old catalog industry volume on the strength of Internet-driven commerce in the U.S. and Europe, predict its executives.

The d-commerce model uses print ads, direct mail catalogs and the database generated for mailings for direct response sales. Customers are then driven to the Internet and steered to target offers, effectively linking print, telephone and e-commerce.

While the catalogs afford Hanover a low-cost way to acquire e-commerce customers, the merchandise displayed in those catalogs must first grab the shoppers' attention. To that end, Hanover has pushed to be dominant in its categories, said Goldberg.

"The development of strong proprietary brands has given us a presence in the home decorating marketplace," he said. The company launched an aggressive program to enhance the value of its brands by making some of them exclusive, thus giving Hanover better control over pricing versus commoditization of its goods, said a company spokesman. Fabrics for the company's 13 proprietary brands, which take aim at upscale and mid-market U.S. consumers, come mainly from overseas suppliers.

"We began sourcing overseas because we found that the U.S. mills were not able to supply new and proprietary fabric runs, which tend to be smaller," explained Anita Iodice, president of The Company Store, Hanover's fashion-directed catalog.

"U.S. mills are set up to do long runs of the same product. We need more flexible mills that can change colors and designs — we like to do fairly often to keep our designs fresh." Hanover Direct recently consolidated its B2C merchandising holdings into one operating group called Hanover Brands, Inc. to optimize its purchasing clout for international sourcing. Brands include The Company Store for the upscale home fashions consumer; Domestications, a leading home textile and fashion decorating catalog; Gump's, a purveyor of luxury gifts and Asian inspired products; Improvements, aimed at the home do-it-yourselfers; newly-launched income-generating Encore; and two clothing catalogs.

The company sources all over the globe, from Europe to India, and relies heavily on international textile fairs for the development of new relationships.

"There are new international vendors entering the picture all the time. The fairs are our primary way to meet them," said Goldberg. "We also purchase artwork at the fairs."

The company's buyers prefer to deal directly with the vendors, agreed Iodice. Off-shore sourcing requires a different focus than sourcing domestically, and because the sourcing company takes on more risk, it's important to get to know personally the strengths and weaknesses of the suppliers, including production abilities and lead times.

"We learned the hard way that it's always easy to make a good sample," said Iodice. "As a merchant, we've found it better to deal directly with the one who makes the product." The fashion-directed catalog over which Iodice presides has cotton-centric fashion-driven customers, so she sources handmade items in India, finished product in Europe and when the political landscape allows, cotton from Portugal.

"The most challenging part of international sourcing is that the supply chain is constantly changing, and is so competitive," said Goldberg. "When the quotas are lifted from WTO countries in 2005, it will change the landscape again. Some now advantaged by the quotas will become disadvantaged. The arena will become even more highly competitive. I think the deciding issues then will focus on textile quality rather than non-textile issues."

But, Goldberg continued, the company has already had to set up relationships all over the globe in anticipation of the changes. Since the development process for supply chain is very long, he said, Hanover is working that far ahead to obtain raw materials and the products for its portfolio.

It will continue to develop its sources and expand its offerings because Hanover Direct believes the home will continue to be a powerful and sustainable source of consumer spending. Its d-commerce model, the company contends, builds brand awareness while driving legions of new shoppers to Hanover's Web sites. And this, it said, has proven the d-commerce model superior to other business models of e-commerce populating the Internet.

Its brands are generating significant growth, profits and cash flow, so the company has an edge to maintain.

"There have been some very pleasant surprises with sales across demographic, geographic and income areas. We've seen nothing but positive incremental growth in sales," Goldberg said.

Sidebar
A Closer Look at Hanover Direct
Hanover Direct, Inc. (AMEX:HNV) and its business units provide branded merchandise through a portfolio of catalogs and e-commerce platforms to consumers, as well as a comprehensive range of Internet, e-commerce and fulfillment services to businesses.

B2C merchandise subsidiary, Hanover Brands, Inc.
Hanover Brands, Inc. is comprised of the catalog and e-commerce Web site portfolio of home fashions, apparel, general merchandise and gift brands, including The Company Store and Company Kids for the upscale home fashions consumer; Scandia Down, a line of high end comforters, linens and European fabrics; Domestications, a leading home textile and fashion decorating source; Gump's, a purveyor of luxury gifts and Asian inspired products; The Safety Zone and Improvements, aimed at the home do-it-yourselfers; Encore, which showcases the most popular company offerings; Silhouettes, focused on stylish fashion for large size women; Undergear and International Male, offering contemporary men's fashions and accessories. The company also owns a retail store, Gump's, in San Francisco.

B2B Internet subsidiary, erizon, Inc.
erizon, Inc. is comprised of Keystone Internet Services, Inc., the company's third-party end-to-end fulfillment, logistics and e-care provider, and Desius, LLC, the company's joint venture with RS Software (India) Ltd., offering web shop services and e-commerce systems development. Includes three warehouse fulfillment centers and four telemarketing/e-care centers, real-time inventory status, web hosting and co-location, a supply chain extranet. Erizon also services the logistical, IT and fulfillment needs of the Hanover Brands subsidiary. Plans call for expansion into artificial intelligence, wireless data services, broadband and globalization of networks.

erizon actively competes in the $5 billion business-to-business market which it plans to expand off-shore through an arrangement with GE Capital International Services.

Equity ownership of new Internet businesses
The company has a majority equity stake in Always in Style, LLC.


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