End of the Road for Foster & Gallagher

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Hardly anyone who follows cataloging can be unaware of the demise of one of the biggest companies, Foster & Gallagher. When you look at the catalogers that have been instrumental in developing the specialty catalog industry, Foster & Gallagher ranks with the Lands' Ends and Lillian Vernons.

F&G started on a table in a basement and grew to revenue of almost $500 million by 1998. It ranked in the top 50 catalogers and was profitable. That year it was the featured cataloger at the annual catalog conference in Boston. However, the company plummeted in the past few years until a couple weeks ago, when it abruptly closed and dismissed all its employees. Are there lessons in this for all catalogers and all companies?

Started as a gift/décor catalog competing with the likes of Miles Kimball and Lillian Vernon, the company changed dramatically over the years. It had closed its namesake catalogs, Helen Gallagher and Foster House, and went on to be the country's largest horticulture cataloger. It still had gift businesses in the Walter Drake subsidiary and Popcorn Factory and branched into children's merchandise with Hearthsong, Magic Cabin and others.

The company is employee-owned. The majority of the stock had resided with the founders, Thomas Foster and Mel Regal. In the late 1990s, the management and board decided to buy enough of the founders' shares to allow the Employee Stock Ownership Plan to be the corporation's majority owner. The stock purchase was funded by borrowing with a schedule of annual interest and debt payments. When the company was making money, it was readily able to service this debt.

A major factor in the company's growth over the past 10 years was the performance of its Michigan Bulb Co. division. MBC offered horticultural products at entry-level pricing, such as 100 tulip bulbs for $9.95. To induce sales it used a sweepstakes offering. This program was so good that it generated hundreds of thousands of new customers for the F&G file every year. Moreover, these new customers tended to be new to buying horticultural products by mail. They were an excellent source of names for other F&G horticultural catalogs, and for the horticultural catalogers that rented the MBC names. MBC's closing may harm all horticultural cataloging.

In the late '90s, sweepstakes lost consumer appeal because of adverse publicity and regulatory control. The Michigan Bulb division began to lose money as its response rates dropped. (This also happened to Publishers Clearing House and many others that employed sweepstakes as a core marketing element.)

So, about 3,000 jobs have been lost, and the effect extends to the families and communities where F&G had its facilities. Some of these companies, such as Stark Bros. Nursery and Spring Hill Nurseries, had been around since before the Civil War.

It is well known that management and the board were aware of the difficulties, as they had to report them -- at least to their employee shareholders. However, they always were optimistic in their releases to the public and employees that things could be worked out.

The burning question: Did the management and board believe these optimistic statements? Were they unwilling to face the problems squarely and in a timely fashion?

By 1998, the company was receiving much more than half its revenue and profit from its horticultural titles. Thus, the problems for Michigan Bulb by not having sweepstakes to drive traffic reverberated throughout the company.

The company had two choices: Seek a new winning formula for Michigan Bulb or cut its losses there and close or scale back operations to a profitable level. Others, such as Hanover, have faced this issue, though Hanover has had a deep-pocket backer, something that F&G lacked.

This is not an easy decision. Yet, those decisions are likely to have kept the overall company going, and, in the end, companies frequently can grow again and provide for the remaining stakeholders.

It is easy to pick on management, which is not excused in this case, but there is more fault with the board of directors in situations like this. Management is too involved in trying to solve the problems and usually is reluctant to lay off staff. While that is a human reaction, it is not what the management or board is being paid to do. However, the board is more removed, and it should have insisted that management make the hard decisions. This is especially true when there are many shareholders and the management does not control the ownership.

The problem is that too often the board consists of management friends, meets only periodically and does not understand its responsibilities. An example of a high-quality working board is Home Depot.

Each board member, on his own and unannounced, has to visit a Home Depot store at least once every few months. Members introduce themselves, talk with staff and customers, check the housekeeping and provide a report to the full board. Board members have resigned because they could not meet that schedule.

It is doubtful that few, if any, catalog companies can answer positively to all of the following questions. Do your company's board members regularly place orders from your catalog/Web site? Do they do it in a way that ensures their orders are treated no differently from anyone else's? Does your board go to your telemarketing center and man the phones, talk with customers, maybe even take orders? Does your board walk through the offices, distribution center and telemarketing area, talking with staff in a way that the staff does not think its complaints will come back to haunt them? Does your board have a method of regularly reporting its observations to management?

It does not matter if you are small or large. The value of a board is to guide management on what is happening outside the offices. Receiving a board book the day before the meeting, then breaking for a catered lunch cannot do this.

If you do not want your company to join the F&Gs, use your board to its best advantage so it is guiding you, not following you.


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