Harry & David’s Bankruptcy: Downturn or Wall Street?
Harry & David landed in bankruptcy
court last week. Although many articles naturally blamed the economy, more
than a few are placing the blame squarely at the feet of Wasserstein & Co.,
which purchased the purveyor of fruit and food baskets in 2004.
The bankruptcy
is gaining some unusual press since many local farmers and landscapers in both
Oregon and Ohio are affected. Harry & David grows or
makes about 85 percent of its products. During seasonal times, 6,000 workers
would join its permanent staff of 2,000 in Medord, Oregon to pick, pack and
ship fruit around the world. Brad Hicks, chief executive officer of the Medford/Jackson
County chamber of commerce, told Business Week, "Harry & David
has been a cornerstone of our community."
The following are some of the
reasons given for the bankruptcy filing:
- The Recession: Sales are said to have begun falling since 2008 as
businesses slashed corporate gift budgets and consumers cut spending in the
weak economy. As a commentator to The New York Times article on the
filing stated, "Hairy & Dead. Who knew selling pears for 20 bucks
a piece wasn’t a sustainable model?"
- The Internet/New Competitors: Online competitors have grown significantly
and many source products from cheaper places to provide more competitive
pricing. Also supermarkets as well as stores like Walmart and Target have
begun offering more gift-food items.
- Overexpansion: Since being acquired by Wasserstein, Harry & David
attempted to accelerate growth by moving into wine, chocolate and flowers.
It also opened more than 100 stores and bought smaller competitors such as
Cushman Fruit in 2008. It closed 52 unprofitable stores before filing for
bankruptcy protection and now operates 70 stores. Joe Feldman, an analyst
at Telsey Advisory Group in New York, told Business Week, "They
may have tried to get into the retail store strategy too aggressively."
- Debt load: Wasserstein was able to reportedly recoup 1.25 times
its investment in acquiring Harry & David but the buyout left the retailer
saddled with $200 million in debt versus none before the acquisition. That
left it particularly vulnerable when the recession hit. Oregon State Rep.
Dennis Richardson told The Wall Street Journal, "Buying a successful
company like Harry & David and crushing it under millions in bonding
debt required to pay for the purchase may be known as brilliant financial
maneuvering on Wall Street. Oregon citizens have a different name for it."
Harry & David is expected to try to reorganize in bankruptcy proceedings
under a smaller size.
- Harry & David’s Bankruptcy Rocks Medford, Oregon – Business
Week - Harry & David’s failed Mr. Fix-It – Fortune
- Harry & David Bankruptcy Filing Creates Ripple Effects – The Wall
Street Journal - Harry & David Files for Bankruptcy – The New York Times
- What a pair: Harry & David and Wall Street – The Seattle Times
Discussion Questions
Discussion Questions: How much of Harry & David’s bankruptcy filing appears to be due to the economy versus over-expansion and debt issues? How should the company reorganize itself?
Financial groups like Wasserstein & Co. do not purchase companies to run the businesses. They make their investments so that they are able to take out as much money as possible from within the company, grow it utilizing debt, and then flip the company for a profit. If the company can’t handle the debt, they help the company declare bankruptcy, they cut their losses, and they move on.
It happened at Simmons Bedding, it happened at Mervyns, and we can name hundreds of companies where the same scenario played out.
These stories seldom end up with a happy ending for the brand, usually only for the investors. Call the Borders employees; they’ll tell you the same thing.
Wasserstein should accept the majority of the blame for the destruction of a great brand in Harry & David’s.
I’m so glad you covered this. It wasn’t the lack of mobile, or customer service, or aversion to fruit. It was like the movie Other People’s Money. I was shocked last year when I went to get the roses my grandfather always purchased–J&P to find much the same thing–in bankruptcy due to being bought out, over-expanded. The roses were all in the ground, unable to be shipped due to the hubris of the investors.
Having said all of that, what is the solution? Never take the money? We live in a capitalist society where risk and investment are supposed to pay off. When that is poorly managed we find the marketplace is unforgiving.
The economy should never be an excuse for poor performance. A poorly run company is the only reason. Well run companies are successful in any kind of economy.
I think the comment, “Who knew selling pears for $20 a piece wasn’t a sustainable model?” LOL! I never got Harry & David as I always thought it was just a way for people who didn’t put much thought into gift giving to give something of appropriate monetary value. Frankly, I think the economy might have broken that mentality, so indirectly, yes, the economy was to blame. But really, I think it reflects a shift in American values away from thoughtless over-consumption.
The model for private equity investors is really quite simple–a 2-3 times return on the initial investment in 2-3 years, regardless of what it takes to do this. Usually it involves taking on huge debt, since the objective is to do this with other people’s money. The private equity firms typically have little if any knowledge of or interest in the underlying business nor do they show much interest in learning it. The object is purely financial.
Some people think this is (insert pejorative adjective here). It’s worth remembering that 1) no one forced the company to get involved with the investors and 2) several of these deals have in fact turned out to be very successful for everyone involved (Jet Blue, Tommy Hilfiger to name a couple).
When you buy a horse you can’t sell all of the hay to pay for the deal. The horse will starve.
There is no better business to thrive because of the Internet than Harry & David. This is plain and simple a result of bad management and poor planning.
Do you think anyone at Wasserstein & Co. is suffering from survivor’s guilt? (See: BrainTrust Query: How to Deal with Survivor Guilt in Your Salesperson) More appropriately it is survivor’s guile.
One doesn’t need 20-20 hindsight to see the strategic debacle that produced this disaster. Who would ever consider opening stores against this business model? Chances are it wasn’t Wasserstein. They got their money out early and put the company in the hands of some “hot” retail executive. This company wasn’t only loaded with debt, it was loaded with expense it could not cover.
Wherever will I get my pears now? Oh yeah, one of the thousands of farmers markets that have sprung up, Whole Foods, or my local gourmet grocery.
I suspect the company has had “ownership problems” extending far back before the Wasserstein era (Disclosure: I used to work for one of the previous parent companies, and even back in the early ’90s it was owned by people who knew little about the business). But I also agree with Joel’s lack of “getting it” (although there are plenty of companies that do a healthy business selling (grossly) overpriced merchandise). Ultimately, I think it’s a perfect storm of overleverage, questionable decisions and a business with high susceptibility to the business cycle…the same factors we usually hear about in these Chap 11 cases.
Knowing nothing about the Harry & David financiers, I do know that from a consumer’s point of view they used to have a unique model where you could send a nicely boxed set of premium fresh fruit and other goodies that would arrive fresh and in one piece and be a nice holiday gift.
Over the past 10 years (at a minimum), they have faced: 1. The maturation of the internet as a retail channel, 2. A host of new competitors, 3. The trend towards “buying local,” and 4. The Great Recession. Consumers are no longer willing to pay a premium for items that don’t meet their new value proposition.
Pears for $20 “a piece?” Perhaps selling pieces of pears instead of whole pears (apiece) caused the H&D bankruptcy. When I read the excellent comments on this topic, I was reminded of the movie “Wall Street,” which I recently re-watched in preparation for its sequel (which sucks). And although there are no allegations of insider trading in the H&D situation, I saw the familiar strains of “take it over, milk it, and dump it” from the movie. It’s part of our financial system and one that, while brutal, must remain. History is littered with the carcasses of H&Ds.
It’s easy to blame the failure of Harry & David on Wasserstein & Co. and the recession. As the investment firm began to take cash out of the business and saddled them with debt they put Harry & David in a difficult position. In many ways such activities could be considered fraudulent.
But business failures are nearly always the result of several factors. At Harry & David, one of those factors was multiple management changes and the company’s inability to adapt to the changing business of catalog, Internet and store retailing. Some problems were also the result of buying other companies.
Wherever the blame lies it is always a tragedy when an old and well-respected company must declare bankruptcy. This failure certainly cannot be blamed on selling expensive pears.
This model is a reflection of a company that has an outdated model that has not adapted. It has been pushing growth where growth was not necessarily needed, and continuing with a model that clearly needed to be changed. The result was conflict, confusion and eventually bankruptcy. To revive itself, H&D needs to evolve and then manage itself around a new model that is probably much smaller, but profitable.