Spiegel Bankruptcy Follows Pattern of Big-Book Catalogers

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Troubled Spiegel Inc. has joined the list of big-book catalogers whose downfall was a failure to adapt to the Internet and targeted marketing, analysts said last week after the retailer sought bankruptcy protection amid a cash crisis.


Spiegel's debt problems stem from its efforts begun two years ago to market credit cards to the sub-prime market, which includes consumers with poor credit histories who pay high interest rates.


Spiegel can survive if it improves its cost structure and finds an investor willing to borrow money to keep the company afloat until it is restored to health, said Kevin Silverman, retail analyst at the Chicago office of ABN Amro Asset Management, whose parent company is among Spiegel's creditors. Current low interest rates raise the odds of Spiegel finding a savior.


Spiegel, Downers Grove, IL, has secured a $400 million credit line from Bank of America, Fleet Retail Finance Inc. and CIT Group/Business Credit Inc. to help supplement its cash supplies during the reorganization. Spiegel expects to keep all of its stores and catalog operations going through the bankruptcy process.


Spiegel will continue to honor gift certificates, merchandise credits and return and exchange policies, the company said. Employee wages, salaries and benefits also are continuing.


"During this process, the company expects to continue to provide the same high-quality goods and services as it has in the past," Spiegel said of the bankruptcy proceedings in a statement. "All stores and catalog operations are open and serving customers."


There's industry speculation that Spiegel will be forced to sell its Eddie Bauer division. Among the speculators was Walter Loeb, senior retail analyst of Loeb Associates, New York. But he said Spiegel still could capitalize on its respected name and retune its catalog strategy.


"It has to be refocused," Loeb said. "A general book has to be changed to be attuned to today's customers."


The big-book catalog is essentially a 19th-century idea, Silverman said. It's original purpose was to bring retail products to people in rural areas. The growth of retail stores presented the first threat to the big book. Today, the Internet and segmented "big box" stores have made survival difficult for big-book catalogers.


Sears closed its big-book operation, for example, and longtime retailer and cataloger Montgomery Ward went out of business in 2000. Fingerhut almost went out of business last year before Federated Department Stores sold certain assets of the company to former Fingerhut CEO Ted Deikel and wholesaler Tom Petters. Federated had bought Fingerhut for $1.7 billion in 1999.


The catalog industry has survived thanks to the emergence of database marketing, which let catalogers retool their product lines and market to targeted and specialized groups of consumers, Silverman said.


But Spiegel failed to catch the database revolution, he said.


"They clung to the big book," he said. "They started doing branding. At that volume, most of the goods should be private label. They didn't segment as much as they should have."


Instead, Spiegel entered the credit card business, which appeared successful at first as retail sales thrived and cardholders borrowed enthusiastically. Yet the success was a mirage, Silverman said.


Spiegel retailers mistakenly thought increased sales resulted from effective marketing and product lines, he said. The sales really were the result of high-risk consumers having new access to credit lines, but Spiegel retailers took their success as a sign that they should increase inventories.


When cardholders didn't pay their bills, Spiegel ceased issuing credit, and retail sales slumped, Silverman said. Spiegel retail, which never had good communication with Spiegel's credit card business unit, was stuck with unsold inventory.


"They were run somewhat independently," Silverman said of the two groups. "That's a disaster."


First Consumers National Bank, Spiegel's bank subsidiary that issued the credit cards, is not covered under the bankruptcy filings, Spiegel said. FCNB's liquidation is continuing, and the company deactivated credit cards issued by the subsidiary earlier this month.


The Otto family of Germany owns almost all of Spiegel's voting stock.


Spiegel was founded in 1865 by Joseph Spiegel, a young German immigrant and Civil War veteran. In 1905, Spiegel began offering mail-order sales to customers in rural areas. Its first issue had 24 pages and weighed eight ounces. The company was the first to use pictures in its catalogs, publish a Christmas catalog and offer credit. It also gained notoriety for providing prizes on "Let's Make a Deal" and other game shows.


Earlier this month, the Securities and Exchange Commission accused Spiegel of reckless behavior and said the company did not file its financial reports to hide its financial problems from investors. The Chicago Sun-Times reported that the Otto family is unlikely to come to Spiegel's rescue because of this and other reasons. Last year, Otto pumped $160 million into the ailing company.


In addition to Eddie Bauer, Spiegel owns Newport News, a cataloger of moderately priced women's clothing and home decorations.


Spiegel's filing with U.S. Bankruptcy Court for the Southern District of New York listed $1.737 billion in assets and $1.706 in liabilities as of Feb. 22. Top creditors in the bankruptcy filings are U.S. branches of German banks, along with Bank of America, owed $85.9 million; JP Morgan Chase, $66 million; and ABN Amro North America Inc., $52.5 million. The top 10 creditors are owed more than $767 million.


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