Fingerhut Companies, Inc. History

Address:

4400 Baker Road
Minnetonka, Minnesota 55343
U.S.A.

Telephone: (952) 932-3100
Fax: (952) 932-3292

Website: www.fingerhut.com

Wholly Owned Subsidiary of Federated Department Stores, Inc.
Incorporated: 1978
Employees: 12,000
Sales: $1.61 billion (1998)
NAIC: 454110 Electronic Shopping and Mail-Order Houses

Company Perspectives:

Fingerhut's vision is to build a world-class, information-based direct marketing company leveraging Fingerhut's core competencies: its proprietary database; its direct marketing expertise; and its state-of-the-art infrastructure. Key Dates:

Key Dates:

1948:: William Fingerhut and his brother Manny begin producing and selling automobile seat covers.
1952:: The Fingerhut business is now entirely reoriented to mail-order marketing; offerings are eventually expanded to include towels, dishes, and electric drills.
1969:: Company goes public.
1974:: Economic recession leads to management shakeup and the installation of Ted Deikel, son-in-law of Manny Fingerhut, as president.
1979:: American Can Company (later known as Primerica) acquires Fingerhut.
1983:: Deikel leaves the company.
1989:: A Deikel-led management group gains leadership of Fingerhut.
1990:: Primerica sells 28 percent of Fingerhut to the public.
1993:: Primerica divests its remaining Fingerhut stake.
1994:: Through financial services arm, company begins marketing cobranded credit cards.
1995:: Two e-commerce sites, fingerhut.com and AndysGarage.com, are launched.
1999:: Fingerhut is acquired by Federated Department Stores.

Company History:

With an active customer base of 31 million people, Fingerhut Companies, Inc. is a leading database marketer selling via catalogs, direct marketing, telemarketing, and the Internet. The company is the number two catalog retailer in the country, trailing only J.C. Penney Company, Inc. In addition to its core Fingerhut direct marketing business, the company also operates several specialty catalogs: Figi's, gourmet food and gift baskets; Popular Club Plan, a membership-based, general merchandise catalog; women's apparel marketers Arizona Mail Order, Bedford Fair, Brownstone, and Lew Magram; and Macy's By Mail, a consumer catalog with products from Macy's department store (Macy's and Fingerhut are both owned by Federated Department Stores, Inc.). In the e-commerce arena, Fingerhut owns and operates eight retail sites: Fingerhut.com (specializing in general merchandise), AtomicLiving.com (general merchandise for young adults), AndysGarage.com (closeout merchandise), AndysAuction.com (company-to-consumer online auctions), Figis.com (gourmet food and gifts), OutdoorSpirit.com (outdoor merchandise), MyJewelry.com (jewelry), and BirthdayHut.com (an 'e-mail reminder and gift recommendation service'). The company also holds equity stakes in a number of other Internet retailers and services. Fingerhut ships an average of more than 330,000 packages per day from four distribution centers, which are located in St. Cloud, Minnesota; Piney Flats, Tennessee; Spanish Forks, Utah; and Cheshire, Connecticut. These centers comprise a total of more than four million square feet of space.

Early History: From Seat Covers to Direct-Marketing Powerhouse

Fingerhut originated in 1948 as a small concern far removed from the world of sophisticated multimedia marketing and high finance. At that time William Fingerhut, the son of Jewish immigrants, was producing and selling automobile seat covers out of his Minneapolis garage to augment the family-run sewing business. William's new enterprise held enough promise--much factory upholstery was then notoriously susceptible to tears and stains&mdashø accommodate his brother, Manny, an exasperated manager of a used-car lot. Aided by four other employees, the Fingerhut brothers saw gross sales during their initial years together that approached $100,000 annually. The 'brainstorm that ultimately transformed the company into a big-time operation,' wrote Arthur M. Louis, belonged to Manny, who handled sales and bookkeeping.

In 1949, after receiving a mail-order solicitation to purchase neckties, Manny envisioned expanding the seat business far beyond the local car dealer and car buyer market. Fingerhut's new market would be car owners across the United States, all of whom could be reached by mail. Before fully implementing his plan, the younger Fingerhut hired an advertiser to produce an eye-catching circular, which the entrepreneur then mailed to 100 new car owners spread throughout Minnesota. From this first test market, Fingerhut received eight orders, many times more than the necessary response for a successful mailing. Within three years, Manny had reoriented the entire business (now grossing nearly a million a year) to mail-order marketing, acquiring lists of new-car buyers, state-by-state, as he went. Unfortunately, Louis noted, 'William Fingerhut had been wary of Manny's bold experiment from the start, and when it worked so well he became resentful. ... The relationship between the brothers became tense, and in 1954 William angrily withdrew from active participation in the business.' (The elder Fingerhut eventually sold his share of the company in 1969 for $12.5 million.)

During the mid-1950s the company faced its first crisis when Detroit automakers introduced vinyl and nylon, fabrics far more durable than previous ones, in their new car models. Fingerhut responded by switching entirely to the production of transparent plastic seat covers, which allowed the car owner both to preserve and display the modern upholstery beneath. The 1950s also saw the company expand its offerings to include towels, dishes, electric drills, and car coats. This last item was so successful that it launched the company firmly into manufacturing as well as merchandising. By the mid-1970s Fingerhut Corporation's product list encompassed some 40 items, a select dozen of which were manufactured internally and responsible for nearly 50 percent of overall sales.

Although a good product mix was certainly crucial to the company's years of continuing growth, even more so was Fingerhut's modus operandi of targeting and maintaining its core market of lower-middle-income consumers. Market research showed that this buying group was most likely to shop by mail and, by logical extension, most likely to buy the many low-cost goods offered by Fingerhut. Coupled with Fingerhut's enticement of free gifts with every purchase and installment credit at department store rates, this made for a powerful sales and marketing formula. Crowning everything was Fingerhut's development and maintenance of a large and dependable customer list, a strategy that would ensure long-term corporate health.

1974--79: Surviving Recessionary Times

Following the watershed year of 1969, when the company went public in an immensely successful initial offering, Fingerhut was at the top of its game--the biggest complete mail-order marketer in the country. Then came fiscal 1974, when rising mailing, manufacturing, and interest costs; declining real incomes; mounting inventories; and price controls seriously threatened the company's future. In a management shakeup, newly installed president Ted Deikel, son-in-law of Manny Fingerhut, took charge of domestic operations and focused on a number of key areas, including cost-cutting, boosting company morale, and rethinking product mailings. Two of the most important steps Deikel took were phasing the company out of manufacturing and calling for pinpoint marketing, in which customers would be segmented by their buying preferences. (By the 1980s Fingerhut's database and corresponding mailings had become so advanced that virtually every customer represented a specialized market, thus earning the company the title of perhaps 'the ultimate niche company' from In Search of Excellence author Thomas J. Peters).

Another positive outcome of the 1974 recession was Fingerhut's development of a multistep contingency plan to deal with future recessions. The plan involved tracking declines in orders from 'solo' product mailings and rises in preshipment cancellations (if certain percentages were reached, a recession was at hand); responding to such key declines and rises by raising credit standards, reducing sales to marginal customers, and increasing sales to core customers; and changing its product mix. By the last months of 1979, a new recession was in sight and Fingerhut was able to implement its plan. The company's ability to reap a profit increase of ten percent in the second quarter of 1980, while other retailers and mail-order houses suffered profit declines ranging from 18 percent to 43 percent during the same period, immediately placed Fingerhut in the limelight. In a November 1980 article for Fortune, Herbert Meyer reported: 'As word of Fingerhut's triumph has spread, Deikel and his colleagues have begun to receive inquiries from executives throughout U.S. industry and from economists about what Fingerhut's data are saying now. Understandably, the Fingerhut crew is rather enjoying the attention.'

1979--89: Subsidiary Status

Ironically, it was Deikel's retailing genius that caused nonretailing conglomerate American Can Company (later renamed Primerica) to acquire Fingerhut in 1979. After the purchase, Deikel assumed the additional responsibility of overseeing other American Can properties, including music merchandiser Pickwick International (then owner of Minnesota retail powerhouse Musicland). By 1983, however, Deikel was ready to build his own marketing organization from scratch and he left Fingerhut and Primerica.

Despite difficulties related to Primerica's later plans to divest Fingerhut, the cataloger managed to flourish through much of the 1980s. As of 1986 the company ranked alongside Spiegel, Inc. and behind retailing giants Sears, Roebuck and Co. and J.C. Penney Company, Inc. in catalog sales and was growing at a rate of 20 percent annually.

Meanwhile, Deikel had founded Plymouth, Minnesota-based CVN Companies, an enormously successful pioneer of the cable home shopping industry. From $63.7 million in sales in 1984, CVN expanded to $683 million in sales in 1989. In October of that year, CVN merged with Pennsylvania-based competitor QVC Network. Deikel, $42 million richer from the deal, was searching for a way to continue his partnership with top CVN managers, who together possessed a wealth of experience in merchandising and general operations. A singularly golden opportunity presented itself virtually next door, at Deikel's former employer, Fingerhut.

Since at least 1986, according to Lee Schafer, Deikel had been discussing the possibility of acquiring Fingerhut with his fellow managers. By that time American Can--now renamed Primerica--was beginning to redefine itself as a diversified financial services company and simultaneously considering selling off some of its interests, including Fingerhut. The situation intensified from late 1986 into 1987, when Deikel was in direct contact with his friend Gerald Tsai, Jr., then chairman of Primerica, about possible business alliances as well as the sale of Fingerhut. Tsai's price of more than $1 billion for the mail-order subsidiary was deemed excessive by Deikel and there the matter rested. Schafer postulated that 'Tsai's determination of Fingerhut's price was based less on an analysis of its value than on Primerica's own pressing financial need.' Then came Primerica's acquisition of Smith Barney, the October 1987 stock market crash, and Sanford I. Weill's purchase of Primerica. Fingerhut was once again for sale and, as its revenues stalled in 1988 and 1989, it became more and more of a bargain for the right investor under the right circumstances. Just weeks before the CVN-QVC merger, senior management at Fingerhut had resigned. This paved the way for a deal between Deikel and Weill in which a Deikel-led management group would be installed before the end of 1989, and 28 percent of the Primerica subsidiary was spun off to the public the following year.

1990--98: Independent Again

Following Primerica's 1990 offering--part of a full divestiture plan that was completed in January 1993--Sears departed the catalog industry and Fingerhut showed especially strong growth in both sales and net income. Under Deikel, the company also demonstrated that it was a business true to its origins, capable of doing year-in and year-out what it did best--servicing the customer--while remaining open to change as new possibilities and challenges arose. In addition to expanding its product offerings to attract a wealthier customer group (both through Fingerhut Corporation and Montgomery Ward Direct L.P., a joint venture catalog marketer formed in late 1991 with general merchandise mainstay Montgomery Ward & Co., Inc.), Fingerhut placed considerable emphasis on growth opportunities within USA Direct Incorporated, an infomercial subsidiary launched in 1991. As the company's 1992 annual report pointed out, the infomercial business was intimately tied to Fingerhut's direct-mail marketing. Those products that had the best chance of selling via TV (food dehydrators, juicers, exercise equipment, and floor cleaners) were marketed there first, then through follow-up advertisements in company catalogs and circulars, and finally through retail stores under royalty contract. Two of the most popular of Fingerhut's infomercial-to-retail market products were the Body By Jake exercise machine and the Bissell Big Green carpet-cleaning machine. Telemarketing and television revenues for 1992 accounted for nine percent of all corporate sales, double the amount achieved in 1991.

Also in 1992 Fingerhut opened a new distribution center in Piney Flats, Tennessee. Two years later the company expanded its St. Cloud, Minnesota, distribution facility by 547,000 square feet. Soon thereafter, a new one million square foot facility was opened in Spanish Fork, Utah. By the late 1990s Fingerhut operated four distribution centers with a total of more than four million square feet of operating space.

At the same time, Fingerhut was leveraging its vast proprietary database through an expansion into financial services, including extended product warranties, third-party insurance, and a cobranded Fingerhut/MasterCard credit card. The credit card initiative, launched in 1994, was particularly successful as Fingerhut was able, through its database, to find good credit card prospects who had been largely overlooked by bank and other credit card issuers, most of whom focused on higher-end customers. By 1996 Fingerhut was one of the 25 largest credit card issuers in the United States. In October of that year, Fingerhut took its financial services arm, dubbed Metris Companies, public through an initial offering that raised an estimated $45 million. Two years later, Fingerhut divested its remaining stake in Metris. Meanwhile, Fingerhut in 1997 began a major credit-related transition when it started converting its customers from close-ended installment plans to open-ended revolving credit.

The second half of the 1990s was also notable for Fingerhut's moves into e-commerce, a key move for a direct marketer. In 1995 the company launched fingerhut.com and AndysGarage.com. The latter, named after e-commerce president Andy Johnson, was positioned as a huge 'garage sale' for overstock and closeout household merchandise, such as electronics and gas grills. The move into cyberspace accelerated following the hiring of Will Lansing as president in May 1998. (Deikel remained chairman and CEO.) Lansing had previously spent nine years at consulting firm McKinsey & Co., where he worked on a number of high-tech projects, including an attempted turnaround of online service provider Prodigy; as well as two years at General Electric Company working directly for legendary CEO Jack Welch. Deikel hired Lansing specifically to bolster Fingerhut's Internet presence and to spearhead an acquisitions drive in a rapidly consolidating catalog sector. Lansing moved quickly on both fronts.

In his first ten months as president, Lansing shepherded through eight acquisitions--five e-commerce sites and three catalogs. The latter included Arizona Mail Order, a women's apparel catalog purchased for $120 million in September 1998; Popular Club Plan, a membership-based, general merchandise catalog purchased from J. Crew Group, Inc. for $42 million in November 1998; and Bedford Fair, another women's apparel catalog, which was purchased out of Chapter 11 bankruptcy for $39 million in December 1998. Fingerhut purchased equity stakes in a number of e-commerce sites in 1998, including PCFlowers.com, a leading online florist service; Mountainzone.com, which offered climbing and skiing products and information; and Freeshop.com, which offered free samples and trial offers of merchandise and magazine subscriptions. In early 1999 Fingerhut invested in Roxy.com, a marketer of Internet equipment; and Handtech.com, a seller of computers and technology products. By this time, Fingerhut had also launched a number of additional e-commerce sites, including Figis.com, an offshoot of the Figi's gourmet food and gift catalog; and thehut.com, a site offering general merchandise for young adults that was later renamed AtomicLiving.com.

1999 and Beyond

In March 1999 Federated Department Stores, Inc. acquired Fingerhut for $1.7 billion. Many analysts considered this an odd pairing of the downscale direct marketing of Fingerhut and the upmarket retailing of Federated, which owned Macy's and Bloomingdale's department stores. However, Federated wished to bolster its fairly small presence in cataloging and e-commerce and could leverage Fingerhut's catalog and Internet order fulfillment infrastructure. Federated also gained access to Fingerhut's coveted proprietary database. For Fingerhut the acquisition deal included the assumption of the company's $205 million in debt by Federated, a move that improved Fingerhut's financial state and provided it with greater flexibility to continue its own acquisition spree of cataloging and e-commerce firms. As far as the seemingly mismatched customer bases were concerned, officials from the companies saw this as an advantage in that Fingerhut customers could be 'graduated' into Federated customers as they moved into higher income brackets.

Management changes soon followed the acquisition. In May 1999 Lansing took over as CEO of Fingerhut, with Deikel remaining chairman. Then in January of the following year Deikel retired, and Lansing took on the chairman's role as well. Just a couple of months later, however, Lansing also left the company. Leadership of Fingerhut was eventually passed to the team of Michael Sherman and John Buck, who together comprised the Office of the Principals, each serving as a president of Fingerhut and reporting directly to Jeffrey Sherman, chairman of Federated Direct, the parent's catalog and e-commerce division. Michael Sherman oversaw marketing operations, while Buck was responsible for financial and administrative functions. Meanwhile, Fingerhut continued to make deals based on its sophisticated distribution and fulfillment systems, including June 1999 deals to handle orders and merchandise shipping for the web sites of Wal-Mart Stores, Inc. and eToys Inc. In March 2000 Fingerhut purchased a 28 percent stake in Empire Direct, a seller of jewelry, electronics, and other goods to Hispanic Americans through its Empire Club catalog. That same month, Fingerhut acquired two more women's apparel catalogs, Brownstone Studio and Lew Magram. Backed by the deep pockets of Federated, Fingerhut was likely to be a major and expanding force in 21st-century direct marketing and e-commerce.

Principal Subsidiaries: Arizona Mail Order Company, Inc.; Axsys National Bank; Bedford Fair Apparel, Inc.; Fingerhut Business Services Inc.; Fingerhut Corporation; Figi's Inc.; Popular Club Plan, Inc.

Principal Competitors: Avon Products, Inc.; Best Buy Co., Inc.; Brylane Inc.; Circuit City Stores, Inc.; Concepts Direct, Inc.; DAMARK International, Inc.; Egghead.com, Inc.; Hanover Direct, Inc.; J.C. Penney Company, Inc.; Kmart Corporation; Lands' End, Inc.; Lillian Vernon Corporation; QVC, Inc.; RadioShack Corporation; Sears, Roebuck and Co.; Spiegel, Inc.; Target Corporation; USA Networks, Inc.; Wal-Mart Stores, Inc.

Fingerhut Companies, Inc. History

Company Perspectives:

Key Dates:

Company History:

Further Reading: