Hanover Direct, Inc. Business Information, Profile, and History

Company Perspectives:

Hanover Direct, Inc. and its business units, provide quality, branded merchandise through a portfolio of catalogs and e-commerce platforms to consumers, as well as a comprehensive range of Internet, e-commerce, and fulfillment services to businesses.

History of Hanover Direct, Inc.

Hanover Direct, Inc. is a leading catalog and online retailer. It operates a fleet of catalogs offering consumers clothing, home fashions, and gift items. Some of its best-known catalogs include The Company Store, Domestications, Kitchen & Home, Silhouettes, International Male, Improvements, and Gump's By Mail. The company moved quickly into web-based retailing in the late 1990s, and many of its catalogs exist online, in tandem with traditional direct mail approaches. With its growing expertise in online retailing, the company established a division named erizon to provide order fulfillment, logistics, and consultation to other e-businesses. Its consumer products division operates under the name Hanover Brands. Until the early 1990s, the company had a substantial stake in various restaurant businesses, running franchises of Burger King, Arby's, the chicken chain Bojangles, and many others. The company originally made its mark as the operator of the famed Automat restaurant chain on the East Coast.

19th-Century Beginnings and Birth of the Automat

Hanover Direct, Inc. operated until 1993 under the name Horn & Hardart. Horn & Hardart was one of the biggest restaurant businesses in the nation from the 1920s into the 1950s. It was founded by two men in Philadelphia, Joseph V. Horn and Frank Hardart. In 1888 Horn had managed to squeeze $1,000 from his family to help him open a small lunchroom, and he advertised in a local paper for an experienced partner. Legend has it that he received only a single reply to his ad, a line scribbled on a torn sugar sack, reading, 'I'm your man! F. Hardart.' Horn took up the confident Hardart, who had grown up in New Orleans and brought with him a precious French-influenced coffee recipe. Horn and Hardart's first lunchroom did very well, with its fine coffee a key selling point. The pair opened several more lunchrooms around town and incorporated in 1898 as the Horn & Hardart Baking Co.

In 1900, Hardart took some time off from the business to travel to Europe. It seems to have been a working vacation, however. He announced on his return to Philadelphia that he had invested $30,000 in Berlin to buy equipment for a 'waiterless restaurant.' Hardart's equipment sank in a shipping accident off Britain in 1901, but by 1902 he had gotten the goods replaced, and the company opened its first Automat restaurant that year. The Automat concept was that customers would deposit nickels into gleaming machines, and hot or cold food would be dispensed automatically. The Automat served not only fine coffee, but staples of American cooking including roast beef, meat loaf, creamed corn, and blueberry pie. Horn & Hardart's chief engineer refined the original German machinery, so that the food popped out of its slots easily. The Automat's staff was located in a central kitchen and did not interact directly with the customers. The décor at first emphasized cleanliness and modernity, striving for a vivid contrast with the often questionable sanitation of neighborhood greasy spoons. The food was cheap but good, with the nickel coffee all but legendary.

Horn & Hardart soon spread its Automats from Philadelphia to New York, in 1912 opening what became a fabled restaurant on Manhattan's Times Square. With stained glass windows conceived by the same artist who designed the windows for the city's Cathedral of St. John the Divine, the Times Square Automat was a bold building, attracting not only poor boardinghouse dwellers but movie stars and Broadway singers. In 1924, Horn & Hardart opened stores to retail prepackaged Automat food. The chain eventually expanded to include 84 stores in New York and Philadelphia.

Good Times in the Depression, Bad Times After

The Automats were enormously popular in the two cities in which they existed. The food quality was consistently good, something personally assured by founder Horn. Every day he and his top management team tasted the foods the Automat's central kitchens had prepared, and whole batches were thrown out for such sins as the lack of a little oregano. The quick efficiency of the Automat concept appealed to busy workers as well as night-owl theater patrons, and the chain was an East Coast institution. Horn & Hardart was a prosperous business, but its profits really began to rise as the United States entered the Great Depression after the 1929 stock market crash. With millions of people poor and out of work, the Automats had a huge new customer base of people who could afford nothing better. At the peak of the Depression, the Automats in New York and Philadelphia boomed, employing more than 10,000 people. Workers were offered free meals per three hours worked, plus a Christmas bonus. Efforts to unionize Automat's workers failed, as its employees seemed to consider that they already had one of the best deals around. The restaurants were often satirized in cartoons and publicized in films such as Easy Living in 1937 and the Irving Berlin musical Face the Music from 1932.

Joseph Horn died in 1941, leaving Horn & Hardart to his hand-picked successor, E.K. Daly. While the restaurants continued to be something of a cultural institution, the chain's heyday was past. Other restaurants such as drive-ins and McDonald's carved out new niches for fast food. The quality of the food declined, and the low prices made the Automats gathering places for only the destitute. When Daly died in 1960, he left no clear successor, and the chain drifted, its restaurants becoming steadily dingier and more out of touch with the times. As old employees retired, they were given a token pension, some as low as $10 a month. Automat workers unionized in 1966, and the cost of paying increased benefits to workers drove the company into the red. One by one, the Automats closed, and in 1971, with only a few outlets left, Horn & Hardart filed for bankruptcy.

Transformation in the 1970s and 1980s

Once one of the largest restaurant businesses in the nation, Horn & Hardart was in poor shape in the early 1970s. But it persisted under new management, and it still had various valuable assets. Although it closed nearly all of its Automats, the company still controlled the valuable Manhattan real estate on which its restaurants stood. Some lots were sold, and other Automats were converted into Burger King restaurants. In 1972, in an attempt to diversify into a different line of business, Horn & Hardart acquired a mail-order company headquartered in Hanover, Pennsylvania, called Hanover House Industries. Both the mail-order business and the restaurant business stumbled along, losing a total of $6 million between 1973 and 1977, on sales of $235 million. The firm was being run by Chairman Fred Guterman since 1973. In 1977, a young Burger King franchisee from Florida abruptly acquired roughly four percent of Horn & Hardart and announced that he would be running the company. Barry Florescue ran six Burger Kings in southern Florida and on Long Island, and he wanted to open more in Manhattan. Horn & Hardart had exclusive rights to the Burger King franchise there, so Florescue decided to take over the company. His initial investment in the company cost him only about $400,000. He won a proxy fight, and Guterman resigned. Then Florescue raised $2 million in a public stock sale, settled the lawsuits over cancelled pensions that had dogged the company for a long time, and shut down most of Horn & Hardart's food operations. What Florescue left in place were the mail-order business and the company's 12 Manhattan Burger King franchises. In 1978, the beleaguered Horn & Hardart was making money again.

Both the catalog and food divisions of the company grew under Florescue's direction. Hanover House expanded from six catalogs in 1977 to a line of 21 by 1983. Up to 60 percent of the company's sales came from its catalog division in the early 1980s. Hanover's catalogs were aimed at middle-market consumers and sold gifts, electronics, clothing, and home furnishings. It was one of the nation's largest catalog operations, and in the early 1980s, sales increased in double digits. The division also spent money, investing in a huge, centralized distribution center in 1984.

Florescue also invested in other restaurant chains. Some were not successful, such as a pizza chain called Mark Twain Riverboat Playhouse. The company moved its headquarters to Las Vegas in 1979 when Florescue bought a casino there, and that business also faltered. The company's move into franchising Arby's restaurants did not go as well as expected and had to be scaled back, while also causing dismay at Burger King. Friction between Burger King and Horn & Hardart lasted for years. On the other hand, Florescue picked up a thriving, privately held chicken restaurant chain in 1982 for $12 million. Bojangles was centered around Charlotte, North Carolina, and it had approximately 50 stores in the South and Northeast. Under Florescue's management, Horn & Hardart built up Bojangles, adding stores rapidly. Florescue hoped to take Bojangles from the fourth largest chicken chain to number two behind Kentucky Fried Chicken. Within two years of its purchase, Horn & Hardart had added more than 200 stores to the Bojangles chain.

Neither Bojangles nor Barry Florescue's career at Horn & Hardart survived for long, however. Bojangles was supposed to be an upscale chicken chain, costing more to run but bringing in more per store than the market leader Kentucky Fried Chicken. The chain grew extremely rapidly and was run by hundreds of franchisees. The Bojangles image was hard to sustain outside the South, where it originated, and by 1987, many stores were failing. The entire chain brought in revenues of $90 million in 1986, but lost more than $47 million. Horn & Hardart had sales of $405 million from its catalog and restaurant divisions combined, but the parent company ended 1986 in the red some $28 million. In July 1988, Horn & Hardart announced that it would sell Bojangles. This left the restaurant division with a small number of Burger King franchises, some Arby's, and other lesser known chains including Tony Roma's and International King's Table Buffet. By the late 1980s, it was Hanover House, the company's catalog division, that was bringing in nearly two-thirds of the revenue. Barry Florescue had left the catalog division to others to manage, and it had been at times a highly profitable business. But in 1988 the catalog division also lost money. Horn & Hardart's board decided it was time for a change, and Florescue was let go. After fending off a takeover threat in 1989, the company's management decided in 1990 to get out of the restaurant business altogether.

As a Catalog Company in the 1990s and Beyond

After Florescue's departure, Horn & Hardart was run by CEO Donald Schupak. Schupak first put the company's East Coast restaurant business up for sale. The company initially intended to hang on to a West Coast franchise, International King's Table. Then in October 1991, the company was taken over by an international investment group called North American Resources, which included members of the Quasha family and a Swiss financial firm. Horn & Hardart closed its one remaining Automat in 1991, and by 1993 it had shed the last of its restaurant division. That year Horn & Hardart changed its name to Hanover Direct, and its sole business focus became catalog retailing. Headquarters moved to Weehawken, New Jersey. Management worked to shape up the catalog division, dropping unprofitable lines and adding new ones. In the early 1990s, the company had 15 catalogs, including Hanover House and Domestications. By 1993 Hanover Direct had acquired two leading catalog businesses, a housewares line called The Company Store and the Asian imports and gifts line Gump's. Hanover also bought Gump's San Francisco retail store and acquired a leading catalog marketer of women's clothing, Tweed's.

In 1994 Hanover announced a joint venture with the nation's largest catalog company, Sears, Roebuck, to launch three new catalogs. Sales for 1994 were around $769 million, and the company's stock, which had slouched for a long time, began to perk up. But the company was still plagued by debt and had to make major changes to improve productivity. From 1993 to 1996 the company was managed by Jack Rosenfeld. Rosenfeld was replaced in 1996 by Rakesh Kaul, a former chief operating officer of the large Fingerhut catalog company. Hanover continued to rebuild in the mid-1990s, adding new catalog lines such as the golf equipment and clothing company Austad.

By the late 1990s, Hanover was a company quite different from what it had been ten years earlier. It was unburdened of its restaurant division, and it had made major structural changes to focus on efficient, up-to-date catalog merchandising. With the rise of the Internet, Hanover made a quick transition to online selling. Its web-based sales were only $700,000 in 1997, but had leapt to $8.3 million the next year. This represented only a small percentage of total sales, but the company was happy to do all it could to encourage online shopping, as it already had the order fulfillment capabilities, and Internet selling was cheaper than mailing out catalogs. In 1999 Hanover announced it would again form itself into two divisions. This time, one was to encompass its catalog and Internet-based consumer retailing, and the other would be a business-to-business service, offering order processing and fulfillment services to other companies selling on the web. Nationwide, the move to the web boomed, including not only catalog and direct-mail marketers like Hanover, but many start-up companies that thought they could sell anything through a web site. Many of these newcomers needed the kind of business service Hanover offered. Hanover named its business-to-business service erizon, and it developed software and systems for customers entering web-based businesses, offering order fulfillment services as well. One key customer for its order fulfillment services was Kbkids.com, an online version of a successful toy company.

As Hanover Direct entered the 21st century, profitability was still spotty. The company lost money in 1998 and again in 1999. Management was sure, however, that Hanover was on the right track. It discontinued two unprofitable catalogs, Tweed's and Austad's, and continued to focus on the relatively new business of offering its database and electronic commerce expertise to other businesses. Its catalog division, Hanover Brands, focused on the several areas the company expected would grow, including home improvement and kids' clothing and furniture, and also aimed to improve sales in the growing markets of Western Europe and the Asian Pacific countries. The company had gone through many changes since its inception as a chain of diners. Despite its often rocky financial picture, its management by the year 2000 believed the company was in a good position to take advantage of growing online and catalog opportunities.

Principal Divisions: erizon; Hanover Brands.

Principal Competitors: Williams Sonoma, Inc.; Otto Versand Gmbh & Co.

Chronology

• Key Dates:

• 1888: Partnership between Horn and Hardart begins.
• 1898: Horn & Hardart Baking Co. incorporates.
• 1902: First Automat restaurant opens.
• 1941: Joseph Horn dies.
• 1960: Horn's successor dies.
• 1971: Firm files for bankruptcy.
• 1972: Horn & Hardart acquires Hanover House Industries.
• 1991: Last Automat closes.
• 1993: Name is changed to Hanover Direct.