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A century-old merchant's decline

Harry & David promises 'happiness delivered' with its gourmet foods. But the mood's not so happy inside the firm, where cost-cutting since a private equity firm took over belies a folksy public face.

September 19, 2010|By Nathaniel Popper, Los Angeles Times
  • Harry & David promises "Happiness Delivered" with its gourmet foods. But the mood's not so happy inside the company, where cost-cutting since a private equity firm took over belies a folksy public face.
Harry & David promises "Happiness Delivered" with its… (Frederick D. Joe / The Oregonian )

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 workforce 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 high-profile 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. Within a few months, new faces occupied nearly all of the company's 20 top positions. 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% 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."

The combination of plunging sales and heavy debt has not only ravaged Harry & David's workforce, 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 who 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 bestsellers 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. Pricey baked goods and chocolates also are sold, most of them made at the Medford headquarters.

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