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Can Hallmark Get Well Soon?


The Corporation: STRATEGIES

CAN HALLMARK GET WELL SOON?

`Please remember that winter's darkness emerges into spring," penned Hallmark Cards Chairman Irvine O. Hockaday Jr. during a management retreat a few years ago, when asked to write a hypothetical sympathy card for Laplanders. Given Hallmark's recent problems, it's just the kind of consoling message he might want to send employees and Hallmark store owners.

The privately held greeting-card giant, based in Kansas City, Mo., has seen its market share slip from an estimated 50% to 45% over the past five years. Revenue steadily increased, reaching $3.8 billion in 1994, up 40% since 1990. But return on equity sagged, falling to an estimated 8% last year--far below its historical 15% to 20% ROE, as Hockaday concedes.

Part of the problem: Hallmark's cards and merchandise look dated next to hipper upstarts, such as Chicago's Recycled Paper Greetings. Meanwhile, risky new investments in media could divert attention from the core business. But Hallmark's biggest challenge is a changing marketplace that now favors mass retailers over the 9,000 independent specialty shops Hallmark relies on to sell its flagship cards.

Hockaday makes no bones about the fact that the company has made mistakes during his nine-year tenure--in particular, unsuccessful attempts to diversify and failed restructurings. The 58-year-old is only the third chairman in Hallmark's 100-year history and the first who isn't a member of the founding Hall family, which holds two-thirds of Hallmark's stock.

Just how bad things are is hard to say. Hallmark's profits are a jealously guarded secret--even from the 21,000 employees, who own a third of the company through a profit-sharing plan. But they know the news can't be good. In 1990, Hallmark's profit-sharing contribution began a slide, from 10% of salaries to 6.5% last year.

Hallmark's response? In January, the company announced yet another round of cost-cutting, this time a merging of the administrative, marketing, and product-development functions of the various Hallmark card brands. But that doesn't mean there will be layoffs: "Hallmarkers" have typically held their jobs for life.

Besides trimming overhead, Hockaday is trying to diversify from the mature greeting-card business. The company plunged into TV production last year with a $365 million purchase of RHI Entertainment, best known for Hallmark's Hall of Fame productions. Next came an $80 million investment in Flextech, a European satellite-TV company, this spring. Where's the synergy with greeting cards? Both cards and programming dish out emotional content, Hockaday says.

SYNERGY SKEPTICS. Such claims of psychic synergy meet with plenty of skepticism. "That's a hell of a stretch. Why not carry it through to warm and fuzzy food?" scoffs one analyst who follows the industry. Hallmark's previous flings with the media business have ended badly. It lost $10 million on a five-year investment in Spanish-language television that cost banks and bondholders $104 million by the time it was dumped in 1992. And it barely escaped another loss last year when it unloaded a $1 billion investment in the cable business that was pummeled when Congress limited the fees cable operators could charge.

Nor can Hockaday afford to ignore the core business. Greeting cards and related items still account for more than half of Hallmark's sales. He hopes to jazz up the card lines by giving more creative control to the artists who produce 21,000 Hallmark card designs in 20 languages each year. Instead of executing greeting-card assignments dreamed up by product managers, they will be encouraged to pursue their own ideas. "We let our products get a little aged, relative to the velocity of the marketplace," Hockaday says.

Hockaday dances around his toughest issue--what to do with the thousands of independently owned Hallmark card shops now that discounters, supermarkets, and drugstores dominate the card market. Specialty card shops, which once accounted for 65% of the business, now constitute less than a third of it. Hallmark makes Ambassador cards specially for discounters, but three-quarters of the flagship line is sold through those specialty shops. The shops agree to carry mostly Hallmark goods in exchange for merchandising support, use of the Hallmark name, and being by tradition the primary Hallmark outlet.

HOWLS OF PROTEST. Publicly, Hockaday voices support for the shops, saying that they protect the brand's premium image. But the relationship seems sure to go the way of the handmade Valentine. Competitors and analysts say they expect Hockaday to strike a deal any day with a discounter such as Target Stores to carry the Hallmark line. Already the company has such agreements with six drugstore chains, including fast-growing Walgreen Co. and CVS Consumer Value Stores. "I believe the decision has already been made," says E. Gray Glass III of Wheat, First Securities Inc. "It's just a question of timing." There's nothing in the contract Hallmark signs with its store owners that prevents it from selling its cards anywhere it wants. But doing so would raise howls of protest from outraged shop owners and go against decades of Hallmark culture.

Meanwhile, the stores have already been hurt by the discounters and many will be out of business in five years if they don't diversify beyond Hallmark products, predicts Glass. Some shop owners have already taken on competing brands. "They're doing what's best for their business. I'm doing what's best for mine," says Virginia Liu, whose Washington (D.C.) Hallmark card shop is located directly across the street from a CVS store.

Still, with almost half the greeting-card market, Hallmark is fighting back from a position of strength. And its brand name and reputation for integrity should play well with today's family-oriented consumers. "We could start a family of mutual funds, and people would buy it," Hockaday boasts. "That's the power of the brand." Still, it will take more than sympathy and sentiment to get Hallmark back on track.By Susan Chandler in Kansas City


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