How Spiegel Recovered

By Paul Miller

Fueled with fresh capital, CEO Geralynn Madonna & co. have revived, repositioned and run Spiegel into profitability.

Just three years ago, the industry, the financiers and the media (including this writer) had all written off the Spiegel catalog as a soon-to-be goner. The mere notion that it would turn a profit again or even mail again seemed a pipe dream. But having emerged a couple of years ago from near liquidation along with its sister title Newport News, Spiegel now is thriving, having nudged its way into the black a little less than a year ago.

"The big story was the repositioning of the Spiegel brand," says Spiegel Brands President/CEO Geralynn Madonna. "Starting in March 2003, we realized that there was a disconnect with the [then-] current positioning and immediately began studying what Spiegel was, and relaunched it in spring 2004."

In conjunction with Spiegel/Newport News management, Spiegel Brands now is owned by Golden Gate Capital, which over the past two years also has invested in the Norm Thompson, Appleseed's and Draper's & Damon's catalogs. Principals from the deep-pocketed private equity firm ($2.5 billion worth of capital to play with) say it aims to buy up more catalog titles soon.

To get an idea of how far it has come, consider where Spiegel has been the past few years:

1. Within the course of one week in March 2003, The Spiegel Group, which then owned and operated the two catalogs as well as the Eddie Bauer catalog and retail business, liquidated its First Consumers National Bank private label and credit card business, and filed for Chapter 11. The credit unit had piled up $69.3 million in losses during Spiegel Group's fiscal year 2001, and had become a drain on the whole company.

2. Spiegel Group then began a series of cost-cutting measures, including the shuttering of its Hampton, Va., call center, layoffs and a cost restructuring to take Eddie Bauer out of the picture.

3. Golden Gate Capital acquired both Spiegel and Newport News in August 2004, then consolidated their respective management teams in Newport's New York headquarters, and cleared out of Spiegel Group's massive Downers Grove, Ill., headquarters.

4. The Spiegel Group emerged from Chapter 11 last year as Eddie Bauer Holdings, and continues to operate the Eddie Bauer division today.

Kevin Silverman, managing partner with the Chicago-based investment management firm Two Rivers Capital Management, reflects on Spiegel's credit-related problems of the early 2000s: "You had these two camps that seemed to be working at odds with one another — the catalog people and the credit people."

"Each side of the boat kept tilting, and it could never get everybody in sync," he says. "Buyers would think they were geniuses because they were selling a lot of blue sweaters as if they were going out of style. What they didn't know was that 20 percent of those customers who bought on credit were never going to pay for them."

Beyond that, and given a relatively clean start and fresh capital from Golden Gate, Madonna and her team worked to optimize the synergies of the two catalogs. Although she restructured the Spiegel and Newport News

catalog organizations so there were separate marketing, merchandising and advertising teams, the two brands would share such functions as finance, operations and information technology.

"She's a talented leader," says Craig Battle, managing director of investment bank Tucker Alexander, about Madonna. "I was impressed with her turnaround game plan a couple of years ago. When I was involved in the due diligence on the business, I listened to her for a day-and-a-half talking about the plans, the metrics that had to change, and found them very compelling."

Among some of the most striking results, the company increased gross merchandise margins by 400 basis points. "Spiegel had sourcing opportunities we saw immediately," Madonna says. "We took advantage of those through an improved sourcing base to get us better margins. I went to China direct [to arrange new sourcing channels]; we had previously sourced in Hong Kong."

What's more, Spiegel Brands reduced its fixed overhead on an annualized basis by $36 million, achieved by restructuring the call center function, centralizing its IT platform and consolidating warehouse functions between July and November 2004. "November was when we became completely free of any infrastructure left by Otto," she says, referring to the Otto family, the former majority owner, which also owns the majority of German direct marketing giant Otto Versand.

Among other cost reductions, Spiegel and Newport News began fulfilling orders out of the same call center, which was moved from Virginia to Nova Scotia. Additionally, Spiegel Brands' marketing department reduced advertising spending by $21.9 million by optimizing circulation strategies for both businesses.

Despite the negative experience with its previous credit business, one of the early actions Madonna took was to strike a 10-year agreement with Alliance Data Systems Corp., a provider of transaction, credit and marketing services, to provide co-brand credit card programs for both catalogs, helping give Spiegel, in particular, a new start in the customer credit business.

"We went from a 56 percent credit penetration to 4 percent overnight," Madonna points out about the closing of the credit card business at the time. "That was the main event … that really impacted our sales in 2003."

As for the catalog's overhaul, Madonna and her team effectively have updated the Spiegel catalog business from a department store in print to a resource of what today's busy women want. "Today, it's much more about ideas, advice, inspiration and concepts," she says. "We have experts in different fields who give customers advice. And we have a new style point of view, which is relevant to today's customer. It's very fabric-driven."

Most notably, this past January, Spiegel rekindled an old relationship with designer Norma Kamali for an exclusive, 17-item fashion line called Norma Kamali Timeless. Spiegel previously had carried a Norma Kamali line during the 1980s; now Madonna says Kamali is in sync again with today's Spiegel customer. "We sourced the line, produced it, and our customers love it."

Part and parcel of the revamped Spiegel catalog are sections of the book that include stories and take a strong point of view, all designed to help customers dress and style — what Madonna refers to as "reality dressing. It's all about being fabulous at any age," she says. "Real people, real style, real issues — all showing how Spiegel can help at any age. A makeover in print. [The Spiegel customer] has great style and looks to us for advice and inspiration to create her personal style through the way she dresses. She wants advice on how to do that, and that's what we give her."

The revamping of the Spiegel catalog takes a cue from Madonna's prior effort in 2002 to make over Newport News and turn it into a fashion-forward magalog format. For instance, impulse-driven accessory sections contain advice from stylists. Likewise, in the travel section, which also has performed well for Spiegel, the catalog offers ways to travel with packable items.

In addition to revamping the Spiegel catalog, Madonna actively has sought positive public relations in the consumer media to return it to its former prominent public image. In fact, by modeling some of Spiegel catalog's turnaround efforts on what she did with the Newport News book's repositioning and moving the Spiegel operations into Newport News' headquarters, "It appears that the company has sort of flipped from the way it used to be under the old Spiegel Group," says Fingerhut's vice president of new business development, Scott Weiland, who served as Spiegel's director of new customer acquisition and new business development from 1999 to 2002.

Although Weiland says he's gotten "positive vibes" on the revived Spiegel catalog to this point, he adds, "If I had any concerns, it would be how distinctive a brand Spiegel is compared to Newport."

But as Madonna points out, "when you're on the verge of liquidation [as Spiegel catalog was], everything that's fundamental to survival" must be reevaluated and taken from the ground up.

And to observers such as former longtime Newport News president/CEO George Ittner, who's now president of The Territory Ahead catalog, "it's all positive. Both catalogs look sharp; they're strong communications pieces to the consumer with excellent Web sites. From the standpoint of what the consumer's receiving, the value that's communicated and the level of fashion for the money, they've done an outstanding job."

Spiegel's Comeback Mantra

During Spiegel Brands' comeback, President/CEO Geralynn Madonna devised her own rules for direct mail:

Businesses don't succeed through metrics alone. "Ideas and people make a company and a brand successful. If all you know about your customer is her numbers, she'll soon be giving her number to somebody else," she says.

Intuition, innovation and sound business practices must all sit "at the grownups' table."

Creativity isn't an indulgence; it's a necessity.

Nobody ever tested his or her way to glory.

Act! "Don't study things to death. A lot of what you should do is pretty obvious. Do it!" she says.

An MBA is no substitute for common sense.

You can't just solve part of a problem; you have to solve the whole thing.

Nobody ever built a statue for a committee; there's no substitute for leadership.

Madonna's Laws of Leadership

In revamping the Spiegel and Newport News catalogs, President/CEO Geralynn Madonna has adhered to these definitions of leadership during the company's rocky times:

Be visible. Although you may want to retreat to the corner office, make a conscious effort to stay visible.

Be positive. Balance optimism with realism. Remember, a leader has to be a true, passionate believer in your vision and brand in order for an organization to embrace change and work together.

Be involved. Leaders must recognize obstacles and barriers, and help everyone navigate around them.

Be accountable. As a leader, being accountable is critical to your board, as well as to your staff.

Be truthful. Tell people the way it is — good or bad.

SPIEGEL TIMELINE

1865: Joseph Spiegel, an immigrant and Civil War veteran, opens furniture store Spiegel & Co. in downtown Chicago.

1905: Spiegel mails its first catalog, a 24-page booklet of home furnishings throughout the United States.

1912: Women's apparel enters the catalog mix.

1943: Opens first order-taking call center.

1950s, 60s, 70s: Develops mainstream reputation by supplying TV game shows with prizes "from the Spiegel Catalog, Chicago 60609."

1978: Refocuses on working women by offering new specialty catalogs in addition to its big book.

1982: Bought by Otto Versand.

1988: Acquires Eddie Bauer.

1989: Acquires First Consumers National Bank (credit unit).

1993: Acquires New Hampton Inc. assets, including Newport News catalog.

1995: Launches the Spiegel.com Web site.

2000: Acquires Clifford & Wills catalog.

2002: Stock delisted by NASDAQ.

2003: Promotes Geralynn Madonna to president/CEO of Spiegel and Newport News catalogs.

2003: The Spiegel Group files for Chapter 11.

2003: Shutters hemorrhaging credit unit.

2004: Golden Gate Capital acquires the Spiegel and Newport News titles in conjunction with management.

2005: Spiegel catalog turns a profit.

2005: Re-launches Spiegel catalog Web site.