The Otto Group, a mammoth but discreet German apparel giant with $15 billion in revenues in 2008 and a mixed track record in the U.S., has quietly set up shop Stateside with the goal of finally taming one of the largest fashion markets in the world.
Never heard of it? You’re not alone. With the exception of home goods retailer Crate & Barrel, in which Otto has a 96 percent stake, the family-owned German company has little presence in the U.S., despite being the largest mail-order company in the world and the second largest online retailer with more than 50,000 employees and 123 major companies operating in 20 countries. Otto’s core apparel business has tackled much of the globe, but the U.S. is tauntingly uncharted.
It’s a different story in Europe, where Otto’s catalogues have been a staple of fashion and furniture retail since Werner Otto, a refugee from Communist East Germany, founded the business in Hamburg in 1949. The privately held company is a fixture in its core European markets, where it oversees catalogue-cum-multichannel retail brands such as Apart, Baur and namesake brand Otto, which sells men’s and women’s apparel, bridal, swimwear, footwear, plus-size apparel, furniture and hardware.
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But as successful as Otto has been in Europe (and more recently in Asia), the U.S. has eluded it. Otto executives are hoping to put an end to that with a new plan that leverages its wholesale and supply chain expertise.
To wit: In January, the Hamburg-based conglomerate established a U.S. division of Otto International, the company’s services arm, with a 5,000-square-foot office on Fifth Avenue in Manhattan and a distribution center in Bentonville, Ark. It staffed up with 20 employees and started to knock on doors.
“We want Otto to become a familiar name in the U.S. as a sourcing and services agent with retailers and vendors alike,” said Wil Hollands, executive vice president of sales and marketing for Otto International U.S., and the acting head of the division since president Mitchell Smiles departed the company in February. “Otto is not well known here. We want to change that.”
Otto is bullish about its goals for the U.S., but for a company its size — annual revenues are in line with those of J.C. Penney and Nike — the firm’s launch has been a somewhat quiet affair. No fancy parties. No sprawling media push. No ads. It has decided not to replicate its existing apparel brands and catalogue-Web businesses in the U.S., despite having done so in other markets.
“They are very committed, but conservative,” said Simon Graj, founder of branding firm Graj + Gustavsen, which is considering working on an eco-friendly apparel line with Otto. “They don’t seem like the 500-pound gorilla in the room, but they are.”
“They like to take their time,” said Smiles, who served as president of Otto International for a year before departing two months ago to pursue other business interests. He still consults for Otto. “This company is very big but it’s careful. It’s how they do business.”
Such caution is perhaps warranted. The company was stung in the U.S. once before. In 1982, Otto, led by family scion Michael Otto, purchased the women’s U.S. catalogue company Spiegel and later acquired Eddie Bauer, which aggressively expanded under Otto’s watch to more than 300 doors. The firm appeared to have triumphed in the U.S. market at last. But slumping sales and credit problems forced the Spiegel Group to file bankruptcy in 2003, and creditors sold the $1.7 billion company off in pieces. And suddenly Otto was publicly and humiliatingly pushed out of the U.S.
“It’s as simple as when you are children and you go to a stove and get burned — it takes a while before you go back,” said Smiles of the company’s view of the U.S. “They came here in the Eighties in a big way and it didn’t work out in a big way.”
So with careful and quiet steps, Otto’s new U.S. division has been enticing the local market — with two primary pitches. As a brand manager, it launched Field & Stream 1871, a brand of outdoor-inspired casual men’s wear licensed from the magazine of the same name. That moderately priced line is retailed online and via catalogue and is also wholesaled to Sam’s Club.
Otto also is shopping its expanding trade services and sourcing business. Years of growing its own retail brands created a vast structure of manufacturing and in-house logistics divisions that five years ago Otto bundled and started offering to third parties.
This is a new business for Otto, accounting for only 6 percent of revenues, but it is the fastest-growing segment. In coming to the U.S., Otto hopes to see that number rise by taking market share from established sourcing companies such as Li & Fung.
“With more than 40 years experience, the sourcing business is the basis for all our operations,” said Ignacio Lopez, one of the managing directors of Otto International, the group’s services division, which oversees the new U.S. business. “Having achieved big business in Europe, we are now prepared to enter the U.S. as the biggest retail market worldwide.”
Otto International U.S. hopes to book partnerships by offering what it calls more flexible options for small and medium-sized companies looking for B2B services including sourcing, trading, logistics, warehousing and financial services.
“A lot of bigger players have minimums and want your whole business. We’re a huge firm with a boutique way of doing business,” Smiles explained.
Recently, Otto booked a deal with knitwear manufacturer The Hampshire Group to produce and source goods for fall. “They seem to be a skilled sourcing organization,” said Heath Golden, president and chief executive officer of The Hampshire Group. “They are more flexible and hungrier for the business.”
Hungry, but cautious. The stakes for success are high. The U.S. is for Michael Otto, now chairman of the company’s supervisory board, the last blank spot on the map for his family’s company.
There is also the matter of sibling rivalry. Michael’s brother, Alexander, has already succeeded here. He runs ECE Projektmanagement, a huge developer of shopping centers in Europe, which last year took a minority stake in publicly traded Developers Diversified Realty, a large mall developer in the U.S. ECE also owns one of the largest private real estate firms on the East Coast — The Paramount Group, whose portfolio includes marquee addresses in Manhattan commercial real estate such as 745 Fifth Avenue, 1633 Broadway and 60 Wall Street.
Otto International U.S. likely could have negotiated a pretty good deal with one of those buildings for the offices of its U.S. business. But the company instead set up shop on 489 Fifth Avenue — a non-family-owned building.
“They have buildings all over this city,” said Smiles. “But we wanted to stand on our own.”