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Company Perspectives:
Grolier is the leader in direct-to-home and e-commerce book clubs for children ages five and under, offering such well-known brands as Dr. Seuss, Barbie, and Disney. Grolier is also the leading online and print publisher of children's reference products—including Encyclopedia Americana, the New Book of Knowledge, and Nueva enciclopedia Cumbre, a Spanish-language encyclopedia sold primarily to U.S. school libraries. Grolier has established itself as the major publisher of nonfiction children's books in the United States under the imprints of Children's Press and Franklin Watts, selling to both libraries and the consumer market.
Grolier Incorporated is a leading publisher of reference books and multimedia reference products in the United States, and, under its Children's Press and Franklin Watts imprints, is the country's major publisher of children's nonfiction. The company is a wholly owned subsidiary of children's book publisher Scholastic, which purchased it from the French media conglomerate Lagardère in 2000. Grolier publishes encyclopedias, children's books, reference sets, educational materials, and electronic products. The company's best-known titles include Encyclopedia Americana and the New Book of Knowledge, a children's encyclopedia. Grolier's electronic products include the Guinness Multimedia Disc of Records and the Grolier Multimedia Encyclopedia. The company also manages direct-to-home and e-commerce children's book clubs which ranks include three million active customers. By company estimates, half of all American children participate in a Grolier book club by the time they reach kindergarten.
Early History
The company originated with the Grolier Society founded in 1895 by a group of Boston scholars. Named after Jean Grolier, a designer and collector of French Renaissance books, the Society produced deluxe editions and memoirs in elegant bindings and sold them on a subscription basis. The Society was incorporated as a business under the name The Grolier Society, Inc. on May 22, 1936, under the laws of Delaware after being purchased by one of the Society's top salespeople, Fred Murphy. In 1960 the company changed its name to Grolier Incorporated. Soon after purchasing the Society, Murphy acquired Encyclopedia Americana, which became one of Grolier's major products. Under Murphy, Grolier became a sales-oriented company. He divided it into discrete businesses, giving managers wide leeway to run their divisions and instituting an incentive plan providing division managers a percentage of sales and profits generated by their respective operations. The incentive plan helped to boost company morale and productivity as individuals could earn substantial money, while being given the freedom to run their areas with minimum interference.
In the beginning Grolier worked much like a finance company, operating largely on installment sales. The company might borrow money, for example, at 4.5 percent and receive 12 or 15 percent in return on its installment accounts. Due to rapid expansion, by the late 1960s and early 1970s Grolier became the largest hardcover publisher of encyclopedias and reference books in the United States, earning about $317 million in sales. In 1969, the 74-year old publicly owned company recorded higher sales for the 30th consecutive year and held about 30 percent of the total encyclopedia market.
In the same year the company purchased Scarecrow Press in Metuchen, New Jersey, a supplier of catalogs, anthologies, and other specialized publications to libraries and schools; and Haddon Bindery, Inc. of Camden, New Jersey, a provider of binder facilities for Grolier's single-volume publications. Western Wood Mfg., acquired in 1967, produced bookcases for Grolier's major multivolume sets. Grolier's juvenile book division also included the subsidiary Franklin Watts, Inc., a publisher of children's books. The company further pursued the educational market through another subsidiary, Grolier Educational Corporation.
While Grolier published the popular 30-volume Encyclopedia Americana, its bestseller was the 20-volume Book of Knowledge, which gained wide acceptance as a basic reference work for children in middle elementary grades. Other Grolier products included the 50-volume set of the World's Greatest Classics, the 20-volume Encyclopedia International, the 20-volume American Peoples Encyclopedia, the 10-volume Grolier Universal Encyclopedia, the 10-volume Book of Art, the Book of Popular Science, the Encyclopedia Canadiana, and several other encyclopedias, yearbooks, and references in French, Spanish, and Japanese. In 1969 the company's subsidiary Grolier International sold these products in 40 foreign countries. Most of its revenues came from door-to-door sales by 7,000 salespeople on commission. Grolier also operated a mail-order business, accounting in 1968 for about 26 percent of the company's net income.
Hard Times During the 1960s and 1970s
Despite these early successes and sound products, in the 1960s and early 1970s Grolier embarked on misguided diversification and expansion programs. The company borrowed heavily, becoming over-leveraged while diversifying into mostly unrelated areas, including trailer parks, water-skiing manufacturing, trailer manufacturing, woodworking products, vending machines, and South American publishing. In 1973 Grolier wrote off three of its domestic subsidiaries—water-skiing manufacturing, vending-machine financing, and bookbinding—for $5 million. Two years later Grolier ended its mobile-home operations, writing off another $11.9 million. In the 1960s Grolier also expanded into the fast-growing foreign encyclopedia market, an expansion that proved to be ill-advised. By 1976 company losses included special charges of $25.4 million for divesting 23 foreign operations in 15 countries. In the same year steep foreign exchange losses hit the company, amounting to $23.2 million. As a result of these missteps, between 1973 and 1976 Grolier lost nearly $160 million, about $77.8 million in 1976 alone. These losses, which showed a consolidated negative net loss of $45.5 million, prompted the New York Stock Exchange to delist the company.
During this period Grolier also saw its share of the U.S. encyclopedia market slip by 15 percent, stemming largely from the industry's image of slick, fast-talking door-to door salespeople and high prices of encyclopedias at $300 to $500 a set. The industry's tarnished image was to some extent justified. In 1972 a complaint filed with the U.S. Federal Trade Commission (FTC) accused Grolier of fraudulent and deceptive practices in door-to-door and other sales techniques, recruitment of personnel, and debt collection. Encyclopedia Britannica and about 30 other companies were found to have engaged in similar practices. In 1976 an administrative law judge upheld the major provisions of the Grolier FTC complaint. Grolier appealed the decision to the FTC's five-member commission, which one year later unanimously sustained the 1976 decision. Grolier was ordered, therefore, to cease and desist all deceptive practices, and to ensure that the company's sales force properly represent the company's products.
At the same time that Grolier faced financial difficulties, its two major competitors for the encyclopedia market, Field Enterprises Educational Corporation and Encyclopedia Britannica, were experiencing substantial growth. The profitability of both companies resulted primarily from expansion into the same overseas markets that Grolier found unmanageable. While Grolier lost money in these markets, Encyclopedia Britannica alone had expanded into 150 countries, finding the foreign business enormously profitable.
1970s: Management Shifts and Impending Bankruptcy
In 1976 under duress from creditors, the company's board of directors demanded a change in management. Disagreement between members of the board and inside management (some had inherited substantial stock in the company) resulted in the selection of Robert B. Clarke to salvage the firm. Clarke was a longtime company insider who joined Grolier in 1949 as a shipping clerk. He rose through middle management before taking charge in 1967 of Grolier Enterprises, the company's profitable mail-order business. Three years after becoming division president, for tax reasons, he relocated operations to Danbury, Connecticut, from the company's New York headquarters on Lexington Avenue. Clarke had a reputation for financial discipline, and at the time of his selection, he was working on evaluating the profitability of Grolier's various businesses.
Upon becoming company president on October 23, 1976, Clarke moved quickly to reorganize the company and keep creditors at bay. Grolier was already in default to several banks for more than $220 million. He relocated the corporate headquarters to Connecticut, where the local corporate court would be more sympathetic to Grolier's financial plight than the courts in New York. To restore the company's finances, he pulled out of losing ventures, cut staff, and hastily implemented cost- and cash-flow controls. He hired the investment firm Goldman Sachs to evaluate the company's financial viability. He also hired Harvey Miller, a bankruptcy expert of Weil, Gotshal to examine the bankruptcy angle. Clarke's concern was how bankruptcy would affect company relations with suppliers and manufacturers, and whether it would ruin Grolier's credit supply. Clarke was also worried that Grolier's subsidiary businesses would have to follow the parent company into bankruptcy. He knew that if Grolier declared bankruptcy, creditors would petition the courts for the liquidation of all assets, including the subsidiary businesses. Nevertheless, if one of Grolier's subsidiaries could pay creditors more than they would otherwise receive through wholesale liquidation, the courts would likely protect the business.
As a result, Grolier crafted a strategy of avoiding bankruptcy by using its most profitable subsidiary, the mail-order division, to carry the entire company and pay off creditors. The subsidiary placed all of Grolier's purchase and manufacturing orders, and paid suppliers and creditors from its own money. Nevertheless, Grolier's position was precarious at best. If creditors either severed its credit line or tightened the terms, the company would be put out of business. To avoid this scenario, the company courted its creditors, assuring them of payment and managing to assuage the concerns of 23 lending institutions to which Grolier owed substantial sums.
At the same time Clarke maintained the support of Grolier's board of directors and launched other strategies to return the company to profitability. In 1977 he negotiated a restructuring agreement with the banks to give Grolier time to reorganize and set out to expand the company's market for encyclopedias. Despite criticism that the market lacked growth opportunity, Grolier nevertheless increased its door-to-door encyclopedia sales. In 1978 Clarke pursued telephone sales, a strategy that proved more profitable than traditional door-to-door sales. The company's use of telephone sales to reach a vast market yielded $43 million for its encyclopedias and other book products in just three years. Grolier began its telemarketing campaign by renting space in downtown Danbury, Connecticut, and hiring six women to make telephone calls. The company also developed a computer databank including the names of millions of individuals who either owed Grolier money or were buying one of its products. By expanding its market, increasing sales, and finally earning profits, Grolier managed to offset its debt payments.
In 1978 Grolier also launched a $1.3 million direct-mail and television advertising campaign, representing another dramatic departure from its traditional door-to-door sales program. The campaign advertised the popular children's encyclopedia the New Book of Knowledge to the consumer using three direct-mail packages targeting 1.8 million U.S. families and two weeks' worth of television commercials in 28 prime mail-order television markets. At the same time Grolier tried to enhance the marketability of the 20-volume set by reducing its price by 39 percent. The Book of Knowledge was first published in 1908 and then completely revised in 1966. In an interview, Grolier president and Chief Executive Officer, Robert Clarke, stated that the advertising program amounted to the largest marketing campaign ever for a multivolume set in the mail-order publishing field. The campaign stemmed from marketing analysis showing declining encyclopedia sales due to consumer discontent over high prices, dislike of door-to-door salespeople, and parental uncertainty of whether their children would make use of the reference books.
Despite Clarke's aggressive capital restructuring program, by 1983 the company continued to have difficulties. Grolier still owed 23 lending institutions $96 million. In lieu of payment in full, the banks agreed to receive $36 million in cash plus a combination of common and preferred stock and warrants worth more than $16 million. Clarke raised the cash through an $82 million bond issue, spending part of it to retire $35 million in Swiss notes. Although free of the banks and the Swiss, Grolier's load of public debt amounted to over half its total capital. Nevertheless, in 1982 the company formed a successful new subsidiary, Grolier Electronic Publishing, which in 1986 introduced the first encyclopedia in electronic format on compact-disc read-only memory (CD-ROM) under the name Academic American Encyclopedia. The company also introduced the product on laser videodisc. Grolier produced both products, containing the encyclopedia's entire nine-million-word text on a single disc, with Activenture Corporation, an expert in optical disc storage technology in Monterey, California. The products, establishing Grolier as the preeminent leader in the field, brought the company closer to realizing its plans of a disc-based encyclopedia encompassing audio, video, and software applications. In addition, the products positioned the company well for future developments in the expanding market for electronic information.
Grolier Regains Financial Health in the 1980s
By the late 1980s Grolier reestablished its financial footing as a leading worldwide publisher and distributor of encyclopedias, children's books, reference sets, and educational materials. In 1987, the company also marketed health information after acquiring Krames Communications, a major direct distributor of health and medical publication materials. In addition to Grolier's operations as a primary producer and distributor of electronic publishing products and services, its other businesses included photo-finishing services, educational toys, play equipment, and classroom furniture for children. The company sold these products in the U.S., Canada, and in 20 other countries through its operations in Mexico, Italy, Australia, the United Kingdom, and the Philippines.
The company's direct-marketing operations constituted its principal means of sales. Grolier began direct marketing by selling annual supplements that updated previously sold encyclopedia or reference sets. The company considerably expanded these operations both internally and through new acquisitions. Most of its direct-marketing sales in the U.S. and Canada came from direct-mail advertising using pamphlets, brochures, and specialty catalogs. The company continued its telemarketing program, selling certain products using trained telephone sales representatives. Under its direct-marketing system, Grolier also marketed children's and other books through book clubs, including the Beginner Reader's Program, Disney's Wonderful World of Reading, the Popular Science Book Club, and Outdoor Life Book Club.
Hostile Takeover and the Early 1990s
In 1988 soon after returning to profitability, Grolier became a hostile takeover target. Although profitable, the company's comparatively small size made it vulnerable in an era of massive leveraged buyouts, mergers, acquisitions, hostile takeovers, and corporate restructurings. In 1986 Lewis Rabinowitz, head of the investment firm R. Lewis Securities, Inc., anticipated the buyout by purchasing large sums of Grolier stock on behalf of his wealthy clients. Rabinowitz believed Grolier's book niche would appeal to large publishers seeking to expand their markets. Grolier's allure also lay in its extensive direct-marketing organization, providing access to upscale, education-oriented young families with children. Rabinowitz's prediction proved correct in 1988 when Hachette, France's largest communications company, offered $415 million in an unsolicited bid. In a prepared statement, Clarke responded that Grolier management would recommend to the board that the company pursue a course that would maximize shareholder value.
Despite public statements of a friendly offer, Hachette filed suit against Grolier in federal court in Manhattan. Hachette challenged Grolier's "poison pill" approach, adopted in 1986, making its acquisition enormously expensive unless approved by the company's board of directors. Hachette's suit also challenged Delaware's takeover statute, allowing corporations to impose difficult conditions on businesses pursuing acquisitions. In 1987, Hachette, owner of newspaper, film, television, radio, printing, and retailing operations, had $3 billion in sales, nearly one-third of these from its book publishing operation. That same year, Grolier had sales of $424 million.
In April 1988 Grolier's poison pill approach and Delaware registration failed to ward off Hachette's $450 million hostile takeover. Shortly after in 1990, Hachette made sweeping changes in Grolier's top management. Clarke was replaced by William C. Johnson as Grolier CEO, ending Clarke's 40-year career as a loyal company insider. Hachette removed other longtime executives, including Howard B. Graham, executive vice-president of Grolier Incorporated and president of Grolier International; and Jonathan N. Gillet, president of Franklin Watts, the adult and juvenile trade subsidiary.
After becoming CEO, Johnson divested several subsidiaries to focus on Grolier's core publishing businesses. He sold the company's educational toy maker, Childcraft Education, to Walt Disney for $52 million, and in 1992, sold Krames Communications to K-III Holdings. He subsequently reorganized Grolier's operations under four main divisions, including the direct-marketing group, the publishing group, reference group, and the international group. Under each operation, Johnson appointed a senior executive to run the divisions. As a result of the reorganization, Grolier's operations generated returns on sales of 10 percent with revenues of $385 million in 1991. After the direct-marketing division, the publishing group represented Grolier's largest operation with 440 employees and approximately 20 percent of total company sales. The publishing group targeted the school and library market as its core business. In 1992 the division had about 20 percent of the U.S. market for juvenile and young adult books and reference books for the school and library market. In a restructuring move, the division sought to eliminate competitive marketing between its various units by redirecting their sales strategies to differing segments of the library market. The publishing group consisted of Children's Press, Grolier Educational Corporation, Franklin Watts, Orchard Books, and Scarecrow Press.
Post-Restructuring in the 1990s
Grolier quickly became a profitable U.S. affiliate of Hachette, a subsidiary of France's third-largest business empire, Largardère. Hachette's management predicted a brighter future for Grolier after years of financial struggle. In 1994 Peter D. Nalle was named chief operating officer in charge of publishing and reference operations. Nalle was previously president of Simon & Schuster's professional information group, and earlier, president and CEO of J.B. Lippincott Co. His appointment was expected to enable Grolier to move more aggressively into key markets. In 1995 Grolier further streamlined operations by consolidating its Children's Press and Franklin Watts children's book publishing subsidiaries into the company's Danbury, Connecticut headquarters. The consolidation resulted from management analysis of Grolier's long-term competitive position. As a result of this analysis, the company also sold educational publisher Scarecrow Press to University Press, and expanded its electronic publishing division, Grolier Electronic Publishing (GEP). GEP subsequently enhanced its multimedia activity through a strategic alliance with Metro-Goldwyn-Mayer, enabling the development and distribution of interactive multimedia games worldwide. In the late 1990s Grolier continued to increase its focus on electronic publishing and multimedia. Among the titles the company introduced on CD-ROM were Prehistoria, an encyclopedia of prehistoric facts, and a 30-volume Encyclopedia Americana. In 1996, the company launched Grolier Online, a subscription-based Internet educational portal aimed at schools and public libraries.
Also in 1996 three key editors at Grolier's imprint Orchard Books, Orchard president Neal Porter and senior editors Richard Jackson and Melanie Kroupa, left the company to join Dorling Kindersley (DK) Publishing to launch a new fiction imprint for that company. The defection prompted Grolier to file an $8 million unfair competition lawsuit against DK, alleging that DK had lured away the editors and was attempting to sign authors and book titles still under contract to Grolier. DK vigorously denied the charges. Finally in July of 1997, the two companies came to an agreement that settled the lawsuit. DK agreed to pay Grolier an undisclosed sum of money, and the two companies announced plans to collaborate on electronic publishing ventures.
New Owner for a New Century
In 1999 Grolier's parent company Lagardère announced that it was putting Grolier up for sale. At the time of the offer, company officials said that their asking price of $400 to 500 million was not "realistic," but apparently, they underestimated Grolier's value. In 2000, children's book publisher Scholastic acquired the company for $400 million. The acquisition was considered by industry experts to be a perfect match. Grolier's main areas of operations complemented Scholastics existing businesses well: Grolier's Kid's Clubs and Interactive units targeted children up to age five; Scholastic's similar programs focused on ages 6-12. At the time of the deal Scholastic predicted that acquiring Grolier would increase its annual operating income by $30 million. The deal resulted in the elimination of approximately 300 positions at Grolier, primarily in telemarketing and customer service. In 2001 Grolier's operations were still located in Danbury, Connecticut, but some industry experts speculated that Scholastic might consolidate operations in New York.
Principal Divisions:Kid's Clubs; Interactive; International; Publishing.
Principal Competitors:Encyclopaedia Britannica; Golden Books; PRIMEDIA.
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