"We always thought the money would come to us if we did the right thing," she explains. For a long time it did. "But it is not so automatic anymore."
The layoffs of last year were the first acknowledgment that bad things did happen to good companies. And they were happening in spades at Hanna. The numbers made it painfully clear: the company's double-digit growth had faltered. Two years of recession had slammed the brakes on sales. Value-conscious customers were less willing to sink $38 into overalls for their two-year-olds. But the poor economic climate accounted for only part of the slowdown. There had been management missteps as well.
In 1992, after Tom surrendered to a midlife crisis and took a sabbatical, the catalog was handed over to a new creative director, who set out to fix what wasn't broken by redesigning the book. Even though the catalog had earned a string of design awards, "we wanted to allow a new director to put her stamp on it," says Gun. The result: sales took a nosedive. Although they revived after the redesign was shelved, 1993 revenues inched a mere 8% above the previous year's. Such lackluster performance was unheard of at a company in which managers used to toy with strategies to limit growth. "We used to sit around and talk about whether we wanted to grow 40% or maybe just 30% next year," Roberts reminisces. "Can you imagine that?"
Profits also began to list. While industry averages indicate that a well-run catalog company of comparable size should post profits in the 6%-to-10% range, earnings at Hanna fell below 5% last year. The cost of everything, from employees' health insurance to the mailing of catalogs, had increased, but price pressure from competitors and customers was forcing the company to absorb those costs. Margins began to erode.
"We thought we were immune to those worldly cares," explains Roberts. "Suddenly, we had to face the fact that we were part of the real world."
If there were any doubts about how cold that reality could get, they were dispelled in the marketplace. Once a private preserve that afforded plump margins and uninhibited growth, Hanna's market had become thick with competitors. When the company mailed its first catalog, in 1984, there were virtually no rivals selling cotton clothing for children. "By the end of 1991 we started to realize, 'Oh my God, we have some worthy competitors out there," says Roberts. Today at least 25 mail-order marketers of children's apparel, including such giants as L.L. Bean, Lands' End, and Oshkosh B'Gosh, have been enticed by the segment's relatively robust growth. They are peddling anything but polyester, and more than a few, Hanna partisans claim, have knocked off the company's designs. Add to the mail-order fray rapidly expanding retailers such as Gymboree and the Gap's Gap Kids division, and competing in this market becomes anything but child's play.
"The market has gotten very crowded, and people are very tough," notes Tom Denhart. Few other companies are saddled with the cost structures that support Hanna's generous employment and discriminating merchandising practices. The company designs and manufactures its own fabrics, buys little "off the racks," and contends with the currency swings and lead times entailed by importing a fair portion of its inventory from Sweden.
"Competitors are sourcing products a lot more cheaply than we are," notes a philosophical Tom Denhart. "In the Far East, for instance. I know there are places where we could get T-shirts cheaper, but I also know that they're being made with child labor under unhealthy conditions. And I don't really want to build a business based on some kid's getting cotton lung disease."
Righteous sourcing may be its own reward. Still, it comes at a price. Along with the company's bounteous benefits and its cordial but not always advantageous relationships with suppliers, scrupulous sourcing numbers among the many costs of doing business the "Hanna way." Until the impact of competition was felt, last year, there was little need to meticulously account for those costs. But the consequences of competition -- price rollbacks, for instance, as well as increased spending to acquire new customers -- have awakened an urgency to contain costs. It's little wonder: benefits and payroll taxes in 1993, at $1.75 million to $2 million, equaled the company's net earnings. Among the more frivolous expenditures, paid parking, which cost the company $80,000 annually, was eliminated last year.
Of course, at any other company, one at which only one bottom line matters, the incursion of new rivals might not have come as such a rude awakening. Ordinary businesses, preoccupied with maximizing profits and minimizing costs, might have anticipated the inevitable arrival of more competition, because they expect the natural laws of maturing markets to apply to them. Not so with Hanna. A passion to be a company apart had to some extent left it a company afield. It wanted so fervently to be a company with a soul, it became a competitor without eyes.
"We became so introspective that we lost sight of what was happening outside the company," says Gun. "Instead of looking out at what was happening in the marketplace, we were all wrapped up in figuring out the best way to run the company."
* * *
By 1992 the Denharts realized that being in business was not purely a matter of satisfying customers and motivating employees. It was also a game of numbers and a never-ending series of compromises. As the company had matured and its competitors had multiplied, the compromises had become more unpleasant. Winning the numbers game required a new discipline. The Denharts knew that costs had to be reduced and efficiencies improved. They simply didn't want to be the ones to do it. "It's part of business, I know," admits Gun. "But it's no fun." Tom wanted to restore boats and spend time with his son. Gun, who had begun lecturing about socially responsible entrepreneurship, wanted to devote more time to her philanthropic interests.
