Otto-Versand (GmbH & Co.)

Otto-Versand (GmbH & Co.)

Wandsbecker Strasse, 3-7
Hamburg 71
D-2000
Germany
(40) 6461-0
Fax: (40) 6461 8571

Private Company
Incorporated: 1949
Employees: 14,683
Sales: DM6.59 billion (US$4.35 billion)

Otto-Versand (GmbH & Co.) is the world’s largest mail-order company with subsidiaries and affiliates in Europe, Japan, and the United States, but it remains very much a family concern, with 65% owned by the Otto family. Founded in 1949, the same year as the creation of the West German nation, it has followed the country’s rising fortunes from occupied state to reunification. In March of 1990 after 40 years of steady growth, Otto became the first mail-order company to open an order center in the former East Germany.

The company was founded in Hamburg by Werner Otto, father of the head in the early 1990s, Michael Otto. Werner 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 seemed to appear from nowhere after the currency reforms of June of 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 ruled supreme. However, 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 mail-order empire. In this new market, Otto’s formula was to offer lowcost fashion garments and cheap credit. For the first time, German customers were invoiced, rather than required to pay upon delivery. Later, Otto acquired its own Hanseatic Bank and offered 3-, 6-, and 9-month payment plans.

In retrospect, the mail-order market was ripe for development when 300 copies of Otto’s first, 14-page 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 lowcost 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. Even in the early 1990s, all shops must close at 6:30 PM on weekdays. Shops have to shut at 2 PM on Saturday afternoons, except on the first Saturday of the month, and are closed all day on Sundays. These hours are zealously protected by the shop workers’ union.

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 has lasted until the early 1990s and the wealth spread downward to lower-paid workers. By 1953 living standards were higher than in 1938, by 1961 Germany was one of the world’s largest industrial powers, and German incomes tripled between 1950 and 1965. In this rising tide of prosperity, mail order bridged gaps between supply and demand. Today, Germany remains by far Europe’s largest annual per capita spender on mail order with 40% of the total European Community market. Seventy percent of all German households receive at least one catalog, and mail order accounts for 5% of all retail sales.

By 1951, Otto sales had already reached DM1 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 believes that his company owes 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 had more than 100 employees. Otto’s catalog had grown to 82 pages. A total of 37,000 copies were distributed, and sales reached DM5 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 telephone ordering to Otto’s regional centers began to replace representatives. In the early 1990s, three-quarters of Otto’s orders were placed by telephone.

In the United States, the United Kingdom, and a number of other countries, mail order has in the past suffered from a very downmarket image as many of its customers have been 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 discovered that all kinds of potential customer groups could be successfully targeted. The company became most successful by going against the grain of conventional mail order wisdom. Otto 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 fashioned-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 DM150 million. In the early 1960s, Otto became one of the first German companies to install integrated data-processing equipment. Otto used this equipment to become the first mail-order company to offer telephone ordering.

The 1966 Otto catalog had 828 pages and was now the largest in Germany. It had moved upmarket, featuring designers like Pierre Balmain, Jean Patou, Nina Ricci, and Christian Dior. In 1972 Otto started Hermes, its own delivery service, and by the year’s end, only 50% of all Otto shipments were being handled by the German Federal Post Office.

By 1974, the year of the company’s 25th anniversary, Otto felt strong enough to begin a period of overseas expansion, which intensified in the 1980s. The company’s first move was into France, where it acquired 50% of Trois Suisses, the second-largest mail-order firm in France. In 1979, Otto founded Otto BV, which has grown to become one of the largest mail-order companies in the Netherlands. Otto formed partnerships with Venca, the largest Spanish mail-order company, and Austria’s 3 Pagen. In 1974 Otto acquired an interest in Heine, a company specializing in luxury clothing and household goods. At the same time Otto 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.

In 1981 Michael Otto succeeded his father as chairman, and the company undertook its riskiest venture to date when it seized an opportunity to buy the Spiegel catalog-sales company in the United States. Although Spiegel was still a U.S. household name, its fortunes had been declining for years. Like the early Otto company, it had concentrated on lowcost women’s fashions. Otto realized that the U.S. mail-order market had changed and gambled by taking the entire operation upmarket. Four years later, Spiegel had tripled its sales and become the United States’ biggest mail-order company. The Spiegel venture was so successful that in 1988 Otto extended its interests in the United States by buying Eddie Bauer Ltd. This company had started as an Alaska expedition outfitter based in Seattle, Washington, but had grown into a national network of stores and mail order. Less well known than the famous Maine outdoor clothing company L.L. Bean, it rode some similar trends to prosperity in the 1970s and 1980s, such as the desire of many affluent young Americans to participate in outdoor activities or, at least, to affect a healthy outdoor image.

The Otto company bought Bauer, with its predominantly male market, ostensibly to complement Spiegel, which specialized in women’s clothing. Through those two companies and also Honeybee, a high-fashion catalog and retail store chain, Otto was appealing to the upwardly mobile young, thought to be an easy target because they had high incomes and little time to shop in retail outlets. With the widely publicized decline in this group’s fortunes in the recession of the early 1990s, it remains to be seen whether Otto will continue to be as successful in the U.S. market as it was initially.

Otto did not want to be outdone by its rivals in the former East Germany. By March of 1990, three months before formal economic unification, Otto had opened mail-order centers in Leipzig, Dresden, and the former East Berlin. By July, Otto was the only mail-order 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 DM1.1 billion, more than double the company’s original forecast, and more than 1,000 order centers are being 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 entered the Polish market in May of 1990. Order centers were established in Czechoslovakia, Hungary, and the Soviet Union. At the same time, Otto has been trying to strengthen its presence in Western Europe in anticipation of the 1993 single European market. In 1988 Otto acquired a 75% stake in Euronova S.R.L., the third-largest Italian mail-order house.

Otto had wanted to expand into the United Kingdom for many years before its well publicized £165 million bid for Grattan, the mail-order arm of the troubled Next retailer, finally succeeded in March of 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 controls the Freemans mail-order house, to secure this U.K. base. Grattan has a computerized warehouse system, a huge customer base, and 13% 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 had already begun to enter the U.K. market in a joint venture with Fine Art Developments Ltd., a greeting card company. In December of 1988 Otto launched Rainbow Home Shopping Ltd., a Bradford mail-order firm, and announced that Rainbow would join forces with Grattan, also Bradford-based.

Retail industry analysts are divided about the impact of the 1993 single European market on the prospects for mail-order firms. Companies like Otto Versand will undoubtedly achieve economies of scale with pan-European operations, and the development of satellite networks such as Sky will increase opportunities for home shopping, but mail-order firms will still have to cope with problems of distance and national distribution networks. Proposed European Community directives may also threaten the use of mailing lists. With 25% of the European Community market, Otto is concerned not to breach competition laws. In recognition of this situation, Otto 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 1990 it also called attention to its environment-friendly policies, including a reduction in energy consumption and careful product selection. In 1988, Otto introduced employee equity ownership through participation rights. By 1990 participation rights capital increased by DM4 million to DM10 million, and a third of employees were participating in the profit-sharing scheme.

Otto is placing its greatest hopes, however, on the development of the Japanese market in a joint venture with Sumitomo Corporation, Otto Sumisho Inc., begun in 1988. Ten years ago, mail order scarcely existed in Japan, but Otto hopes to develop this untapped market with many of the characteristics of markets in which it has been successful elsewhere, namely urban concentrations of the newly affluent and fashion-conscious. From the Japanese base, the company hopes to develop similar markets on the Pacific Rim. Initial results were encouraging. In its third year of operations, the company was able to increase its sales by 30% compared with the previous year, to DM119 million.

In the early 1990s Otto was represented by 28 mail-order firms on three continents and in a total of 13 countries. No firm currently has a wider global reach.

Principal Subsidiaries

Schwab Versand A.G. (94%); Josef Witt GmbH (94%); Corso; Handelsgesellschaft Heinrich Heine GmbH & Co. (99%); KG Hermes Versand Service; Alba Moda GmbH (90%); Fegro-Markt; Trois Suisses (France, 50%); Euronova S.R.L. (Italy, 75%); Modenmuller Versandhandelsgesellschaft (Austria); Heinrich Heine Handelsgesellschaft AG; Otto Sumisho Inc. (Japan); Otto Investments Ltd. (U.K.); Rainbow Home Shopping Ltd. (U.K.).

—Clark Siewert