Scott Fetzer Company Business Information, Profile, and History

History of Scott Fetzer Company

Scott Fetzer Company is a holding company for a variety of companies engaged in providing industrial and commercial products, perhaps the best known of which are World Book encyclopedias and Kirby vacuum cleaners. Its Campbell Hausfeld subsidiary makes air compressors and other power tools. Vacuum cleaners were the company's sole mainstay until it went on an acquisition spree in the 1960s and emerged with 31 businesses. A new CEO later trimmed Scott Fetzer back to concentrate on some core products. Conglomerate Berkshire Hathaway acquired the company in 1986, and its earnings have been steady since then.

Origins

Scott Fetzer was founded in a barn in 1914 as The Scott & Fetzer Machine Company, a joint effort of George H. Scott and Carl S. Fetzer, who would go on to produce automotive parts. Together, the men built a machinist shop producing tools and dies that became known for their precision. During World War I, the Cleveland-based Scott & Fetzer manufactured flare pistols. Overseeing that production was a young entrepreneur named Jim Kirby, who showed Scott and Fetzer his designs for a vacuum system. They agreed to manufacture the Kirby Vacuette, a non-electric sweeper. Moreover, their company, then known simply as Scott & Fetzer, became involved in the marketing of the product, pioneering the concept of the door-to-door sales force that provided in-home demonstrations. In 1925, Scott & Fetzer produced for Kirby the Vacuette Electric, which had a removable handle and nozzle attachment. Ten years later, Scott & Fetzer were still working with Kirby and introduced the Kirby Model C vacuum.

The vacuum cleaner was the company's staple for the next 40 years. In the 1960s, Scott & Fetzer began diversifying its interests to include a variety of businesses, including chain saw and trailer hitch manufacturers. In 1967, the company purchased manufacturer FRANCE, which produced neon transformers for lighted signs. In 1969, the company acquired Meriam Instruments which made gauges and other instruments to measure pressure, calibration, and flow.

Ralph E. Schey, a Harvard business school graduate, became president of the company in 1974. Schey was a noted venture capitalist who quickly applied himself to trimming and restructuring the company. The company did make one acquisition during this time. Carefree of Colorado, a maker of awnings, joined Scott Fetzer in 1974. By 1976, Schey also held the posts of chairman and chief executive officer at Scott Fetzer. Within four years, Schey reduced Scott Fetzer from 31 to 20 divisions. He concentrated the remaining divisions in brand name goods for consumer markets, based upon his belief that such goods were more recession-proof. In addition, the company's senior managers at that time were primarily marketers rather than manufacturers, and this goal suited their strengths.

Scott Fetzer's new direction was the home improvement market. Schey's first large acquisition was Wayne Home Equipment, a maker of oil and gas burners and pumps, which it purchased in 1978. As a subsidiary of Scott Fetzer, Wayne went from supplying manufacturers to becoming a retail competitor, issuing branded products into mass merchandise stores. By the mid-1980s, Wayne was forming a new operating group--known as Environmental Products & Services--to sell a broad line of air- and water-treatment products, as well as heating, cooling, and home-security products.

While these changes were taking place, Schey was also working on expanding the direct sales arm of Scott Fetzer. The retail arena was experiencing fluctuations at the time due to rising overhead costs, which led to clerk cutbacks, and an increase in double-income households, which gave consumers less time to shop. Direct selling, also known as door-to-door, avoided both of these obstacles. For $50 million, Schey purchased World Book from Field Enterprises in 1978. At the time, World Book was the market leader in direct sales. The company came with a profitable mail-order business in books and various consumer goods. Encyclopedia buyers proved to be ideal mail-order customers: they had already been found credit worthy--as most encyclopedias were purchased on credit--and were willing to receive products through the mail. World Book's only ostensible competitor was Encyclopaedia Britannica.

After the purchase, Schey spent two years revising World Book by selling off the Japanese division and trimming domestic operations in much the same way as he had Scott Fetzer. Preschool and elementary school lines were expanded so that customers could start buying sooner and then trade up into other sets of encyclopedias as their children grew older. By 1984, World Book had more than 30,000 sales representatives. Scott Fetzer's other prime product, Kirby vacuum cleaners, was also sold door-to-door by dealers who bought the machines for cash. As these sales representatives worked strictly on commission, Scott Fetzer's profit margins grew plump enough to attract attention.

As the sales force of World Book was reorganized in 1981, Scott Fetzer also revised its traditional selling strategies. Instead of attaching salaries only to sales, sales managers were given greater responsibility for expenses and profits. Recruiting, training, motivational, and compensation strategies were all updated, and the sales force was increased by 50 percent in 1984. Around the same time, other direct-selling giants, such as Avon and Mary Kay Cosmetics, were unable to get the number of sales representatives they needed. Direct selling was developed into a science by Scott Fetzer during the early 1980s. Sales people no longer wandered through neighborhoods, knocking on doors and applying charm to random homemakers. Sales representatives now contacted potential buyers first by phone, at fairs, or in shopping malls, and set up appointments. From there, the sales challenges were the same, but Kirby sales representatives in the 1980s boasted one sale out of every three pitches--a good record for a purchase that then ran up to $900, with accessories.

Just as World Book had undergone reconstruction, Kirby too was overhauled between 1977 and 1981. A dramatic change came in 1980, when Kirby eliminated half of its distributors. For the most part, these distributors were independent contractors who recruited their own sales staffs. At the time, a practice called bojacking was in vogue. Bojacking by distributors referred to the practice of buying vacuums from Kirby and jacking up the price, then reselling them with a price tag that undercut Kirby salesmen. This prompted Scott Fetzer to write a new dealer agreement that mandated that Kirby vacuum cleaners be sold in the home. The roughly 700 distributors who disagreed with this new policy were eventually dismissed. Between 1971 and 1981, unit sales plunged by one-third. The company, instead of panicking, concentrated on training its key salespeople to run their own dealerships. This strategy inspired other direct sellers to turn their attention to training as a way to increase productivity.

It also culled compliments from competitors. And it worked. Direct sales traditionally pepped up when the economy dragged, with revenues reflecting the number of available representatives rather than market size. A slowed economy meant cutbacks, which translated to more people looking for work such as direct selling. The sales force thinned as the company recovered. This was not the case, though, during the down-cycle of the late 1970s and early 1980s. Those who usually entered direct sales to help meet family bills went looking for part-time company work instead. The sales force dipped during this time, and when the recovery arrived, there were even fewer candidates. Avon and Mary Kay Cosmetics were especially bruised by this trend; in fact, Avon had to give up on its goal for an increased sales force. Scott Fetzer had already streamlined its sales force and unleashed the highly trained group on consumers. It was so successful that by the mid-1980s, World Book and Kirby vacuum cleaners accounted for more than half the company's sales and operating profits, while direct sales titans like Avon and Mary Kay were wobbling.

Change of Ownership in 1986

Up to this point, Scott Fetzer was prospering rather quietly. In the four quarters leading up to December 1984, sales had risen 17 percent and earnings were up 45 percent. In the takeover craze of the 1980s, however, Scott Fetzer could not go unnoticed. Financier Ivan Boesky began accumulating shares of the company before the spring of 1984, when Schey announced a plan by a group he led to take the company private in a leveraged buyout. Kelso & Company, a New York investment firm, entered the fray with a $61-a-share bid. Kelso's specialty was corporate buyouts through employee stock ownership plans (ESOP). An ESOP would have taken over up to 60 percent of the company within five years, had Kelso's deal gone through. The bid was raised to $62 a share in January 1985, but ultimately the sale was made to Berkshire Hathaway for roughly $320 million in early 1986.

Berkshire was an Omaha-based holding company managed by CEO and part-owner Warren E. Buffett. Buffett became something of a hero in investor circles, with a good record of finding companies whose stock prices did not reflect their intrinsic worth. Using this for a guide, Berkshire acquired interests as diverse as insurance, publishing, candy, and furniture. At the time of the sale, Scott Fetzer was considered well-managed and a good earner, two of Buffett's favorite green lights for a purchase. Berkshire Hathaway specifically sought companies with consistent earnings that it would not have to micromanage, in industries that were not so technical that board members could not comprehend the business.

Scott Fetzer, with 17 businesses at the time, had sales of about $700 million. In addition to World Book, which then accounted for about 40 percent of Scott Fetzer's sales, other businesses included Kirby, Campbell Hausfeld air compressors, and Wayne burners and water pumps. World Book was then selling more sets of encyclopedias in the United States than its four largest competitors combined. After the ESOP plan was scuttled, Buffett wrote to Ralph Schey saying he admired the company's record. Just a week after their first dinner together, the acquisition contract had been signed.

In 1986, World Book's unit volume increased for the fourth consecutive year. Encyclopedia sales were up 45 percent over 1982. The Childcraft unit sales were also growing significantly. Success was in part attributed to good prices and editing and a sales force that was strongly identified as educators. More than half of the active sales force in the mid-1980s were teachers and another 5 percent were librarians. Kirby sales were also strong, with unit sales worldwide growing 33 percent between 1982 and 1986. In Kirby's case, the product was more expensive than most competing cleaners, but it was also known for its longevity. Some homes boasted 35-year-old Kirbys still on duty. Campbell Hausfeld, Scott Fetzer's largest unit, was the nation's leading producer of small and medium-sized air compressors. Its earnings more than doubled in 1986.

Pre-tax earnings for Scott Fetzer rose 10 percent in 1987. At the close of that year, World Book introduced its most extensively revised edition since 1962. The number of color photos had nearly doubled, more than 6,000 articles were revised, and these changes helped unit sales to increase for the fifth year in a row. The company's export business was particularly strong in 1988, when World Book became available in the Soviet Union. World Book had begun a costly decentralization into four locations in anticipation of having to leave its Chicago Merchandise Mart location. At the same time, Kirby's overseas sales more than doubled in two years.

Digital Age

If Scott Fetzer had been an independent company, it would have ranked close to the top of the Fortune 500 in 1990 in terms of return on equity. Despite costs of moving and a small decrease in unit volume, World Book earnings improved. A new Kirby vacuum cleaner was introduced and did very well. However, earnings overall for Kirby did not grow as quickly as sales because of start-up and learning curve costs for the new product. Northland, a division of Scott Fetzer based in Watertown, New York, also kept the company tradition of quiet excellence. It won a design award in 1990 for a redesigned bypass cover that cut production costs by up to $8,000 annually, while producing a more consistent product. International business remained strong, with another 20 percent sales gain in 1990. Campbell Hausfeld had record sales of $109 million that same year, most of which came from products introduced within the past five years.

In 1991, pre-tax earnings declined for World Book and the rest of Scott Fetzer, except Kirby. The following year, Kirby remained steady while World Book and the rest of Scott Fetzer's units increased again. All units again increased earnings in 1993. From the time of its purchase by Berkshire Hathaway in 1986, Scott Fetzer had consistently increased its earnings while reducing its investment in both inventory and fixed assets--using minor amounts of borrowed money outside of its finance subsidiary. It seemed healthy indeed, and Berkshire's continued parenting was proof.

In 1990 Scott Fetzer released the first version of its 22-volume World Book on CD-ROM. In 1992 executives from World Book also began a worldwide tour to promote World Book's new international edition. An estimated $5 million was used to convert the World Book's spelling into British English and expand the book's subject matter, making sure to include more articles about countries where English was not the primary language. The new World Book was marketed to non-Western countries such India, Singapore, the Philippines, and Egypt.

As the technology industry blossomed in the late 1990s, sales for the printed World Book began declining. "I suppose the biggest challenge was arranging for the survival of the company in the mid-'90s," Dom Miccolis, vice-president of World Book, said in the Chicago Daily Herald. He noted, "It became a different business." As the information medium transitioned from printed paper to electronic media, the cumbersome 22-volume World Book became an increasingly difficult sale for World Book representatives. Sound, video, and images were being added to the CD-ROM versions of World Book. For instance, a CD-ROM article about Wolfgang Amadeus Mozart also included sound bites from several of the composer's symphonies.

In 1998 World Book launched its World Book Online Reference Center, a web site that allowed subscribers to access every World Book published since 1922, along with extra articles that had never been published. Moving further into the electronic realm, in 1999 World Book entered into an agreement with the American Education Corporation, the creators of the A+dvanced Learning System. The agreement integrated the A+dvanced Learning System software with World Book's electronic content. Teachers could use the tool to monitor and control their students' learning processes. The final product was sold to U.S. and Puerto Rican schools.

New Millennium

On December 31, 2000, Scott Fetzer's CEO and chairman, 76-year-old Ralph E. Schey, retired. Schey was succeeded by Kenneth J. Semelsberger, who had worked closely with Schey as the chief financial officer, group vice-president, and division president for Scott Fetzer.

As the U.S. economy slumped after the September 11, 2001, terrorist attacks on the United States, Kirby distributors were able to be more selective about whom they hired as their door-to-door sales representatives. Despite a rash of charges that the sales reps hired by Kirby's distributors were targeting the poor, Kirby continued selling only to its select distributors. Direct selling remained a lucrative strategy in the new millennium. According to the Direct Selling Association, in 2002 the sales for the direct sales industry were posted at $28.7 billion, a significant increase over the $15 billion posted in 1993.

One of Scott Fetzer's smaller companies, Northland, laid off several of its workers in 2002. The New York-based company designed AC and DC electric motors, which were then manufactured in Juarez, Mexico. "The business level wouldn't support the employment we had at that time," Scott Wakeman, the company's general manager, told the Watertown Daily Times. "We don't see this as a permanent situation," he said. Northland management told the newspaper that they hoped to rehire the employees after the company's profits improved.

In the new millennium, World Book shifted its focus further away from selling printed 22-volume sets. Instead it sold electronic versions of World Book to schools and libraries. World Book formed a partnership with America Online Inc. (AOL) to make World Book a reference source for AOL's English and Latino web sites. World Book's printed set was still the best-selling printed encyclopedia in 2004, but it was World Book's transition to CD-ROM and the Internet that helped the company survive. In 2004 World Book posted the highest profit rate that the company had reported since 1989, according to Chicago Daily Herald. Scott Fetzer's performance validated Warren Buffet's reasons for buying the company. In the first 13 years Berkshire Hathaway owned Scott Fetzer, it netted more than $1 billion for the new owners.

Principal Subsidiaries

The Kirby Company; World Book Inc.; Campbell Hausfeld; Carefree of Colorado; Cleveland Wood Products; Douglas Products; ECM; France; Halex; Kingston; Meriam Instrument; Northland; Powerwinch; Quikut; ScottCare; Scot Laboratories; Stahl; United Consumer Financial Services; Wayne Home Combustion Systems; Wayne Water Systems; Western Enterprises; Western Plastics.

Principal Competitors

Electrolux AB; Danaher Corporation; Whirlpool Corporation; Black and Decker Corporation.

Chronology

• Key Dates
• 1914 The Scott & Fetzer Machine Company, a manufacturer of parts and tools, incorporates.
• 1925 Scott Fetzer releases the Kirby Scott & Fetzer Sanitation System.
• 1964 An acquisition spree begins.
• 1974 Ralph E. Schey becomes president and begins scaling back on Scott Fetzer's holdings.
• 1978 Scott Fetzer purchases World Book from Field Enterprises.
• 1984 World Book sales staff is increased 50 percent.
• 1986 Berkshire Hathaway purchases Scott Fetzer for an estimated $320 million.
• 1990 Scott Fetzer releases the first World Book available on CD-ROM.
• 1998 World Book launches its World Book Online Reference Center.
• 2000 CEO Schey retires and is replaced by Kenneth J. Semelsberger.