HSN Minds The Store

It was two years ago this month that HSN CEO Mindy Grossman completed what she hoped would be a transformation of the second-largest home shopping channel into a lifestyle, entertainment and shopping destination for educated, upscale women.

After a couple of rocky periods and one of the biggest economic recessions in recent memory, Grossman has succeeded in dramatically changing the look and feel of the network, but like everyone else in the home shopping game, struggles with a challenging retail environment. So far, HSN has managed to outperform expectations — first quarter sales were down 1%, compared to double-digit declines at its chief competitor QVC. And Grossman is hoping that momentum will continue.

Grossman came to HSN in late 2006 amid much fanfare — she had a storied career in the apparel industry, launching the Chaps and Polo jeans labels for Ralph Lauren and serving six years as global vice president and head of apparel sales for Nike. But soon after her arrival, HSN hit a rough patch — sales growth began to decline, primarily because of a poor product mix and a decline in quality. That spurred Grossman to begin what she called a total relaunch of HSN.

The seeds of that relaunch began germinating in 2006 shortly before she took her current position, when Grossman was having lunch with IAC chairman and CEO Barry Diller.

“I said to him, I’m really excited about this opportunity but I have two things to discuss — one is, if it’s live TV, why does it look so fake?” Grossman said. “And No. 2, if you really want to do something kind of different, I’m up for it. I think this really can become the next lifestyle network.”

Grossman added that her strong feelings were fueled by what she was seeing in the external environment, primarily the movement away from a solely linear TV platform.

“I think customers today want to access things on their own terms when and where they want to,” Grossman said. “The other is this idea of eclecticism. One of the things that I love about HSN is that we’re not locked into a price point, we’re not locked into a look or feel or category. We’re locked into our customer and what we want to deliver to her. That could be a handbag at $79 or a handbag at $600.”

The relaunch officially occurred in July 2007 and involved shedding about $150 million worth of brands, including some that were generating strong revenue but didn’t fit in with the overall vision for the company. The focus, according to Grossman, was not only on differentiating HSN from the competition, but on reinvigorating the HSN brand in the eyes of its customers.

So instead of cubic zirconium and thigh-masters, Grossman is mixing higher-end, higher value products like handbags from Carlos Falchi (priced between $50 and $450 each), electronics from Canon, Sony and Gateway and health and beauty products from Lancome, Bliss and Clarins with lower-priced fare. Also among the mix are products from celebrity experts in their respective fields— cookware from well-known chefs Wolfgang Puck and Emeril Lagasse; apparel from celebrity designer Stefani Greenfield and home-design products from designer Nate Berkus.

“We spent many months with our consumer, speaking to her, understanding consumers who shopped in this venue and who didn’t,” Grossman said. “We really felt that this idea of lifestyle, editorial and commerce and bringing the story to life was really going to set us apart.”

The switch hasn’t caused an exodus of HSN’s loyal customer base — Grossman said that 4.6 million customers shopped with HSN in the past 12 months (43.5% were repeat customers). And while HSN customers are overwhelmingly females aged 25 to 65 — about 83% — they are younger than most outsiders expect — about 52% of those women are in the 35-to-54-year-old age bracket. The typical HSN customer is also college educated, 93% own their own home and have annual household incomes of more than $65,000.

HSN has also broadened product variety: It has more than 70,000 products available compared to 25,000 in 2007. And more than 65% of those products are proprietary.

Janco Partners media analyst Murray Arenson said that for the past few years, speculation that HSN would be snapped up by rival QVC — owned by Liberty Media, which also owns 30% of HSN — has sometimes overshadowed operations. But after HSN was split off from IAC in 2008, along with four other businesses, and a recession that hammered the retail sector and drove down valuations for shopping channels, that merger talk has died down a bit.

Arenson said that while a QVC deal is still a possibility in the future, HSN’s management is running the business like a deal will not be done.

“I see them focusing on a couple of things — doing whatever it takes to make sure they hold on to the customer base and being pretty innovative on the new-product front,” Arenson said.

Arenson pointed to a new program — Mom, Inc. — as an example of that innovation. The show, starring Kelly Ripa, will be aired on cable network TLC during the first quarter of 2010 and will help women inventors develop their own products. Ripa will help those women manufacture and market their inventions and eventually sell them on HSN.

Grossman added that interest is high for the Mom, Inc. program — she said more than 1,000 women showed up at the first casting call for the show.

HSN also is trying to stay ahead of the curve on the technology front, making the customer experience easier via a remote-shopping function that allows customers to order products from their television remotes. Currently available in about 17 million homes — through agreements with DirecTV and Cablevision Systems — only current customers can access the service (meaning they have to set up an account over the phone). HSN chief financial officer Judy Schmeling said the company also is rolling out the service with Comcast and hopes to have agreements with Time Warner Cable and other operators soon. She added that in markets where the service is available, sales are up by about 10%.

In the first quarter, HSN surprised some analysts with stronger-than-expected performance — revenue at the channel and Web site was down 1% at $474.9 million and cash flow dipped 4% to $35.3 million. That compared to a 10% revenue decline and an 18% cash flow decrease at chief rival QVC in the same period.

Arenson expects bigger declines in the second quarter — he predicts revenue will fall 8% to $640 million and cash flow will dip 31% to $23.5 million, mainly because of difficult comparisons with the previous year. He expects those comps to level off in the second half of the year and expects HSN to finish fiscal 2009 with revenue of $2.7 billion (down 3.6%) and cash flow of $117 million (down 14.6%).

“I think if you take a look at the last couple of quarters, they have managed things as well as you can expect them to manage in this environment,” Arenson said. “They are clearly trying to run the business for the future.”

While the state of the economy has had an impact — mainly in the jewelry, fashion and home decor sectors — overall the effects have been minimal. Grossman said that to buoy sales of those lines, HSN just has to make the prospect more compelling.

“What we’ve done there is really use a very aggressive approach. Is it convenient, is it special, is it at a great price?” Grossman said. “Because if she [the customer] is going to spend it, she’s going to have to really want it.”

Key statistics for the TV retailer:
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