International Business

Chapter 16: Technology and the Future Global Economy

BusinessWeek Online

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How Otto Got an e-Commerce Head Start

With $3.8 billion in sales, the German outfit is the world's second-biggest online retailer. Its CEO's foresight paved the way

Is Michael Otto Germany's answer to Jeff Bezos? The reserved 63-year-old chief executive of Otto Group doesn't look the part of an online entrepreneur, dressed in a conservative suit and striped necktie as he greets a visitor in his office in a utilitarian building in Hamburg. But with $3.8 billion in online sales last year via Otto brands, including Crate & Barrel in the U.S., Otto Group is, remarkably, the world's No. 2 online retailer, behind only Bezos' Amazon.com (AMZN).

Germans already know the company well. The red Otto logo is instantly recognizable there; the phone-book-thick Otto catalogs are as much a part of the national psyche as Sears catalogs once were in the U.S. But it's safe to say the Otto brand means nothing to most Americans.

It should. Michael Otto, a patron of modern art who used to hang with Andy Warhol and helped his friends Christo and Jeanne-Claude wrap the Reichstag, arguably belongs in the pantheon of e-commerce pioneers. In the mid-1990s, well before the Internet became a mass medium, Otto took part in an experimental project led by Time Warner (TWX) to test whether residents of Orlando, Fla., would shop online via a specially installed cable network.

Since those early days, he has built Crate & Barrel, which he acquired in 1998, into one of the fastest-growing retailers in the U.S., largely by boosting catalog and online sales. "They really went into the game early on," says Hellen K. Omwando, consumer market analyst at Forrester Research in Amsterdam. "They understood that e-commerce is here to stay and organized themselves as a multichannel retailer."

PROSPECTIVE TECH. Thanks in part to Otto's early emphasis on e-commerce, the closely held company today boasts annual sales of $18.5 billion and 54,000 employees worldwide. It sells everything from clothes and sporting goods to electronics and appliances online. Profits have suffered in recent years from the slow German economy, but Otto says he expects the fiscal year ended in February, 2006, will show an improvement from the previous year's pretax result of $526 million. Otto Group's core business is still the German catalog, but Otto generates half of sales outside of Germany, chiefly in other European countries but also in the U.S. and in Asia.

At Crate & Barrel alone, U.S. sales last year were $1.2 billion. And in Japan, the Otto-Sumisho catalog retailer is pioneering the use of mobile technology to buy online, already generating 30% of sales via cell-phone orders. Otto is also in the travel business and sells financial services via holdings such as French consumer credit company Cofidis.

Otto began investigating the possibilities of computer technology soon after assuming leadership of the family business—started in 1949—from his father in 1981. He and his senior IT manager have made treks to the U.S. every other year to check out the latest developments in computer technology. They visit companies such as IBM (IBM), Hewlett-Packard (HPQ), and Microsoft (MSFT), as well as dozens of tech startups.

"I want to find out what's going on in the laboratories," he says. "Not what's being introduced in two months—that I can find out at the trade fair. But to see what's really new and what might become relevant for our own future development."

SIGNED ON EARLY. Otto sensed the potential of online commerce early, joining with Time Warner in the mid-90s in the so-called Orlando test. Homes in the Florida city were outfitted with interactive cable that allowed services such as home shopping and video on demand.

The test was plagued with problems, and the technology was soon overtaken by the Web. But the experiment gave Otto valuable experience, which the company used to become one of the first traditional retailers to make money on the Internet. Otto Group's online sales activities, introduced in 1995, were profitable by 1998, Otto says.

Today the company faces increasingly intense competition not only from Amazon but also eBay (EBAY), which small businesses are increasingly using as a platform to sell online. Otto responds by constantly updating its product assortment and offering services such as clothing delivered on hangers rather than in boxes.

The coddling is possible in part because Otto also owns Hermes Logistics Group, Germany's second-biggest package-delivery service after Deutsche Post and its DHL unit. "That's our advantage—mail order has been our business for decades," Otto says.

U.S. UPTICK. Otto has suffered its setbacks, though. Its Chicago-based Spiegel catalog filed for bankruptcy protection in 2003 after the well-known retailer extended too much bad credit to customers. Spiegel survived, but Otto was forced to cede the company, as well as the group's Eddie Bauer outdoor-clothing unit, to creditors. The affair also drew scrutiny from the U.S. Securities & Exchange Commission, which revoked trading of Spiegel shares after determining the company concealed its financial condition from investors.

Still, the Spiegel fiasco and negative press coverage were a severe embarrassment for Otto, who has worked hard to cultivate a good-citizen image. His long list of honors includes the German Order of Merit, the country's highest civilian honor, as well as the Jewish Museum of Berlin Award for Tolerance and Understanding. Otto is chairman of the German chapter of the World Wildlife Fund and a prime donor to civic institutions such as Hamburg's Elbe Philharmonic.

Things have been improving for Otto in the U.S. recently. Crate & Barrel sales have tripled since Otto Group bought a majority in 1998, and rose 14% in 2005 to $1.1 billion. Now Crate & Barrel is planning expansion to Canada and, within the next five years, to Europe and Japan. Michael Otto attributes Crate & Barrel's growth to founder Gordon Segal, but also to the expertise in home shopping that Otto Group introduced.

"That's what we could contribute: the experience in using catalogs and the Internet," Otto says.

IPO AVERSE. Otto continues trying to push into new areas of e-commerce. His current enthusiasm is a "t-commerce" partnership with Microsoft that would allow customers to buy from the Otto catalog using a TV, a remote control, and a set-top box. Otto hopes to reach the millions of people still not comfortable with the Internet.

Of course, one thing sets Otto Group sharply apart from Amazon, eBay, and other big e-commerce companies. It's not publicly listed. Furthermore, Otto—who plans to retire in two years and turn the company over to non-family managers—rules out an initial public offering. He argues that companies perform better if they're not constantly trying to keep the stock market happy.

"We don't have to come up with a good story every quarter for the investors and the press. So we can concentrate on bringing forward our business," he says. Public investors or not, Otto has a pretty good story to tell.

By Jack Ewing
May 9, 2006

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