Otto Versand (GmbH & Co.)

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Otto Versand (GmbH & Co.)

Wandsbeker Strasse, 3-7
22179 Hamburg
Germany
Telephone: (040) 64 61-0
Fax: (040) 64 61-85 71
Web sites: http://www.otto.de
http://www.shopping24.de

Private Company
Incorporated: 1949
Employees: 50,055
Sales: EURO 14.07 billion (US$15.57 billion) (1999)
NAIC: 454110 Electronic Shopping and Mail-Order Houses; 421430 Computer and Computer Peripheral Equipment and Software Wholesalers; 442110 Furniture Stores; 442299 All Other Home Furnishings Stores; 452910 Warehouse Clubs and Superstores; 492110 Couriers; 522110 Commercial Banking; 561510 Travel Agencies

While Otto Versand (GmbH & Co.) is the world’s largest mail-order company with subsidiaries and affiliates in Europe, Asia, South America, and the United States, it remains very much a family concern, being majority-owned and operated by the Otto family. Based in Hamburg, Otto Versand’s numerous catalog businesses in 20 countries include Grattan and Freemans in the United Kingdom, 3 Suisses in France, and Heine, Schwab, and the flagship Otto in Germany. Otto Versand offers its customers a variety of ordering methods, including print and CD-ROM catalogs as well as options via online services and the Internet. The company is also involved in several non-mailorder businesses in Germany, including the Actebis Group, a distributor of computers and peripherals; Fegro/Selgros GmbH & Co., a cash-and-carry chain offering 50,000 food and nonfood items; several travel agencies; Hanseatic Bank, a 24-branch, full-service regional bank; and Hermes, the company’s delivery and customer service unit which also offers its services to third parties. In the United States, Otto Versand holds a majority stake in Euromarket Designs Inc., which operates the Crate & Barrel chain of home furnishings stores. In the early 1980s Otto Versand acquired Spiegel, Inc., known for its flagship Spiegel catalog, but soon transferred that ownership from Otto Versand (GmbH & Co.) to the separate Otto family enterprise known as Otto Versand Combined Group.

Early Years

Otto Versand (GmbH & Co.) was founded in 1949—the same year as the West German nation—in Hamburg by Werner Otto, a refugee from Communist East Germany; it followed the country’s rising fortunes from occupied state to reunification. Otto was one of a generation of extremely successful German entrepreneurs after World War II that included such famous names as Max Grundig, Axel Springer, and Heinx Nixdorf. These men rose to prominence after the currency reforms of June 1948 that restored confidence to consumers in the U.S., British, and French zones of occupied Germany. After three years of severe shortages, Germans had no faith in the money issued by the occupation powers. Cigarettes were a more popular parallel currency, and the black market was thriving. Nevertheless, Ludwig Erhard, director of the economic council for the joint Anglo-U.S. occupation zone, persuaded the Western Allies to accept his currency reform plan, which required the population to exchange a limited amount of the old currency for the new deutsche mark. Goods suddenly appeared as if by magic and Germans went on a buying spree, first for food, then household goods, and finally clothes, which were to become the mainstay of the Otto Versand mail-order empire. In this new market, Otto’s formula was to offer low-cost fashion garments and cheap credit. For the first time, German customers were invoiced, rather than required to pay upon delivery. Later, in 1969, Otto Versand acquired its own Hanseatic Bank and offered three-, six-, and nine-month payment plans.

In retrospect, the mail-order market was ripe for development when 300 hand-bound copies of Otto’s first, 14-page shoe catalog were distributed in 1950. In the then-new West Germany, retail distribution was still badly dislocated by World War II. Rationing and shortages meant that many goods had been unavailable for years in local shops and the range of choice was poor. City commercial centers had been heavily bombed, and the absence of Jews left a noticeable gap in retail distribution, as in many other fields where Jews had been successful and innovative before the rise of the Nazis. By 1950, however, West Germany had restored most of its postal and telephone systems, which were a relatively low-cost way to facilitate the distribution of goods in a country in which many store locations were still in ruins. German shop hours were restrictive, giving working people little opportunity to shop. All shops closed at 6:30 p.m. on weekdays. Retailers closed at 2:00 p.m. on Saturday afternoons, except on the first Saturday of the month, and were closed all day on Sundays. These hours were zealously protected by the shopworkers’ union. In fact, the only way Otto Versand was later able to offer 24-hour ordering was to establish its telephone bank in Denmark and hire German-speaking operators.

In 1949 Ludwig Erhard became economics minister of the new Federal Republic of Germany and pushed through further reforms that, along with Marshall Plan aid, helped create the famous Wirtschaftswunder, or German economic miracle. Rationing and price controls were ended, duties on imports were lowered, and tax on overtime work was abolished. Erhard encouraged production of consumer goods to stimulate employment and economic revival. The boom lasted into the early 1990s and the wealth spread downward to lower-paid workers. By 1953 living standards were higher than in 1938, and by 1961 Germany was one of the world’s largest industrial powers. German incomes tripled between 1950 and 1965. In this rising tide of prosperity, mail order bridged gaps between supply and demand. At the turn of the millennium, Germany remained by far Europe’s largest annual per capita spender on mail order with annual sales of DM 43.5 billion. Seventy percent of all German households received at least one catalog, and mail order accounted for 4.6 percent of all retail sales—surpassing the 3.3 percent figure in the United States.

By 1951, Otto’s sales had already reached DM 1 million, generated by 1,500 catalogues of 20 pages each. In 1952, Werner Otto’s next major innovation was to introduce a system whereby customers ordered through agents or representatives who forwarded the orders to the company’s main office in Hamburg. Werner Otto believed that his company owed its early success to this form of personal contact. It also enabled the company to keep costs and prices low through lower catalog numbers. By 1953, Otto Versand had more than 100 employees, and the company’s catalog had grown to 82 pages. A total of 37,000 copies were distributed, and sales reached DM 5 million.

Unlike Werner Otto’s archrival, Quelle, whose market strategy included a safety net of retail stores as well as a mail-order empire, Werner Otto concentrated on mail-order catalogs and representatives throughout the 1950s. From the 1960s onward telephone ordering to Otto’s regional centers began to replace representatives.

In the United States, the United Kingdom, and several other countries, mail order had in the past appealed only to low-income bargain hunters or people living in remote rural areas, far from centers of population. By the mid-1950s, however, German consumers began to demand higher quality goods, and Otto Versand discovered that all kinds of potential customer groups could be targeted. The company became most successful by going against the grain of conventional mail-order wisdom. Otto Versand developed a methodical, computerized approach and gained knowledge of preferred customers in highly concentrated urban areas. Catalogs such as Otto Heimwerker targeted specific groups such as home enthusiasts, while Post Shop offered the latest styles to fashion-oriented youth. When the company later began its overseas expansion, areas such as Scandinavia, with its widely dispersed population, were ignored in favor of more urbanized, densely populated countries such as Holland and Belgium.

By the end of Otto’s first decade in business, the company had more than 1,000 employees and sales of DM 150 million. In the early 1960s, Otto Versand became one of the first German companies to install integrated data-processing equipment. Otto Versand used this equipment to become, in 1963, the first mailorder company to offer telephone ordering.

The 1966 Otto Versand catalog had 828 pages and was now the largest in Germany. It had moved upmarket, featuring designers such as Pierre Balmain, Jean Patou, Nina Ricci, and Christian Dior. In 1972 Otto Versand launched Hermes Paketschnelldienst, a proprietary delivery service named for the mythic Greek messenger. Stores magazine called this operation “a significant competitive edge, since it can offer domestic deliveries within 24 hours and free pickup of returned items.” By the end of 1972, only 50 percent of all Otto Versand shipments were being handled by the German Federal Post Office.

Key Dates:

1949:: Company is founded by Werner Otto.
1950:: The first catalog, featuring 14 pages of shoes, is distributed.
1963:: Telephone ordering service is introduced.
1969:: The Hanseatic Bank is acquired.
1972:: Hermes Paketschnelldienst, a proprietary delivery service, is launched.
1981:: Michael Otto succeeds his father as chairman.
1982:: U.S. mail-order giant Spiegel is acquired.
1984:: Ownership of Spiegel is transferred to the Otto family.
1987:: Otto Versand becomes the world’s largest mailorder group.
1990:: Otto Versand becomes the first mail-order company to open an order center in the former East Germany.
1993:: Company acquires the largest Italian mail-order firm, Postalmarket.
1995:: Company launches e-commerce site www.otto.de.
1998:: A majority stake in Crate & Barrel is acquired; Postalmarket is divested.

Mid-1970s and Forward: International Expansion

By 1974, the year of the company’s 25th anniversary, Otto Versand felt strong enough to begin a period of international expansion, which intensified in the 1980s. The company’s first move was into France, where it acquired, in 1974, 50 percent of 3 Suisses, the second largest mail-order firm in France. In 1979, Otto Versand founded Otto B.V., which grew to become one of the largest mail-order companies in the Netherlands. Otto Versand formed partnerships with Venca, the largest Spanish mail-order company, and Austria’s 3 Pagen. In 1974 Otto Versand acquired an interest in Heinrich Heine, a German company specializing in luxury clothing and household goods. At the same time Otto Versand continued to expand within Germany, acquiring Schwab in 1976, Alba Moda in 1982, the linen and home textiles company Witt Weiden in 1987, and a holding in Sport-Scheck in 1988.

Michael Otto succeeded his father as chairman in 1981. Having set up his own financial and real estate business, the second-generation leader had joined his father’s company in 1981, advancing from textile purchasing through the corporate ranks. Michael Otto pushed his family’s company to undertake its riskiest venture to date when it seized an opportunity to buy the Spiegel catalog sales company in the United States in 1982. Although Spiegel was still a U.S. household name, its fortunes had been declining for years. Like the early Otto Versand company, it had concentrated on low-cost women’s fashions. Otto Versand realized that the U.S. mail-order market had changed and gambled by taking the entire operation upmarket. The image makeover was accompanied by a thorough fiscal reorganization and productivity enhancements.

Spiegel’s sales quadrupled within its first two years under its new management, and it had become the largest U.S. mail-order company by the end of the decade. In the meantime, however, the ownership of Spiegel was restructured. In 1984 all of the capital stock was transferred from Otto Versand to members of the Otto family, resulting in common ownership for Otto Versand and Spiegel but no direct financial or legal link between the two. What the family called the Otto Versand Combined Group included both Otto Versand and the so-called Spiegel Group. The latter name was adopted to reflect Spiegel’s acquisitions of outdoor clothing specialist Eddie Bauer in 1988 and of Newport News, a catalog offering women’s apparel and home furnishings, in 1993.

Otto Versand entered the 1990s as the world’s largest mailorder firm, a position it had gained in 1987. German reunification took center stage in the early 1990s, and Otto Versand did not want to be outdone by its rivals in the former East Germany. By March 1990, three months before formal economic unification, Otto Versand had opened mail-order centers in Leipzig, Dresden, and the former East Berlin—becoming the first mailorder company to open an order center in the former East Germany. By July of that year, Otto Versand was the only mailorder house to boast a comprehensive distribution network in all five of the new federal states, the result of an earlier agreement with an East German association of consumer cooperatives. Sales in these new states exceeded DM 1.1 billion, more than double the company’s original forecast, and more than 1,000 order centers were soon established throughout the former East Germany.

Initially, the company was less interested in the other former communist countries in Eastern Europe, but moves by Quelle and other competitors rapidly changed Otto’s outlook. With the formation of Otto-Epoka mbH, Warsaw, a joint venture, Otto Versand entered the Polish market in May 1990. Order centers were established in Czechoslovakia, Hungary, and the Soviet Union. At the same time, Otto Versand worked to strengthen its presence in Western Europe in anticipation of the unified European market. In 1988 Otto Versand acquired a 75 percent stake in Euronova S.R.L., the third largest Italian mail-order house. Five years later, Otto Versand acquired the largest Italian mailorder company, Postalmarket. Meanwhile, the company continued to bolster its customer service: in 1990, introducing 24-hour express delivery service, and in 1991, launching 24 hours a day, seven days a week telephone sales.

Otto Versand had wanted to expand into the United Kingdom for many years before its well publicized £165 million bid for a majority stake in Grattan, the mail-order arm of the troubled Next retailer, finally succeeded in March 1991. In 1986, it had been outbid by Next, which paid £300 million, but in 1991 it was prepared to pay a premium of £15 million above a rival £150 million bid by Sears plc, which controlled the Freemans mail-order house, to secure this U.K. base. Grattan—the fourth largest U.K. mail-order firm—had a computerized warehouse system, a huge customer base, and 13 percent of the U.K. mail-order market, but it had been devastated by the recession of the early 1990s and a postal strike. Its parent company, Next, desperately needed to refinance a convertible bond issue. Otto Versand had already begun to enter the U.K. market in a joint venture with Fine Art Developments Ltd., a greeting card company. In December 1988 Otto Versand launched Rainbow Home Shopping Ltd., a Bradford mail-order firm, and announced that Rainbow would join forces with Grattan, also Bradford-based.

Otto Versand also made significant inroads into largely untapped Asia, forming a joint venture with Sumitomo Corporation, Otto-Sumisho Inc., in 1986. The German company hoped to develop this market, which boasted many of the characteristics of markets in which it had been successful elsewhere, namely urban concentrations of the newly affluent and fashion-conscious. In 1993, Otto Versand, through the Otto-Sumisho joint venture, and Eddie Bauer formed a joint venture to sell the Eddie Bauer line through retail stores and catalogs in Japan. From its Japanese base, Otto Versand developed similar markets on the Pacific Rim, including a 1994 strategic alliance with Burlingtons’ in India known as Otto-Burlingtons Mail Order Pvt. Ltd. Initial results were encouraging.

The company did not shy away from new technology or new business opportunities in the early 1990s, becoming the first mail-order firm to offer an interactive CD-ROM catalog in 1994, for example. Having dabbled in the travel industry since the early 1980s, Otto Versand stepped up its efforts in this segment with the 1993 acquisition of a controlling interest in Reisland GmbH’s 60 travel agencies. The company also partnered with Rewe in a 1990-created joint venture, Fegro/Selgros GmbH & Co., which established a cash-and-carry chain offering more than 50,000 food and nonfood items. Otto Versand bought two British collection agencies in 1994.

Retail industry analysts remained divided about the impact of the single European market on the prospects for mail-order firms. Companies such as Otto Versand were expected to achieve economies of scale with pan-European operations, and the development of satellite networks increased opportunities for home shopping, but mail-order firms still had to cope with problems of distance and national distribution networks. Proposed European Community directives also threatened the use of mailing lists. With 25 percent of the European Community market, Otto Versand was also concerned not to breach competition laws. In recognition of this situation, Otto Versand announced that it would continue its policy of operating through national subsidiaries and allowing a degree of freedom to local subsidiaries familiar with local customs and markets.

In his 14 years at Otto Versand’s helm, Michael Otto built his father’s company into an international retail colossus and garnered high praise from analysts and competitors alike in the process. His “green” side was evinced by environment-friendly business policies such as reducing energy consumption and selecting environmentally sensitive products. He was named Environment Manager of the Year in 1991 and created the Michael Otto Foundation for the Environment in 1993. In 1988, Otto Versand introduced employee equity ownership through participation rights. By 1990 participation rights capital increased by DM 4 million to DM 10 million, and one-third of employees were participating in the profit-sharing scheme. Michael Otto’s combination of business sense and social awareness helped win him 1995’s National Retail Federation International Award.

These progressive strategies did not preclude growth or profitability. Annual sales increased 17.2 percent from DM 16.42 billion in 1992 to DM 19.25 billion in 1994, and net income increased 32 percent from DM 369.83 million to DM 488.07 million during the same period. By the mid-1990s Otto Versand was represented by 36 mail-order firms on three continents and in a total of 16 countries.

Late 1990s and Beyond

Probably the most significant development during the late 1990s for the entire global mail-order industry was the emergence of the Internet as a new selling channel. Otto Versand was quick to set up a web site, www.otto.de, in 1995 from which it began selling the flagship Otto line as well as specialty catalog lines. Two years later the company set up a second web site, www.shopping24.de, a “virtual mall” featuring a much wider range of products and services from Otto Versand’s various companies and joint ventures, including fashion items, furniture, books, CDS, posters, travel services, insurance, and a parcel service (from Hermes). Also featured were computers and other high-tech goods stemming from the company’s 1995 investment in Actebis, Germany’s second largest distributor of computers. By 1997 sales through the CD-ROM and Internet channels had already reached DM 435 million (US$247 million).

Otto Versand also continued its aggressive late 20th century expansion through its usual assortment of joint ventures and acquisitions. The company’s partnership with Eddie Bauer, which had begun in Japan in 1993, broadened via additional joint ventures, first to Germany in 1995, then to the United Kingdom in 1996. In Asia, Otto Versand partnered with local firms to set up joint venture catalog and Internet shopping endeavors in Shanghai, China, in 1996, and in both Taiwan and South Korea in 1997. The late 1990s financial difficulties in the region provided these ventures with a difficult launch environment. Italy was also having economic troubles in this period, which particularly affected that country’s mail-order sector, leading Otto Versand to sell its Postalmarket stake in 1998 and to concentrate on the Euronova business.

In April 1998 Otto Versand made another bold move into the U.S. market when it acquired a majority stake in Crate & Barrel, which primarily sold through its chain of more than 60 home furnishings stores but which also sold via catalog. Crate & Barrel, whose legal name was actually Euromarket Designs Inc., agreed to the deal in order to tap into the deep pockets of its new parent for expansion; it also hoped that Otto Versand’s mail-order expertise could bolster its catalog operation. For Otto Versand, the addition of Crate & Barrel further widened its product range.

Also serving to diversify Otto Versand’s activities were several other late 1990s developments. In 1997 that company launched a new mail-order company in Germany called Otto Büro & Technik, which offered a wide range of office products, including furnishings and electronics and telecommunications goods. The following year the travel services unit was bolstered through the purchase of 25 travel offices from American Express Germany. In early 1999 Actebis, the computer distributor, was enlarged through the purchase of a competing firm, Peacock AG.

In April 1999 Otto Versand paid about £150 million to acquire the Freemans U.K. mail-order business from Sears plc. The acquisition increased Otto Versand’s share of the U.K. catalog market from eight percent to 15 percent, making it the number three player, trailing only Great Universal Stores P.L.C. and Littlewoods Organisation.

This was the last major acquisition of the 20th century for a company that was clearly on the rise heading into the new millennium. Sales had more than doubled during the 1990s, and net income was on the increase as well. During 1999 Otto Versand celebrated its 50th anniversary and could also celebrate its position as the preeminent company in the global mail-order market.

Principal Subsidiaries

Schwab Versand GmbH; Josef Witt GmbH; Baur Versand GmbH & Co. (49%); Handelsgesellschaft Heinrich Heine GmbH; Alba Moda GmbH; Sport-Scheck GmbH; Eddie Bauer GmbH & Co. (60%); Zara Deutschland GmbH; Bon Prix Handelsgesellschaft mbH; Otto Büro & Technik Handelsgesellschaft mbH & Co. KG; Otto Reisen GmbH; Reiseland GmbH & Co. KG (75%); KG Maris Reisen GmbH & Co. (51%); KG Travel Overland Flugreisen GmbH & Co. (75%); FCB Freizeit-Club Betreuungs-GmbH & Co. (50%); OHG Fegro/Selgros Gesellschaft für Grosshandel mbH & Co. (50%); Actebis Holding GmbH; Peacock AG; Otto Versand GmbH (Austria); Otto B.V. (Netherlands); Otto Katalogusaruhaz Kft. (Hungary); Jelmoli Versand AG (Switzerland; 65%); Crate & Barrel Holdings, Inc. (U.S.A.; 50%); Together Ltd. (U.K.); Selgros Sp. z o.o. (Poland; 50%); Euronova S.R.L. (Italy); Otto Sp. z o.o. (Poland); Grattan PLC (U.K.); Tesco Home Shopping Limited (U.K.; 40%); Eddie Bauer (UK) Ltd. (60%); Arcadia International S.A. (Spain); Arcadia Holding S.A. (Chile; 50%); Shanghai Otto-Cheer Mailorder Co., Ltd. (China; 80%); Otto-Doosan Mail Order Ltd. (Korea; 75%); Otto-Chailease Mailorder Co. Ltd. (Taiwan; 55%); Otto-Sumisho Inc. (Japan; 51%); Eddie Bauer Japan Inc. (70%); Otto-Burlingtons Mail Order Pvt. Ltd. (India; 74%); 3 Suisses International S.A. (France; 50%); 3 Suisses France S.C.S. (France; 92%); Civad S.A. (France); 3SH S.N.C. (France); Senior & Cie S.A. (France; 99%); XPL S.A. (France); Beaute Createurs S.A. (France; 50%); Becquet S.A. (France); Jm. Bruneau S.A. (France; 62%); Saint Brice S.A. (Belgium); 3 Pagen Versand und Handelsgesellschaft mbH; La Cite Numerique S.N.C. (France; 92%); C.I.F.D. S.A. (Spain); VPC Portugal Lda.; Motive Ltd. (U.K.); Cidal S.N.C. (France); Club Createurs Beaute Japon Inc. (80%); Hermes General Service GmbH; KG Hermes Versand Service G.m.b.H. & Co.; Shopping 24 GmbH; Corso Handelsgesellschaft mbH; Oktavia Gesellschaft für Bekleidung mbH; Media Handelsgesellschaft mbH; Otto Versand International GmbH; Hanseatic Versicherungsdienst GmbH; I.V.K. Industrie-Versicherungskontor GmbH & Co.; Northside Insurance Company Ltd. (Guernsey); Hanseatic Bank GmbH & Co.; Cofidis S.A. (France; 80%); Banque Covefi S.A. (France; 66%); Cofidis S.A. (Belgium; 85%); Cofidis Hispania EFC S.A. (Spain; 85%); Vecofin S.p.A. (Italy; 85%); Cofidis Ltd. (U.K.; 85%).

Principal Competitors

DAMARK International, Inc.; The Great Universal Stores P.L.C.; Hammacher Schlemmer & Company; Hanover Direct, Inc.; Karstadt Quelle AG; L.L. Bean, Inc.; Lands’ End, Inc.; Lillian Vernon Corporation; Littlewoods Organisation; METRO AG; Pinault-Printemps-Redoute SA; Schickedanz-Holding AG & Co. KG; Vendex KBB N.V.