Magazine

Otto The Modest


Even in Germany, not too many people know that Hamburg retailer Otto Group is second only to Amazon.com Inc. (AMZN) in business-to-consumer e-commerce worldwide. But then, Chief Executive Michael Otto has never been much of a self-promoter. The billionaire son of the company founder rarely gives interviews and recoils at the idea of taking the $18.5 billion family-held company public. Otto, whose family's wealth has been estimated at more than $10 billion and who owns such pricey real estate parcels as the 47-story office tower at 1177 Avenue of the Americas in New York, is one of Germany's richest men. Yet he doesn't play the role of a tycoon. Reserved and down-to-earth, he often relaxes by playing a game of volleyball with Otto workers.

In Germany, Otto's style would be called bescheiden. That translates as modest, frugal, or unpretentious. Those qualities no doubt helped Otto avoid giving in to the greed of the dot-com era. Instead of cashing out, he hung on to develop a business model that has made his company a real power on the Internet, with online sales last year of $3.8 billion. Otto has made regular scouting trips to U.S. high-tech companies since the 1980s, and early on he figured out how to harness the Net in service of the retailer's traditional German mail-order business.

That so-called multichannel strategy has helped the company withstand a prolonged slump in German spending and some bad miscalculations managing its U.S. operations. Otto was forced to give up control of Spiegel Inc., the mail-order house, and Eddie Bauer, the outdoor clothing unit, both of which ran into serious trouble in 2003. But he has more than made up for those missteps with a majority stake in home-furnishings retailer Crate & Barrel, where e-commerce has helped sales triple since 1998, to $1.2 billion. Including other holdings such as French consumer finance company Cofidis and Japanese catalog retailer Otto Sumisho, Otto Group's online sales grew 30% in the fiscal year ended in March and now account for about 20% of total revenues of $18.5 billion. Last year the group had profits of $526 million, and Otto says that figure will go higher for the fiscal year ended in March.

Otto Group's attempt to preserve tradition while embracing the modern reflects Otto, the man. Although outwardly conventional, Otto, 63, is a major collector of avant-garde art. He played a role in persuading German lawmakers to let New York-based artists Christo and Jeanne-Claude wrap Berlin's Reichstag, its Parliament building. "Because of his connections, people could tolerate the idea of wrapping the Reichstag," says Christo.

Otto lobbied 17 years for the project before it happened in 1995. He is often just as patient in business. Otto refuses to take his company public partly because he thinks the market encourages shortsighted management. "We don't have to come up with a good story every quarter for the investors and the press," Otto says in an interview in his Hamburg office, which is decorated with a Christo drawing.

That's a very German point of view, and it has worked for Otto. The company was founded in 1949 by Michael Otto's father, Werner, now 96, a refugee from territory now part of Poland. Initially the Ottos lived in bombed-out Hamburg, squeezed into a house with another family. But their business, which began by selling shoes through the mail, thrived. Soon Otto catalogs, thick as phone books, became to Germans what Sears (SHLD) catalogs were to Americans, specializing in clothing but also selling a range of electronics, toys, sporting goods, building supplies, and travel packages. When Michael became CEO in 1981 he took the company overseas. Now Otto generates half its revenue outside Germany via subsidiaries such as Bonprix, which sells clothing and housewares in Britain, Russia, Poland, and elsewhere.

In the 1990s, Otto could see that e-commerce would challenge traditional retailing. So he took part in the now infamous Orlando test, a project led by Time Warner Inc. (TWX) The mid-'90s attempt to provide home shopping via interactive cable to Orlando residents was plagued with technical glitches, but it gave Otto valuable experience. The company launched its first online catalog in 1995, which it supplemented with a CD-ROM version to compensate for the era's sluggish dial-up modem speeds. By 1998, Otto's online business was profitable.

SAVVY SNAIL MAIL

Otto's online philosophy differs markedly from that of Amazon or eBay Inc. (EBAY) Those e-tailers only take orders online. Otto allows customers to order on the Net but get a bill in the mail and pay by bank transfer. That encourages online shopping by Germans who lack credit cards. To lure shoppers, the site lets women create images of themselves, then try on clothing combinations virtually. To keep ideas flowing, info tech managers worldwide meet at least twice a year to swap best practices, such as the Japanese unit's success with customers ordering via cell phones.

Within the group, Chicago-based Crate & Barrel has become a template for integrating stores, catalogs, and the Net. The assortment in shops, online, and in catalogs is almost identical, part of the company's strategy of eliminating distinctions between the different sales channels. Items bought online can be returned in stores, and one back-office and delivery system serves all customers. About a quarter of Crate & Barrel's $1.2 billion in annual sales now comes via the Net. "Otto really supported and pushed that effort," says Crate & Barrel founder and CEO Gordon Segal, who hopes to expand into Canada and Europe.

Despite the success of the Crate & Barrel acquisition, Otto has had its share of setbacks in the U.S. Spiegel filed for bankruptcy protection in 2003 after it extended too much bad credit. Spiegel survived, but Otto was forced to cede the company, as well as the group's Eddie Bauer unit, to creditors. The affair also drew scrutiny from the Securities & Exchange Commission, which revoked trading of Spiegel shares after determining the company concealed its financial condition from investors. The SEC continues to investigate the case and could impose a fine, according to a company spokesman. An SEC spokesman, citing agency policy, declined to comment.

For Michael Otto, the Spiegel affair was a bitter pill. But his concern now is the relentless competition from the likes of eBay. To stand apart, Otto aims to offer better service and reliability. That includes local phone reps, a quick-dial help number for mobile phones (6886, or OTTO), and the company's own package delivery service. "It's extremely hard for competitors to replicate that and nibble away at Otto's market share," says Dan Bieler, an analyst in Cologne at market researcher Ovum Ltd. Another good thing not to boast about.

By Jack Ewing


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