THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Wednesday, November 23, 1994 TAG: 9411230425
SECTION: BUSINESS PAGE: D01 EDITION: FINAL
SOURCE: BY MARK ROBICHAUX, THE WALL STREET JOURNAL
LENGTH: Long : 101 lines
The home-shopping revolution is on hold.
In the latest sign of a slowdown in the electronic retailing industry, Fingerhut Cos. Monday canceled the launch of S The Shopping Network, because it couldn't persuade investors that the venture would be profitable.
Other players are also dropping out or quietly scaling back. QVC Inc. is combining two new TV shopping services to cut costs. Spiegel Inc.'s Catalog 1 isn't growing as fast as had been expected, and Federated Department Stores Inc. has put TV Macy's on the back burner while it merges with R.H. Macy & Co. Moreover, the percentage of cable homes watching such shows has plateaued.
``This is not a lull,'' says Joanna Barsh, a partner with consultant McKinsey & Co. in New York. ``This is a leveling off until you get to some new technology enhancement, like interactivity.'' She adds, ``It's still much easier to pick up a catalog and walk into any room of the house and call when you want to.''
The home-shopping industry still produces an impressive $2-billion-plus in annual revenue, and for the two established players - QVC and Home Shopping Network Inc. - the business is still a good one. But the percentage of home-shopping viewers is only about 12 percent of cable households in 1993, down from 16 percent in 1991, according to McKinsey & Co., while the number of frequent buyers has increased slightly during the period. And no one has figured out how to attract younger and more upscale viewers or the millions of consumers who never shop via TV.
Home shopping, once a low-profile business, became a hot property two years ago when Barry Diller left Hollywood to head QVC, a West Chester, Pa.-based company that has its main distribution center in Suffolk and a telecommunications facility in Chesapeake.
Diller announced big expansion plans for QVC, and a flood of powerful media and retailing giants - from Time Warner Inc. to Macy's - followed with plans for shopping channels of their own.
But the grandiose plans have faded. Even Diller, who was seen as the programming wizard who could reinvigorate the category, is expected to leave QVC, which is being acquired by Comcast Corp. and Tele-Communications Inc. His impending departure has blunted optimism for television shopping's future.
On Monday Fingerhut said it would take a fourth-quarter charge of about $19 million on the closing of its home-shopping station. Fingerhut executives said the ``business for cable companies has changed dramatically'' since it announced the service in March.
For starters, cable operators can't fit more new services on their systems. They say new federal rate restrictions have cut their cash flow and thus their ability to upgrade and expand channel offerings.
``The channel-capacity crunch is a real problem for the foreseeable future,'' says Marilyn Harris, vice president for programming and new media at Catalog 1, a joint venture of Spiegel and Time Warner. Analysts say any new cable channel requires about 15 million subscribers or more to break even. And in recent months, new shopping channels have jumped into a bidding war to get carried on cable systems.
Whereas cable operators typically pay new networks for their programming, new home-shopping channels pay operators to carry them. Some have offered cable operators as much as $9 a subscriber, in hopes that returns would cover the costs. QVC, for example, is offering $5 a subscriber as a part of long-term commitments.
``When people start talking $9 per subscriber, we just didn't know how you make money doing that,'' says Theodore Deikel, Fingerhut's chairman and chief executive officer.
Deikel attributed a third-quarter earnings slide to its shopping-channel investment. Fingerhut's net fell 49 percent to $7.1 million from $13.8 million a year ago.
The biggest obstacle for new home-shopping entrants is the dominance of HSN and QVC. But even for these industry pioneers, the explosive subscriber growth of the late 1980s is over, says Craig Bibb, an analyst with PaineWebber Inc. While QVC's growth in subscribers and revenue over recent quarters has been slightly better than HSN's, both companies concede they must broaden their audiences. ``But no one is doing what QVC promised and didn't deliver with Q2 - something totally different,'' Bibb said. Q2 is a new QVC shopping service aimed at a younger, more upscale audience.
Even QVC, which says its list of ``active customers'' should grow by 8 percent this year, was forced to scale back plans. Last month it merged Q2 with OnQ, a channel that sold primarily apparel to younger shoppers. Neither channel reached sales expectations as stand-alones.
Douglas S. Briggs, president of QVC electronic retailing, suggested that the answer to expanding beyond its traditional audience may be mainstream products of a higher quality than those typically associated with home shopping, rather than ``upscale'' merchandise. The company has added such brand-name products as Craftsman tools, Coach leather goods and products from Warner Bros. retail stores. But more than 40 percent of revenue for both QVC and HSN still comes from more traditional jewelry sales.
QVC remains convinced that bigger profits are coming, as channel capacity expands and interactivity attracts more customers.
``I am very bullish on the business,'' said Briggs. ``We are going to build a brand.'' ILLUSTRATION: Color File Photos
QVC is an established player in the home-shopping industry. The
company has its main distribution center in Suffolk and a
telecommunications center, shown below, in Chesapeake.
by CNB