Catalog deals reflect changes
Montgomery Ward’s old and new headquarters still stand in Chicago
SwissColony, a cataloger of food, gifts and general merchandise, has acquired Montgomery Ward, Charles Keath and HomeVisions catalogs last week at a foreclosure sale from Direct Marketing Services Inc. (DMSI). Its Midwest Catalog Brands division will manage the new businesses.
The former owner of Montgomery Ward and several other catalog brands, DMSI is the latest in a growing list of multichannel retailers to be affected by an increasingly unfriendly banking environment unwilling to extend credit to retailers.
There's no denying that times are tough for catalogers, thanks to rising costs, pinched consumers and uninterested banks. However, acquisitions of these businesses indicate that while many catalog brands may be down, they are not necessarily out.
In fact, financial experts say that with some tweaking to the business model and the proper financing, brands such as Montgomery Ward, Lillian Vernon, Red Envelope, Wolferman's and Sharper Image could wind up stronger than ever.
DMSI could not be reached for comment about its reported financial woes or the sale.
“It's tough out there for direct, retail and companies in general right now,” said Michael Sherman, senior advisor at investment bank Peter J. Solomon. In this environment, marginal brands or companies that aren't strong enough financially are going to have a hard time hanging on, Sherman continued. DMSI is a case in point: its Montgomery Ward was growing quickly and wasn't able to fund its growth, he said.
However, Stuart Rose, managing director at investment bank Tully & Holland, said that in this environment, stronger companies can come along and pick up weaker players — sometimes at a bargain — and make them profitable.
“Now is a time of opportunity, because other players are hurting and prices are down,” he said.
Eighteen months ago, direct marketing companies were selling for 10 times their earnings. Today, prices have come down to 8.5 times their earnings, Rose said.
In the long term, however, the intense scrutiny Montgomery Ward and several other brands are undergoing currently as a result of changing hands could end up making them stronger. “Swiss Colony has a much stronger position and will be able to sustain Montgomery Ward's growth,” Sherman said.
Rose concurred with that assessment. “The Montgomery Ward brand still makes a lot of sense to folks,” he said, pointing to the brand's more than 100-year history. Over the long term, the deal seems to make sense for Swiss Colony, he added, because it can invest in building the brand's Internet operations at a lower cost than its traditional direct mail model.
Swiss Colony itself appears to agree. “It is extremely difficult to grow a consumer catalog business today,” said John Baumann, president of The Swiss Colony, in a statement. “We're finding that more consumers are using Internet search engines for shopping or are visiting name brand sites. Although the Ward brand needs to be rebuilt, it does have strong recognition among consumers.”
Montgomery Ward has worked to leverage its brand name in the past. Fall 2006 saw the brand relaunch its holiday catalog as a 148-page catalog with a Web site and gift card sweepstakes.
The growing list of catalog brands acquired at auction this year indicates that while there is still value in the direct marketing retail business model, the model is changing, said Steve Trollinger, EVP at catalog consultancy J. Schmid & Associates.
“It used to be easy to craft a merchandise concept, define a niche, put together a catalog and mail it out,” Trollinger said. But today, he adds, the cost structure has made this very difficult, he adds.
This explains why more companies either establish an online presence first and then market to existing customers through the mail, or simply acquire existing direct mail-based brands.
“We used to not talk about brand at all,” Trollinger said, explaining that if you had great product and shipped it direct to consumers, that was enough of a point of difference to thrive. “Now, however, with so much competition out there, the concept of brand is very important.”
Wolferman's acquisition by Harry & David earlier this year was cited as an example. As with Montgomery Ward and DMSI, Wolferman's couldn't grow the business the way it needed to grow, while Harry & David brings the kind of leverage that can help the brand grow. At the same time, Harry & David acquires a recognized brand, Trollinger said.
Other business models are also appearing. Hilco Consumer Capital LLC, Gordon Brothers Brands LLCand additional joint venture partners acquired The Sharper Image at auction on May 29 and soon began closing all 86 Sharper Image stores. However, the new owners have developed a global licensing strategy for wholesale, retail, direct-to-retail, e-commerce and catalog businesses for The Sharper Image with the goal of tapping into the brand's heritage of quality, excitement, innovation and fun.
Also unloaded in auctions were Lillian Vernon, to Taylor Corp. in April; and RedEnvelope, which Provide Commerce agreed to acquire at auction in May. While few details are available about what the plans are for these brands, there are efficiencies to be gained in sourcing and customer acquisition from these deals.