Department 56, Inc. Business Information, Profile, and History

Company Perspectives:

To ensure that all of our collectible product lines maintain their integrity, quality and affordable price points, we retire and introduce several new products and product lines each year. The hand-crafting of our product lines involves many important production steps, but it is the combination of all our processes-a great idea, design, sculpting, hand-painting, detailing and packaging-that distinguishes Department 56 products from all others.

History of Department 56, Inc.

Department 56, Inc. is a leading designer, importer, and distributor of hand-crafted collectibles, giftware, and holiday merchandise. The company is perhaps best known for its collection of ceramic and porcelain miniature villages. Also popular, however, are other holiday and home decorative accessories, which include a line of porcelain and pewter figurines known as Snowbabies. In fact, Department 56's product line consists of more than 3,000 different items; the company typically introduces approximately 600 new items each year, while discontinuing items from previous seasons, a practice that enhances the collectibility of Department 56 products. Most of the manufacturing of Department 56 items is contracted to facilities in Asia--particularly in China, Taiwan, and the Philippines--with occasional imports from India and Europe. More than 90 percent of the company's sales are made to about 17,500 independent gift retailers across the United States; the remainder of sales are made to department stores and mail-order houses.

Early Years

Department 56 was founded by Edward R. Bazinet, who worked in the early 1970s as a manager at Minneapolis-based Bachman Holdings, Inc., a retailer of floral, gift, and garden items. Bazinet was in charge of a wholesale gift imports department at Bachman Holdings, which, for accounting purposes, was dubbed Department 56. When Bazinet decided to form his own company in 1976, he named it Department 56. Bazinet served as chairman and chief executive officer, and Todd L. Bachman was named president and vice-chairman. Headquarters were established in Eden Prairie, Minnesota.

Appealing to collectors of Christmas decor, the new company's first offerings centered on its Original Snow Village Collection, which was introduced in 1977. The Original Snow Village comprised small, hand-painted, ceramic pieces nostalgically recollecting small-town American winter scenes. Some of the little buildings and houses featured miniature electric lights inside, the wires for which were meant to be hidden underneath blankets of plastic snow. The unique design and quality of each piece in the Village series appealed to customers, who spotted them in gift and department stores and began acquiring them to recreate entire miniature villages in their homes.

Over the next seven years, the popularity of Department 56 gift items increased steadily, and in 1984, the company was formally incorporated as Department 56, being owned and operated by Bachman Holdings and ed bazinet international, inc. That year, the company introduced a variation on its Snow Village theme: the Heritage Village Collection. The first pieces in this collection became known as the Dickens Village and comprised porcelain homes, buildings, and accessories for recreating a Victorian Christmas village. Porcelain, as opposed to ceramic, allowed for greater detail, and porcelain's translucence gave a warmer visual effect to the pieces when lit. The Dickens Village series also offered tiny figurine representatives of characters from Dickens's A Christmas Carol. Moreover, Department 56 obtained a license from the Dickens estate to use the famous Charles Dickens signature initials on some of the products. With the addition of finer detail and quality, the collectibility of Department 56 products rose dramatically.

The year 1986 was an important one for new product introduction at Department 56. That year, two new series were added to the Heritage Village Collection: the New England Village (with such pieces as covered bridges, town halls, and sleighs, recalling winter scenes in rural American towns) and the Alpine Village (with farmhouses, churches, and clock towers reminiscent of hamlets in the Swiss Alps).

Another important introduction in 1986 was that of the Snowbabies. Snowbabies were figurines of toddlers bundled in fuzzy-looking snowsuits; they were made entirely of porcelain bisque, which was also hand-applied onto the little snowsuits, creating the impression that snow crystals had fallen on the babies as they played outdoors in the snow.

The Snowbabies series reportedly took six years for designers Kristi Jensen Pierro and Bill Kirchner to perfect, and the concept could be traced back to the late 1800s. Although some collectors disagree on their origin, two theories have emerged. One is that the concept originated with explorer Admiral Robert Peary and his wife Josephine. The couple, residing in Greenland in 1893, had a daughter, whom the Eskimos referred to as "Ad-Poo-Mickaninny," or "snow baby," because of her white skin. The child was named after an Eskimo woman friend, who made the baby a one-piece snowsuit. Josephine Peary later wrote two children's books about a snow baby, and, as an adult, daughter Marie Peary published an autobiography in 1934 entitled The Snowbaby's Own Story. Others, however, trace the snow baby to 19th-century Germany, where "tannenbaumkonfekt"--small dolls made from sugar, flour, and a gum thickener--were a popular holiday decoration. The candy figurines became so popular that commercial confectioners could not keep up with the demand. One confectioner reportedly commissioned a German company to create "snow babies" out of hand-whipped bisque, and other German manufacturers were quick to adapt the designs. The bisque figurines remained popular in Germany through the 1930s.

Department 56 Snowbabies represented considerable craftsmanship and labor on the part of the company's overseas manufacturers. Each design was transformed into a clay model, from which several molds were cast. The final production mold was then filled by hand with a hand-blended mixture of clay and water. All accessories, such as backpacks, wings, and stars were then attached to the dried, hardened figurine by hand, as were the fine grains of bisque known as snow crystals. Finally, facial features and coloring were applied by hand to each figurine. The popularity of the Snowbabies later prompted Department 56 to publish a hardbound book featuring poetry and stories on the adventures of the Snowbabies.

From 1988 to 1991, Department 56 focused primarily on expanding designs and production within their popular collections. Toward that end, it began issuing specialized pieces that would appeal to the vocations and hobbies of consumers. For example, the company introduced a vet and pet shop model for pet owners and veterinarians, a bank or brokerage house for those with financial interests, and a post office that might appeal to mail carriers. Moreover, the Snowbabies collection was expanded to include tree ornaments, picture frames, music boxes, and water globes featuring the popular characters. Snowbabies also became available in pewter. Finally, the company enhanced the Heritage Village Collection (first offering the Christmas in the City and Little Town of Bethlehem series of collectibles in 1987 and the North Pole series in 1990) and introduced such new lines of collectibles as Mercury Glass tree ornaments, Winter Silhouette figurines, and Merry Makers porcelain monk figures.

Department 56 relied on independently owned foreign manufacturers, located primarily in the Pacific Rim, for the manufacture of their collectibles. To oversee quality control and the export of products, the company formed a wholly owned subsidiary, Department 56 Trading Co., Ltd., based in Taiwan. The company believed that its relationship with its foreign manufacturers was crucial to its competitive position in the industry, enabling it to develop and produce detailed, high-quality products, while keeping prices affordable for customers.

Emerging As a Public Company in the Early 1990s

In the early 1990s, Department 56 went through a period of reorganization. In October 1992, the company entered into an agreement to acquire all outstanding stock held by Bachman Holdings, Inc. and ed bazinet international, inc. Department 56 was then organized and acquired by a private investment firm, Forstmann Little & Co. for $270 million. The following year, Forstmann Little and the company's management took Department 56 public, with an initial offering of 5.29 million shares at $18 each. Leadership throughout the reorganization remained with Bazinet and Bachman.

Early in 1994, a second public offering was made of 5.8 million shares at a little more than $27 each. The company was clearly thriving. In fact, since 1989 the company had experienced average annual net sales growth of 25 percent, while net profits averaged a 39 percent annual growth rate.

The financial success of Department 56 was attributable to several factors. First, the company had a large number of repeat sales. In a study conducted by the company, it was learned that 60 percent of Department 56 customers received their first Village piece as a gift. Of these, 70 percent continued to build their collection, acquiring two to three new pieces each year. In fact, Department 56 had built a following of an estimated 200,000 collectors. In addition, the company regulated the availability of its products, creating greater demand. While many Department 56 products were available in the mid-1990s through approximately 19,000 gift retailers, mail houses, and department stores, only 6,000 retailers were authorized to distribute the Village Series and Snowbabies products.

Success also was heightened by the collectors' market the company was helping to foster. As Village Series and Snowbabies designs were retired, they began trading in secondary markets at prices higher than the original retail prices. Although Department 56 did not participate as a purchaser or seller in the secondary market, the company certainly benefited from the publicity and the potential collectibility of its new lines. According to a 1993 article in Fortune magazine, one of the most highly prized Department 56 items became a miniature mill produced in a limited quantity of 2,500 and originally selling for $35 in the mid-1980s; a little more than ten years later, the mill sold on the collectors' market for as much as $6,500. To ensure authenticity, each Department 56 item was clearly marked with the series name, title, year of introduction, and company logo.

In 1994, Bachman left Department 56, returning to Bachman's Inc. to serve as chairman and CEO. He was replaced by Susan Engel, who assumed the positions of president and chief operating officer at Department 56. A graduate of Cornell University and Harvard Business School, Engel had extensive experience in marketing and management, which she gained through employment at J.C. Penney Company, Inc. and Booz, Allen and Hamilton, before becoming president and CEO of the Champion Products division of Sara Lee Corporation. It was Bazinet's hope that Engel would help Department 56 build its lead in the giftware market. Commenting on her move to Department 56 in a 1995 Gifts & Decorative Accessories magazine article, Engel observed, "It's hard to look at this company and not get really excited about it. ... Both the products and the displays were so inviting, I knew this was something I could do."

Gaining licenses from Coca-Cola and Walt Disney Co. in the mid-1990s, Department 56 began offering collectibles incorporating these popular logos and themes. Soon consumers were able to build collections from the Disney Parks Village Series, including Mickey's Christmas Shop, antique shops, a fire station, and other Mickey and Minnie Mouse accessories. Longtime collectors of the Snow Village series were offered a new Coca-Cola bottling plant and delivery truck to add to their villages. Moreover, by concealing motors in the bases of village accessories, Department 56 began offering "animated" pieces, including the Village Animated Skating Pond, with skating figures gliding over a "frozen pond," and the Village Animated All Around the Park, with adults and children strolling through a snowy, tree-lined park. In 1994 the Snowbunnies line of collectible figurines made its debut.

To promote its items and raise money for charitable causes, Department 56 held a national holiday decorating program called "Homes for the Holidays" in 1995. There, retailers of Department 56 items offered decorating ideas, free seminars, and demonstrations for decorating the home during the holiday season. In conjunction with this event, Department 56 raised money for Ronald McDonald Houses through corporate contributions, fund-raising raffles, and auctions. Olympic skater Dorothy Hamill was chosen as the event's national hostess, being a loyal collector of Department 56 items herself.

Although giftware and decorative accessories was a highly fragmented and seasonal industry--with most sales occurring around major holidays, especially Christmas, and thousands of companies competing in the industry with a wide variety of products--it also represented a promising niche market, with estimated growth of ten to 14 percent annually. In the mid-1990s Department 56 maintained an enviable position in the market, holding an eight percent share of the collectibles segment, in which the industry leader held about a 16 percent share. Revenues were continuing to increase smartly, reaching $252 million in 1995, an increase of nearly 16 percent over the previous year.

Struggling in the Late 1990s

At the same time that the company announced the good news about 1995, however, it also warned that its 1996 results were not likely to be nearly as rosy. When this announcement was made in February 1996 the company's stock plummeted by more than 40 percent in one day. The difficulties were traced to the dealer distribution system. Some dealers were discounting Department 56 pieces in violation of company policy. About 50 dealers were terminated for such discounting, including Dillard Department Stores, Inc. Other dealers were maintaining excess inventory, some possibly hoarding older pieces, waiting for their retirement; excess inventory also led to the temptation of discounting and price wars between dealers. In response, Department 56 began implementing an inventory management system and deliberately limited new product introductions; this resulted in reduced orders during 1996 as inventories were brought back into balance. Department 56 also developed new ways of communicating with its dealers that year, including a bimonthly newsletter and a web site that included both product information and a dealer locator feature. The company also experimented with several nontraditional sales channels, including incentive programs, the corporate gift market, and television home shopping. In November 1996 Engel was promoted to CEO, with Bazinet remaining as chairman. Sales for 1996 ended up declining to $228.8 million while net income also fell, to $45.9 million, $5 million less than one year earlier.

The inventory reduction effort continued in 1997, leading to a further decrease in revenues and earnings. By late that year the company appeared to have rectified its inventory problems, leading to a 1998 rebound, when earnings were reported at $46.5 million on revenues of $243.4 million. In September 1997 Bazinet stepped down as chairman and Engel was named chairwoman and CEO. More frugal than her predecessor, Engel quickly made one large cost-cutting move by selling the corporate jet. New product introductions picked up steam, highlighted by the firm's first new village series in five years, the Seasons Bay Collection, which debuted in 1998. Based on a late 19th-century American resort town, Seasons Bay was the first village with a "year-round" theme. The village series also began featuring a number of new brand names in the late 1990s through new licensing deals, including Ford, Harley-Davidson, McDonald's, and Hershey's. Department 56 also attempted to increase its sales in Canada by offering its full product line to its Canadian dealers in 1997 and by establishing a direct sales force in that country in 1998.

Unfortunately, Department 56 suffered a setback in 1999 in part from Y2K-related problems. The company had difficulty implementing an enterprise-wide computer system that was installed to make the company Y2K compliant. Some orders were lost while others were duplicated in error, all leading to a general productivity decline for the sales force. As a result, revenues for 1999 increased only slightly and net income showed a small decline. Initiatives that year included the debut of a new village series based on the Monopoly board game, the launching of national print advertising in part to boost recognition of the Department 56 name, and the opening of the first corporate retail store, located in the Mall of America in Bloomington, Minnesota. The company was also experimenting with the sale of its products through e-commerce retailers and began implementing a business-to-business Internet system as an avenue for more efficient relationships with its dealers. Although Department 56's products retained their popularity with collectors, the company faced a key challenge as it entered the 21st century: regaining the rapid growth of its initial years as a public company.

Principal Subsidiaries: Department 56 Retail, Inc.; Department 56 Sales, Inc.; Can 56, Inc.; FL56 Intermediate Corp.; D 56, Inc.; Department 56 Trading Co., Ltd.; Browndale Tanley Limited (Hong Kong).

Principal Competitors: The Boyds Collection, Ltd.; Enesco Group Inc.; Roll International Corporation; Ty Inc.

Chronology

• Key Dates:

• 1976: Edward R. Bazinet forms Department 56 as a spinoff of Bachman Holdings.
• 1977: The Original Snow Village Collection is introduced.
• 1984: Company is incorporated as Department 56, Inc., under ownership of Bachman and ed bazinet international, inc.; Heritage Village Collection debuts with the Dickens Village series.
• 1986: The Heritage Village Collection is extended with the addition of the New England Village and the Alpine Village; Snowbabies line is introduced.
• 1992: Forstmann Little & Co., a private investment firm, acquires Department 56 for $270 million.
• 1993: Department 56 goes public; Bazinet remains CEO.
• 1994: Susan Engel is named president and COO; Disney Parks Village Series debuts.
• 1996: Engel is promoted to president and CEO.
• 1997: Bazinet steps down as chairman; Engel is named chairwoman and CEO.
• 1998: Seasons Bay Collection is introduced.
• 1999: The first corporate retail store opens in the Mall of America in Bloomington, Minnesota.