Otto The Great Rules In Germany

Supermodel Cindy Crawford poses for him. Trendy outdoor retailer Eddie Bauer reports to him. Giant cataloger Spiegel Inc. is creating a mail-order business for African Americans for him. And throughout Europe and the U.S., consumers generate billions in sales for him. Yet outside of Germany, not many people have ever heard of Michael Otto.

In fact, from his spartan office in Hamburg, the 50-year-old chief of privately held Otto Versand runs the biggest portfolio of mail-order businesses in the world. Annual group sales top $12.4 billion, almost half of that outside Germany. Profits are estimated at $320 million. In addition to owning 90% of Spiegel, Otto Versand controls such catalogers as Grattan PLC in Britain and 3 Suisses in France, as well as a stable of German companies (table). It mails more than half a billion catalogs every year.

To the hypercompetitive Otto, his company's expertise and monstrous size give him a special edge in a rapidly changing world. In most of Europe, as consumers tire of limited store hours, Otto is luring them to mail order by offering 24-hour service and quality merchandise. In the U.S., he is preparing Spiegel, with its potent brand name and ability to ship goods fast, to offer home shopping to television viewers. And in Asia, where mail order is barely known, Otto Versand plans to make millions familiar with its catalogs. Says Otto: "I love looking for new markets."

It's a game plan that could make Otto Versand one of the world's biggest multinational retailers. Not even the mixed results of 1993 give Otto pause in his quest for growth. Yes, Spiegel and its subsidiary Eddie Bauer have been thriving. Alexander Pais, a Barrington Research Associates analyst, expects 1993 profits at Spiegel of $60 million, a 50% jump, on sales of $2.5 billion. But in Germany, the picture is different. After a huge surge in German sales following the fall of the Berlin wall, Otto Versand's home market is now flat because of recession. As a result, worldwide company sales increased only 5.5% last year.

Yet as Michael Otto wades through the tough times in Germany, he's showing much the same determination as his father, Werner. A wartime refugee from eastern Germany, he built Otto Versand over decades. He started his mail-order business in 1950 by pasting 28 black and white photos of shoes into 300 hand-bound catalogs. Later he pioneered prompt home delivery by acquiring his own fleet of trucks. Today, the 1,300-page main catalog--with cover girls such as model Claudia Schiffer--is a fixture in millions of German homes. Germany's working women and teen-agers, meanwhile, get their own specialty catalogs from the company.

DELIVERY. The younger Otto has added innovations of his own. After setting up an investment company, he joined Otto Versand in 1971, took the helm in 1981, and continued his father's search for new twists in service. To skirt notoriously restrictive German labor laws, he set up a 24-hour telephone order service in 1991 by hiring German-speaking operators in Denmark and installing special phone cables to handle international calls at low rates. He gives rivals a run for their money by delivering orders within 24 hours and returning to pick up unsuitable items at no charge.

While developing the German market, Otto is always on the lookout for the right moment to expand abroad. After stalking a company until the time and price are right--he waited 10 years to buy Spiegel in 1981--Otto swiftly sends in teams of distribution and financial experts to improve the new business. At Spiegel, the team redid inventory control and ordering systems, cut merchandise handling from a ponderous eight-step procedure into a three-step operation, guaranteed bank loans for four years, then stepped back. Now, Spiegel, along with the thriving Eddie Bauer operation, is the shining star of the Otto portfolio.

The company is hoping for a similar hit in Britain with its 1991 acquisition of Grattan, a mail-order company that sells everything from furniture to apparel. Otto Versand has already made Grattan's unwieldy main catalog easier to use, turning it into a series of accessible specialty sections all available in one book. Inventory systems have been modernized, too. Yet with Grattan still losing money, "it may take the company a couple of years to sort itself out," says Hilary Monk, senior analyst at Verdict Research Ltd. in London. "But I think the long-term prospects are very good."

Once the original fix-it job is done, Otto observes a limited hands-off policy in ruling these far-flung properties. If the vital statistics that appear weekly on his computer screen show all is in grder, he leaves the local managers alone. But a 5% deviation from mutually agreed profit and sales targets sparks phone calls or a visit from an Otto Versand team to sort out the problem. "My job is not to centralize," Otto says, "but to decide when to interfere." Managers do, however, collaborate on purchasing to get volume discounts. And the catalogs also save money by often using the same photographs of models. "The resulting lower prices are critical in today's mail-order market," says Charles Allen, retail analyst at Natwest Sellier in London.

Otto is now looking for more properties outside his company's strongholds in the U.S. and northern Europe. A main criterion is the presence of the basic postal and phone infrastructure needed for mail order to develop. Otto sees those possibilities in southern and Eastern Europe and East Asia. In June, for example, the company bought Italy's unprofitable Postalmarket. Otto scouted Shanghai personally to establish a fledgling mail-order business in one of China's richest corners. And he's now keeping a close eye on possibilities in Mexico.

In the U.S., Otto is especially keen on Spiegel's participation in a new Time Warner Inc. fashion channel, Catalog 1, which will debut in four markets in March before a national rollout in the fall. Germany, however, lags behind the U.S. in electronic shopping: One reason is that restrictive laws prevent price cuts during programming, a favorite home-shopping ploy in the U.S.

BROWSE AND SCROLL. But Otto figures such restrictions will eventually disappear in Germany, so he is already testing several schemes in-house. In one, TV viewers would browse through a cable-televised catalog and order electronically. In another, customers would peruse an interactive CD-ROM that would allow shopping via computer at home. And Otto says he is discussing with some companies the possibility of joining forces for interactive shopping throughout Western Europe. "We must prepare for the future, not just wait for it to happen," Otto says.

There have been setbacks: A costly foray into German retail stores in the 1970s ended in retreat. An attempt to crack the Dutch market in the 1980s with special discount offers stumbled when customers who snapped up deals failed to make repeat purchases. Yet at times like those, employees recall Werner Otto's favorite saying: "Everyone should learn from mistakes, but never make the same mistake twice." With that slightly menacing piece of advice ringing in their ears, Otto Versand executives have so far managed many more hits than misses.

      *U.S. sales are 1993 estimates;
      others are for year ended February 1993
      Country/venture     Sales*
                   Millions of dollars
      OTTO VERSAND     $4,084
      HEINE               493
      SCHWAB            1,080
         SPIEGEL        1,600
      EDDIE BAUER       1,000
      WEST HAMPTON        240
      3 SUISSES         2,200
      GRATTAN            $751
      POSTALMARKET        300
      EURONOVA             85
      OTTO SUMISHO        148
      MARGARETA           20
Before it's here, it's on the Bloomberg Terminal.