QVC, H.O.T. Running Close Race to Profitability in Germany

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DUESSELDORF/MUNICH - Shopping channels QVC and H.O.T. are running neck and neck into profitability on the lucrative German market. H.O.T., in which HSN has a 42 percent stake, turned a profit in 1999, QVC expects to this year.

"1999 was our third year on this market," QVC Germany head Francis Edwards said, "and it was a very successful one." Sales topped 220 million Deutschmarks (about $110 million at current, fluctuating exchange rates).

"That's 150 percent higher than the previous year when we did DM 92 million (closer to $50 million at '98 exchange rates). Obviously we are very pleased with the progress and the growth we have made," Edwards said.

H.O.T.'s figures were equally impressive. The channel made a pre-tax profit of DM 20 million ($11 million) last year compared to an operating loss in 1998 of DM 19 million. Sales rose from DM 199 million to DM 350 million last year, an increase of 75 percent.

"These results exceeded our own expectations," H.O.T. CEO Dr. Andreas Buechelhofer said. "We're more than satisfied with our 1999 results and look with great optimism into the year 2000." He expects double-digit growth in both sales and profits.

Both channels have overcome initial legal problems in the mid-nineties that threatened to keep them off the air, even though QVC still operates under a pilot license.

"We currently have 800,000 customers, do an average DM 1 million worth of business a day and expect a turnover for 2000 of at least DM 300 million. I think we have a good opportunity to make an operating profit this year," Edwards said.

"What happens as we grow is that we are still losing a little bit of money each month, but if you look at the entire year we have a good chance of entering positive territory." Home shopping, he added, is still a growth industry in Germany and "I expect our gross turnover to be DM 1 billion in five years."

QVC now reaches 27 million German households for at least three hours a day and 20 million households around the clock. The channel beams live broadcasts for 19 hours a day and repeats for the other five. H.O.T. does 16 hours live.

QVC enters some 10 million household via satellite with both digital and analog signals in use. Digital broadcast was begun last month, Edwards said. The rest of QVC distribution is via cable.

The extra seven million homes are reached for three hours a day via the German NBC channel which broadcasts QVC programming from noon to 3 p.m. The NBC outlet has gone through some restructuring on the German market, he said.

"They sold their German cable distribution to a German consortium so the NBC channel is now a mix of QVC, some German programming and some NBC programming."

QVC has distribution across the country in every state including the "new" states of what was once the German Democratic Republic.

More than 60 percent of product sold on QVC is sourced from German suppliers. As in the US, the biggest single seller is jewelry, with most of it sourced from Italy. Electronic and hard goods tend to be German.

About 10 percent of product is imported from the US, usually items that have done well on QVC at home. Blue Blocker sun glasses are one example that worked well, and George Foreman grills are another.

"Foreman came over here in November and was live on our show here in Germany. He had a press conference and we had a much larger audience than we usually do. Five major TV stations and the national newspapers attended."

The former heavyweight champ went on the air live with QVC extolling his grill in English. "Most of our audience knows English well enough to understand him and the show host translated for those who didn't.

"We use celebrities when they are appropriate for the product. We like guests who represent the product and are experts. Foreman's grill is still his product, not ours. He demonstrates it and uses it. It's his.

"Our most successful product is a set of hair curlers designed and patented by a German lady and she comes on regularly and tells housewives how they work and is very successful doing that.

"Our approach to selling is that we like it to be a conversation over a backyard fence so we're not looking for professional presenters. We screen for people with good TV presence, who are credible and learn quickly.

"We don't like to use hard sell techniques and the feedback we've had from surveys is that our viewers really appreciate our friendly, informative style.

Although HSN has a large stake in H.O.T. it leaves management pretty much alone, spokeswoman Annette Holzapfel said. "It's a very comfortable relationship. Our management has complete freedom of action."

The company changed its corporate structure last year so that under German law the company could be taken public if it so desired. The new structure, Holzapfel said, was more transparent and appropriate to company growth.

She also noted that capital markets have shown growing interest in H.O.T. as an acquisition property. No decision has been made yet about going public since the enterprise generates enough cash to finance multimedia expansion.

"We took the home shopping idea from the US but adapted it to the German market. You have to know the regional characteristics very well because here in Europe there are many and they are many-colored."

Service counts in Germany, which has a long mail order tradition. Goods must be sent on time, and billing handled in appropriate fashion. Infomercials, Holzapfel said, "were never able to establish themselves successfully on this market."

H.O.T. has broad pan-European aspiration. It has been trying to launch in Italy since last summer but efforts have been stymied by government regulation and the issuance of new broadcast frequencies.

"We're close. We're in the rankings for assignment of a frequency and need only await a decision from the ministry of communications. We expect to start in the second quarter of the year."

H.O.T. is also looking to expand into any market with more than 5 million households and where one language is spoken - a criteria that includes Poland and Benelux as well as France and the UK.

QVC, which is now solidly established in the UK and Germany, is less specific. "We're looking at various markets around the world but don't have any active plans to open another channel.

"We are, however, reviewing a number of possible locations - the most likely are Japan, Argentina, France and China in terms of having the kind of audience we need," Edwards said.

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