From selling postcards in his room at the Kansas City YMCA in the early 20th century, Joyce Hall's greetings card empire has become a financial giant. Hallmark has also been dubbed a 'magical place to work'. Scott McCulloch discovers the secrets of its success
Don J Hall Jr can be forgiven for his mild bewilderment over what type of legacy he expects to leave at Hallmark Cards, the USA's number one producer of warm fuzzies. To be fair, the grandson of Joyce Hall, Hallmark's founder, is just over three years into his tenure as president and CEO at the US greeting card giant. The dimensions of the role, he admits, are almost staggering. "The biggest learning experience I've had has been how many demands there are on my time and how limited time is to accomplish the many things that we want to address."
Don could not have chosen a more challenging time to take up the reigns at the Kansas City organisation. But above all, his stewardship began with a tough act to follow: his predecessor, former CEO Irvine Hockaday. Within months of stepping into Hockaday's shoes, Hallmark initiated a shake-up to its hallowed profit sharing plan. The move came at a time when the group was working hard to improve its long-term performance. Hallmark had weathered an 8% decline in sales in 2001 while its privately held stock increased by a barely discernable 0.8%. In 2002, it fell by an undisclosed amount.
The group set out to convert employees' stock to 'preferred' status and guarantee a rate of return for that stock, a return tied to interest rates with a built-in premium. At the time, Hallmark employees held 22% of the company's stock with the rest owned by the Hall family. The family still holds a majority stake in Hallmark although Don is reluctant to reveal ownership figures, preferring instead to emphasise the broader benefits of being a shareholder in what is one of the USA's biggest family businesses. "I don't want to get into a pursuit of a specific percentage," he says. "It is important that employees know that they have a stake in the business."
When the Hall family agreed to convert the stock it did so at the higher of the two prices, ensuring that employees would not see the value of their shares fall. Back then 75% of employees' shared profits were invested in Hallmark stock. That figure will soon level off to 30-40%, leaving a larger portion for employees to make their own investment decisions from a blend of 16 investment funds. "Our plan has always been that by 2006 we would be in the 30-40% range, which we thought was the right place long term," says Don.
The changes gave Hallmark greater control over its investment capital and liquidity, and it helped soothe employees' nerves over the stability of their retirement nest eggs. Another aim was to allow employees to diversify their portfolios, as some younger workers are probably more risk tolerant than older ones.
The Hall family's cost of looking after its employees' best interests wasn't significant. But given that there was no compelling reason for the family to do this, it was an extraordinary gesture for corporate ownership to make. With that gesture came praise from unlikely quarters: the press. "The Kansas City company is a national icon for its pursuit of the wholesome corporate culture that was the guiding credo of founder Joyce Hall," gushed Jerry Heaster, a columnist with the Kansas City Star.
Profit sharing is one of three components of Hallmark's employee benefits package. It also has what it calls a thrift, which is much like a tax-efficient savings plan, and a cash balance account for employees based on years of service and salary, much like a pension.
Don's grandfather Joyce Hall and Hallmark, at the suggestion of an executive ironically named Bill Harsh, introduced the profit sharing plan in 1956. Fortune called the scheme the USA's "most liberal" employee-benefit and profit-sharing plan. Don believes his grandfather's decision helped lay the foundation on which the greeting card giant was built. "People were looking at the concentration of assets and retirement in general," he says. "I think we took a creative approach on how to accomplish a number of goals simultaneously. The intent was to share profits with employees, to give them a real stake in the long-term viability and health of the business."
If the big idea was to give employees a sense of ownership and groom their long-term vision for Hallmark, then it worked. Although the group's North American workforce has fallen to 9,900 employees from 11,000 at the end of 2003, Hallmark says most of the reduction has emerged via attrition. It seems that Hallmarkers, as Don calls them, are fiercely loyal. No wonder then that some commentators claim the group has earned worldwide recognition as a "near-magical" place to work. If so, the feelgood factor more than likely blossomed from Joyce Hall's climb from childhood poverty where, often in search of a square meal, he vowed to make something of himself in order to sate his appetite for butter-drenched baked potatoes. He also earned a reputation as a fatherly guardian of his employees. During the Depression, he was determined not to lay off any workers. But twice he had to ask them to take a temporary pay cut. Each time all agreed, rather than seeing any of their fellow employees sent home. One year he decided to start giving $10 bonuses for each year an employee had been with the company. Other similar perks were to follow.
That was then. Today Hallmark has some 18,000 full-time employees, down sharply from a peak of 24,500 in 2000. Unlike many companies, Hallmark has made this change gradually, by not replacing everyone who retires or leaves. The group is streamlined and more efficient. But future profits could be hard won, not least because of stiff competition from American Greetings Corp, a $2 billion company with a remarkable distribution network that includes retail giants Wal-Mart, Kmart and Target. Given the state of its balance sheet you wouldn't think so. The US's second-largest maker of greeting cards saw sales soften in its first three quarters, ending 30 November, down 2% to $1.4 billion. Except for online greeting cards, the card category lacked lustre. Meanwhile, the company had high debt-repurchase costs and took restructuring charges, such as for a plant closure. "But the problems are temporary and the company's financial fixes position it well," says John Rogers, CEO of Chicago-based Ariel Capital Management. "Nice returns should resume."
Strong or weak, a recovery at American Greetings could put downward pressure on Hallmark's margins. The question is: Will profits come before people? It's unlikely, says Don. Resorting to massive job cutting measures to meet quarterly statements is for public companies, he adds. "Long-term problems are not resolved with knee-jerk reactions [and] we have not viewed that as a financial tool to reach a goal. We truly believe that people are our most valuable asset; they are how we succeed."
Success, of course, is relative and open to definition. Three years ago, when Don succeeded non-family CEO Irvine Hockaday, triumph was to be met at a lofty financial milestone: tripling annual sales to $12 billion by 2010. No longer. "That is one of the things that when I moved into this role I thought was distractive." Bigger, he reasons, is not necessarily better. That means Hallmark's success will more than likely be measured in terms of how well it runs its businesses. "I think it's consistent with the way my grandfather felt. If you look to your product, you look to your customers first."
So what's going on with products then? At 48, Don has notched up a few solid years as CEO. He's run a steady ship. But he's indebted to Hockaday, who joined Hallmark as executive vice-president in 1983 before taking over as president and CEO in 1985. The 68-year old Hockaday led the company through an aggressive diversification programme that saw Hallmark's revenue increase from $1.47 billion in 1983 to $4.3 billion in 2000. What's more, Hallmark's non-greeting card operations increased from half to two-thirds of company revenue during those years. Growth is still there, but these days it's taking a more leisurely pace. In February, the company reported 2004 net revenues up 2% to $4.4 billion. But earnings slipped by 2% as sales of greeting cards were lukewarm and revenue at Hallmark's television production company fell by 6%. Business as usual, says Don. Investment was needed and therefore earnings would suffer. "We planned to make some investments in 2004 and planned that our overall earnings would be less in 2004 than they were in 2003, but those were decisions focused on our commitments to product, to creativity, to marketing and to distribution."
So Don Hall Jr has his work cut out, not least, say analysts, because of his bloodlines. Family business consultants believe there's an obligation of family to perform. "I think performing to a higher standard means that a family member must establish credibility beyond the family name, " says Fredda Herz-Brown, managing partner at Metropolitan Group.
Is there an obligation to reaching particular financial targets? Not necessarily, says John Ward, a family business expert at Kellogg School of Management. Ward believes if the family is in it for the long haul, then how well the business is governed deserves as much urgency as financial performance. Indeed, they go hand in glove. "Certainly, financial benchmarks and standards are important, but not the only thing," he says. "The more the family can communicate that to the CEO and the board, the less artificial pressure there is on the leadership and the better they can perform in the long run."
The ascendance of Don Hall Jr returned the day-to-day management of the company to its founding family. That was just over three years ago. At the time, Hockaday told the media that when he considered retirement in 1999 he was comfortable with Don Hall Jr's knowledge of the greeting card business. As for non-core businesses, he was sanguine. "He understands those businesses," said Hockaday, who remains a trustee of the Hall Family Foundation. "It would be a waste of time to not let him have a go at it."
Fortunately, Hockaday is still in the picture. "I continue to stay in touch with Irv and seek out his counsel," Don confides. "He is still very active here in Kansas City and in the US business environment. He is still very accessible and continues to give me good advice."
The family CEO also has Shoebox, the group's freshened-up line of humorous cards, on his side. Shoebox – now 18 years old – benefited from a major redesign that has generated double-digit retail sales gains. Nevertheless, revenues for the group's personal expression division, which includes greeting cards, gift wrap, stationery, ornaments, partyware and gifts, was flat for the year. On balance, the market stagnation cannot last. Ninety per cent of US households buy an average of 35 cards a year. Even in a down economy Christmas and birthdays never go out of style.
When Don Hall Jr assumed the role of president and CEO on 1 January 2002, he was continuing a long family tradition that has its roots in America's rough and tumble 19th century. Indeed, for the first half of its corporate history, Hallmark was registered as Hall Bros Inc. The official change to Hallmark did not occur until 1954. There is "something special" to be expected of Don Hall Jr as CEO, says Dennis Jaffe, professor of organisational systems at Saybrook Graduate School in San Francisco.
"The presence of a family member at the helm of a venerable family business sends many positive signals to the marketplace," he says. "First, it signals long-term family commitment to sustain what the company has stood for. In a time of concern about too much focus on short-term results, the presence of the 'patient' capital and commitment of a family is a source of stability and consistency."
Stability may well be a Hallmark watchword. Don himself believes family leadership has kept the company on an even keel, enabling it to do right by its employees through thick and thin. "I think that they have appreciated the stability that a private company can provide." This chimes with Jaffe's views – not only of family businesses, but of their values. He points to data, which argues that the average tenure of a family CEO is much longer than that of CEOs in non-family public companies. This, says Jaffe, allows a family business to steadily pursue its vision.
Hallmark and philanthropy
Hallmark has a strong reputation in terms of its philanthropic efforts. A key beneficiary has been Kansas City, its hospitals and universities. In his book, When You Care Enough, first published in 1979, founder JC Hall explained his love affair with Hallmark's home town:
"We had built an organisation that we felt we'd have a hard time duplicating anywhere else. We fully realised the importance of quality of the environment and the people in making quality products. We decided then that we had the best location in the industry. Our roots now were firmly planted in Kansas City, and this is a decision that we have never regretted."
In 2001 Children's Mercy Hospital, one of the nation's leading paediatric centres, received the largest gift in its 104-year history: nearly $25 million from the Hall Family Foundation. Earlier the same year, the Hall Family Foundation announced a donation of $42 million to the University of Kansas, with the bulk of the money going towards developing a new research facility at the university's medical centre.
But if there is any one project that embodies the Hall's deep commitment to the Kansas City community, it would be the Crown Center. Don Hall Sr's responsibility from day one, his father Joyce once described the Crown Center as a prime example of how private industry could contribute to the rebirth of America's inner cities. When the Halls embarked on the project in the 1960s, businesses were fleeing the city centre for the suburbs. The Signboard Hill area, south of Union Station, had grown particularly blighted. What the Halls created was what some critics have described as the greatest private redevelopment effort in the history of urban America.