Fingerhut's demise could potentially leave 6,000 people without jobs, 4,700 of them in Minnesota. If Federated Department Stores can't find a buyer, it says it will close Fingerhut. But analysts and former employees say Fingerhut's business model is still sound. And those who watched Fingerhut falter and fail say Federated mismanaged Fingerhut.

	The final Fingerhut catalog went in the mail this week. Shortly thereafter, the firm began placing people on paid leave. (MPR Photo/Jeff Horwich)

Sue, 51 from St. Cloud,lives on the $500 a month she gets from the government. She is disabled and can't drive.

About five years ago her downstairs neighbor told her about Fingerhut. Sue started buying. Fingerhut shipped for free, and would include little gifts along with her purchases.

"I ordered a stereo system, I ordered a VCR, I ordered a dresser, I ordered a beautiful bird set for an anniversary gift, shelves," she said.

At first, every time she bought something, Fingerhut would send her a coupon book. Each coupon was denominated at some small dollar amount. She would attach a check for that amount to the coupon, and send it in. After sending a certain, pre-set number of checks, her bill would shrink to zero. She liked the system, known as closed end credit.

"They were very nice when they were the other way around, like the coupon book. I didn't seem to get behind or nothing, and then when I did tell them, 'I'm going to be a little bit behind, I'm moving,' They understood," she said.

But in 1999, under its new parent - Federated - Fingerhut changed the system. It was a decision that some say played a major part in Fingerhut's undoing.

By the mid 1970s, Fingerhut had a quarter century of steadily mounting sales totalling some $100 million annually.

When Ted Deikel took over as president in 1974, the company started using computer databases to create models of consumers' credit risk and buying habits.

Rick Courtheoux, senior vice president of database marketing and consulting for Experian, which helps catalog retailers sell more effectively, says Fingerhut became renowned for its mastery of database marketing.

"The best database marketers have a lot more detail about their customers and their behavior over time available to them, collected and organized in a database. The best database marketing companies also tend to have larger groups of high-level professional statisticians who can analyze that data and create models. Fingerhut has certainly been known as a leader on both fronts," he said.

"They don't seem to understand the Internet. They don't seem to understand the catalog business. And they sure as hell didn't understand Fingerhut." - Maxwell Sroge, a catalog retail consultant, on Federated Department Stores management

Fingerhut's database was like a crystal ball. It could tell you everything from what customers would buy, how much they would spend, to who would be more likely to pay back their debts, and who would not.

The system helped Fingerhut give people access to credit, who otherwise had none.

Rafael Saldana, the former manager of Fingerhut's Hispanic business and a former company vice president, left the company last February to be near family in Florida.

"In the old days, retailing would have a lot of layaway plans and the local store credit. All those things disappeared over time. And what Fingerhut provided was that access, that credit," he says.

In return for providing access, Fingerhut charged customers a little more than average for its products. The resulting margins, and the volume of sales, helped Fingerhut make a healthy profit. By 1999, the company had sold more than $1.5 billion worth of goods.

But things were about to change.

That year, under new CEO Will Lansing, Fingerhut embarked on an expansive e-commerce initiative. In March, Ted Deikel sold Fingerhut to Federated Department Stores, the parent firm of Bloomingdales and Macy's, for $1.7 billion.

Federated wanted to use Fingerhut's massive warehouses and fulfillment system to handle millions of online orders for its department stores.

One month later, Fingerhut did away with the Fingerhut installment plan. In place of the coupons, Fingerhut began issuing credit cards and as the company changed to a revolving credit system, it extended more credit to more people.

Soon Fingerhut's once finely tuned database marketing machine started belching smoke.

Experian's Rich Cortheoux says databases look ahead by looking back.

"All models, whether they're marketing predictions or whether they're credit predictions, are built around the idea that past behavior we've observed is very much the same as the behavior we're likely to see in the future. If you change the terms of credit. If you change the nature of the business, the degree to which models built on past behaviors will be predictive of what's gonna happen in the future is somewhat up for grabs," according to Cortheoux.

	Peter Lytle, left, and Marshall Masko, right, are hoping to buy what's left of Fingerhut. (MPR Photo/Andrew Haeg)

Meanwhile, customers like Sue in St. Cloud, saw their credit limits rise. Simultaneously, Sue says, more Fingerhut promotions started showing up in her mailbox.

"They expected you to keep on ordering and ordering and ordering. That's what they expected," she said.

Sue started buying more and more and her bills piled up. The more she missed her payments, the more she had to pay.

"There was a new balance - $1,921.06 - minimum due: $591. The more you paid you were getting behind," she said.

Bill collectors began to call her house, first periodically, then more often. "There was times it was twice a day they were hassling me and threatening me. I didn't know what to do," she said.

In 2000, just a year after switching credit systems, Fingerhut had lost some $400 million because customers failed to pay their bills. Bad debt continued to rise and, despite efforts to tighten credit and fix Fingerhut, the damage was done.

Maxwell Sroge, a catalog retail consultant based in Evanston, Illinois, watched Fingerhut's fortunes rise and fall over the past 30 years. In the end, he thinks Federated had no idea what it was buying in 1999, or what to do with Fingerhut when it had it.

"It seems as though they don't understand anything other than department store merchandise. And, I will give them credit for the fact that they do a brilliant job in the department store area which is a very tough area. But they don't seem to understand the Internet. They don't seem to understand the catalog business. And they sure as hell didn't understand Fingerhut," he said.

Despite what Sroge and others say were Federated's missteps with Fingerhut, many think Fingerhut's business proposition remains strong.

"I cannot overemphasize that the Fingerhut model actually works," says former vice president Rafael Saldana.

At the moment, there are three investors interested in buying Fingerhut.

Two, Peter Lytle and Tom Petters, are from Minnesota. The third is from the East Coast. The question remains whether Federated will think it more profitable to sell Fingerhut as a whole, or to break it up and auction off the pieces.

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