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Originally published Tuesday, September 28, 2010 at 8:49 PM

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Harry & David is in turmoil

The holiday catalogs are already being mailed out by Harry & David, offering the century-old merchant's trademark luxury gifts ...

Los Angeles Times

The holiday catalogs are already being mailed out by Harry & David, offering the century-old merchant's trademark luxury gifts including gourmet fruit from Oregon's Rogue River Valley, with a promise of "happiness delivered."

The picture is much less cheerful at the company's headquarters in Medford, Ore., where corporate cost-cutting and absentee management belie the firm's public face as a folksy, agrarian outfit with roots as solid as those growing under the pear trees in Harry & David's orchards.

Since New York-based private-equity investors bought Harry & David six years ago, the company has sliced its work force by a third and cut back on raises and benefits.

The turmoil worsened this year when the company's longtime chief executive, widely viewed as a pillar of the local community, was fired and replaced by a hotel executive who had left his previous job under a cloud.

The new chief executive, who is running Harry & David from an office near his home in Atlanta more than 2,000 miles away, cleaned out the rest of the executive suite soon after taking over in February. More lower-level workers were let go in April, and management has been farming out to contractors some work that had been done in-house.

Among the remaining staff, the mood is described as one of gloom and apprehension.

"You walk around and you see that people have taken down their family pictures in their cubicles," said a headquarters employee, who, like other staffers, did not want to be identified for fear of being fired. "Tomorrow, if security comes to get them, they don't want to have to pack up."

The company's circumstances can be explained, in part, by the country's economic downturn, which has sharply depressed demand for most upscale goods. Harry & David's sales have plunged 25 percent from their peak before the recession.

But that pain has been compounded by debt that has made it harder for the company to make a profit. The investors who acquired Harry & David in 2004 first loaded it up with debt to finance the deal. Then they piled on more debt a few months later to pay themselves back all the cash they put up to buy the company.

"This is a classic case of a leveraged buyout," said Raj Parikh, dean of the business school at Southern Oregon University in nearby Ashland. "They hoped to increase the earnings through a combo of slashing expenses and then paying off the debt."

Ellis Jones, chief executive of New York private equity firm Wasserstein & Co., which led the buyout, acknowledged that the interest payments that Harry & David now must make are a drag on the company. But he said the borrowing appeared prudent at the time.

"Based on the company's performance, the leverage we put on the company looked extremely conservative," Jones said. "It was only after the great recession — the 100-year flood — that financing became an issue."

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Concern in Medford

The combination of plunging sales and heavy debt has not only ravaged Harry & David's work force, but it also has caused business leaders in the Medford area, where the company is the largest private employer, to worry about the local economy.

"For the average person that landed in Medford 20 years ago, they saw Camelot," a promised land of good jobs and beautiful scenery in the mountainous southwest corner of the state, said Bill Thorndike, owner of a local manufacturing firm.

Thorndike is on the boards of the charitable Oregon Community Foundation and the Oregon Business Council, a group of prominent corporate leaders. "It's something that we took a great amount of pride in — we had this economic engine that paid well and that played well with the community. It's not that anymore."

The story of Harry & David began in 1910, when Samuel Rosenberg traded his Seattle hotel for orchards in southern Oregon that grew the distinctive fleshy, red and green Comice pears. After his sons, Harry and David Holmes, took over, they began marketing the pears as high-end gifts and sold them to affluent city folk.

In 1984, the family sold the business to RJR Nabisco, the first of a number of corporate owners, the longest lasting of which was Yamanouchi, a Japanese pharmaceutical conglomerate.

The outside owners relied on Medford-based executives to run the company, including Bill Williams, who was CEO for two stints starting in 1988 before he was fired in February.

Under Williams, the company expanded its product line and its distribution, opening a chain of retail stores that now number 125 nationwide.

Harry & David's best-sellers these days are fruit-of-the-month boxes — which cost about $350 for a year of deliveries — and $40 drums of Moose Munch candied popcorn.

Rank-and-file employees who still have their jobs have felt pain in the form of benefit cutbacks that began even before sales tumbled. The company froze its traditional pension plan, then suspended contributions to its 401(k) plan. Most yearly raises also have come to an end, according to employees.

Outside executives

The hiring this year of executives from the outside prompted a surge in workplace gossip after the staff searched the Internet for information on their new bosses.

The new CEO, Steve Heyer, lost his most recent high-profile job as chief executive at Starwood Hotels after facing allegations that he had sent inappropriate sexual e-mails to underlings.

Ross Klein, whom Heyer brought in to run Harry & David's new branding effort, left a job at Hilton Hotels in 2008 after he was accused of corporate espionage, an allegation that is a subject of a federal criminal investigation. Klein is working out of an office near his home in Beverly Hills, Calif.

Heyer and Klein have denied any wrongdoing.

Heyer has tried to rally the troops. He spent all of August in Medford.

In some unusual moves since he took over, hourly workers are now called "talent" instead of employees. And staff members were asked to sign a "Harry & David Culture Promise," which says, "We laugh as we learn, and we are committed to being the world's most joyful brand, delivering happiness to each other."

Those who were reluctant to sign the document were pressured to do so by their supervisors, employees said.

Ed Dunlap, chief financial officer at Harry & David, said he wasn't aware of any such pressure.

"My understanding and impression is that employees embraced it — that there was finally a definition of values, and employees signed it as an indication of their commitment," Dunlap said.

For workers, perhaps the biggest change might be a shrunken staff. At the end of July, Harry & David had 1,026 full-time employees, down from 1,538 in 2005.

The company this year was even briefly at odds with local authorities who said it no longer had enough employees to qualify for a local tax break.

The new, long-distance management at Harry & David also has sharply reduced the firm's once-generous philanthropic involvement in the local community, said Ron Fox, executive director of Southern Oregon Regional Economic Development, a nonprofit group.

The situation has created a "great deal of apprehension and concern," Fox said. "The question I hear in the community is, 'What are the implications for us?' and 'Where does our beloved Harry & David go beyond this?' "

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