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For Steuben's Craftsmen, a Fragile Future

Post Time:Aug 22,2008Classify:Company NewsView:622


After decades of taking a loss on the high-end glassmaker, Corning has sold Steuben Glass to private equity firm Schottenstein

On July 23, Corning (GLW) executives called a 1:30 p.m. meeting in an auditorium near the glassblowing shop in Corning, N.Y., where Steuben Glass artisans have crafted crystal for more than 50 years. The Wednesday morning shift had just let out, and the workers were still warm from the glowing glass furnaces as they filed in and sat down at round tables spread out as in a dining room.

There was reason to be anxious. Steuben, a division of Corning, had been unprofitable for years. Cost cutting at the corporate parent had taken on new urgency, after Corning extricated itself from a series of disastrous bets on fiber-optic technology that nearly sank the company (BusinessWeek.com, 10/18/04)> in 2002. Corning executives had sounded Steuben's death knell a few months before. If they couldn't sell the 105-year-old company, it would be shut down. "There were rumors going around," says Max Erlacher, an engraver who first started working at Steuben 50 years ago. "Some people said: 'Maybe they're gonna sell us, maybe they're gonna ship us to China.' "

Reassurance from New Owner
A manufacturing company in the red. The economy in the tank. It's a familiar story today, and the outcome is predictable: Time to get out those résumés. At the meeting, Corning officials confirmed they had found a buyer, a private equity firm from Ohio called Schottenstein Stores. As these things go, though, the news was reassuring: Schottenstein Stores executives said they weren't looking to liquidate Steuben's crystal or to send the plant to China.

Still, the sale takes Steuben away from Corning Inc., which had acted for decades like a benevolent but vaguely disinterested parent. And even though the sale to Schottenstein Stores is complete, Steuben employees remain on edge. The Schottenstein family, after all, made its money as liquidators, buying up bankrupt companies and either selling their inventories or trying to turn them around.

In this case, Schottenstein Stores says it hopes to boost sales by opening new stores and exposing Steuben to newly rich consumers in countries such as China, Russia, and the United Arab Emirates. But if the marketing plan doesn't pan out or if the new owners eventually decide that the work can be done much less expensively overseas—Steuben's 84 unionized workers (of 150 total employees at the division) make nearly $30 an hour after including benefits—those workers could be looking for new jobs in a field with about as much growth potential as the typewriter industry.

How Steuben Became Deadweight
How had Steuben—whose glassmakers' work was once so exalted that U.S. Presidents would present it to other world leaders to smooth over such nasty disagreements as the Cuban Missile Crisis—lost its parent's affection? A better question, perhaps, is how it managed to hang in for this long.

In recent years, Steuben's crystal objects, which sell for anywhere from $125 for holiday ornaments to tens of thousands of dollars for specialty pieces, had become anachronisms, sitting untouched for months on counters at Neiman Marcus stores. Even the presidential gifts became less ornate; when asked what sort of glass had been sent to the White House recently, Steuben President Marie McKee says President George W. Bush "likes baseballs."

Steuben has lost of some of its former glory. But it nonetheless occupies a unique niche. Here in the town of Corning there's a sense of hand-crafted workmanship—and corporate paternalism—that's nearly extinct in today's globalized, Web-connected world.

Old-World Craftsmanship
Corning (population 10,842) is located just south of the Finger Lakes in western New York. It has long been known as the Crystal City; there is, indeed, no getting away from the stuff. At least a half-dozen shops on Market Street sell art glass, and they call downtown the "gaffer district," after the workers who shape the glass. Among other activities, tourists can blow their own glass at the Corning Museum of Glass or visit the Little Joe Tower, where workers used to stretch hot glass 196 feet and cut it to make thermometers. "If a city has a heart, Steuben is Corning's," wrote master gaffer Jeffrey Babcock in a letter to Corning's local paper, The Leader, in April.

At Steuben, the danger and difficulty of creating art out of molten glass fosters deep camaraderie. Workers with an average of about 30 years experience with Corning rush through the plant with 1,200-degree glass drooping off of steel poles. Heating the glass too long or cooling it too quickly can mean the difference between a $10,000 piece of art and a worthless, distorted glob.

Steuben is named after the county where it is located. Founded there in 1903 by Thomas Hawkes, who owned a glass engraving company, and Frederick Carder, an English glassmaker, the company was sold to Corning Glass Works in 1918. Carder had become famous for making colored glass pieces in every shade from green to gold, but Corning changed the mixture, pouring and blowing lead-infused glass into crystal stemware and ornamental pieces. The result was a flawless clear glass that appeared to create its own light from within.

Steuben glass became a popular high-end gift for departing executives and visiting dignitaries, and the company started to gain a reputation for artistic excellence. Artists such as Henri Matisse, Georgia O'Keeffe, and Salvador Dali designed pieces for a glass exhibition Steuben put on in 1940. Steuben pieces delight in whimsy; One famous piece depicts an ice fisherman plunging a spear into a crystal frosted over to look like ice; beneath the ice, the spear reappears in the clear crystal water, its points just inches away from two fish swimming by.

Marginalized at Corning
But for all its prestige, Steuben was never central to Corning's profits. Steuben's revenues of $26 million last year still made up less than one-half of 1% of Corning's overall $5.8 billion net sales. Still, back in the post-World War II era Steuben at least fit into its parent's core business. Corning had always focused on finding innovative uses for glass: It developed the bulbs for Edison's light bulb, parts of the tubes for televisions, and Pyrex baking dishes. Corning also invented a hearty ceramic-glass mixture that could survive the stove and the broiler and in 1958 launched a brand called Corningware.

In the 1970s and 1980s the company began pushing into new technologies, albeit ones that still utilized glass. It developed optical fiber and liquid-crystal-display technologies that would transform the company once again. In 1998, Corning sold its housewares business, including Corningware, to an affiliate of Borden.

Steuben increasingly seemed like an anomaly. There was also tension at the time between the sometimes abstract artistic vision of the designers and Corning's corporate mission. Arthur Houghton Jr., a former Corning chairman, wrote a letter to the head of Steuben's design department in 1984 reminding him that the Steuben designers were "employed as designers, not as artists" and needed to take their direction from the top, according to the book, Steuben Glass: An American Tradition in Crystal, by Mary Jean Madigan. He wanted them to focus more on pleasing customers and less on expressing themselves.

Corning, which had invested heavily in a field called photonics during the 1990s, rose with the telecom boom and then nearly died with the bust. By 2002 its stock had plunged nearly 95%, and half the workers were laid off. With the company looking to regain its balance and remove deadweight, Steuben's future looked bleak.

Cutting the Cord
Steuben lost money in 17 of the past 20 years, says James Flaws, Corning's chief financial officer. Over the past five years, it had lost $30 million. (Corning says Steuben is not big enough to warrant breaking out its own financial results.) The 2007 sales were stronger than usual but not enough to reverse the decline.

McKee, Steuben's president, a Corning veteran who had come to Steuben from the human resources department, had tried to get Corning to invest more money in the unit. She successfully persuaded executives to nearly double the advertising budget and to sell crystal on the Internet, but her pleas for new stores—Steuben has only one shop in which its glass is sold exclusively, on Madison Avenue in Manhattan—went unfulfilled.

Corning hired McKinsey & Co. in the spring of 2007 to evaluate Steuben. The consultants concluded Corning would have to make a big investment to turn the division around. "We asked ourselves, 'Why are we doing this, other than this is a nice part of our history?' " Flaws says. "You can't stay around losing money forever."

In March, Corning announced that it planned to sell Steuben, and if it could not find buyers it would close the division down.

Schottenstein's Bid
Several companies showed an interest in Steuben, but not all were a good fit, Flaws says. Some were considering moving the division out of the town, an option Corning's executives wanted to avoid. So they were pleasantly surprised when they sat down with Schottenstein Stores. The company's CEO, Jay Schottenstein, was a Steuben collector. Among the Schottensteins' biggest successes was American Eagle Outfitters (AEO), which they purchased when it was struggling in the 1980s and took public in 1994.

Now they wanted to move into the luxury market. In the past year they had bought Judith Lieber, which makes designer clothes, handbags, and jewelry, and Italian designer label Shiro, which specializes in handbags. Steuben would join those brands in the Schottenstein Luxury Group.

Schottenstein Stores executives walked into a meeting at Corning's New York City offices in early April carrying shopping bags loaded with their luxury goods and spread them out on the table. Jay Schottenstein and his deputies spent half of the meeting trying to pitch Corning on why they were the best company to buy Steuben; other companies had spent most of their time listening to Corning's pitch. McKee recalls: "He said: 'I want to tell you why we believe we should be considered to buy Steuben.' It was fascinating because we were supposed to be telling them why they should buy us."

Corning announced the sale on July 23, but didn't disclose the sale price. Flaws says Corning, which will continue to hold a 19.9% stake in Steuben, sold the division at a slight loss to its book value.

Staying Put, For Now
Workers didn't know what to expect when they heard that Schottenstein would be their new boss. Besides being highly paid, Steuben workers also have a certain amount of security. The union, Local 1000 of the United Steelworkers, negotiated a three-year deal with Schottenstein Stores that will bump up salaries by 3% a year and maintain benefits over that period. Beyond that, it's hard to tell what the future holds.

Partly that's because Schottenstein Stores is so intensely private. Its various companies employ more than 20,000 people, yet it doesn't even have a Web site. A spokesman would not talk about the company's revenues or profits and warned prior to an interview that it would "irritate" Jay Schottenstein if he was asked to discuss them.

The Schottensteins are known for buying well-known brands that have fallen on hard times and turning them around or selling their merchandise off. One Schottenstein Stores affiliate is SB Capital Group, which operates "special event sales, and store closings or relocations," according to the company's Web site. But when Schottenstein Stores executives came to Corning to meet the Steuben workers a few days after the announcement, they offered some reassurance. Workers say they were left with the impression that the new owners knew glass and seemed to have a vision for the company. When Jay Schottenstein finished speaking, they gave him a standing ovation, says Robert Misuraca, the Steelworkers' chief negotiator at Steuben.

"A lot of times, executives show a bit of aloofness and condescension," Babcock says. "I didn't get any of that."

Retailing Savvy
Milton Pedraza, the CEO of the New York-based Luxury Institute, which researches luxury products for high-end consumers, says he thinks the Schottensteins can bring their savvy with low-end retailing to the luxury market. "Unlike with other private equity firms that buy private equity companies, these guys are retailers and marketers," he says.

And Steuben still has cachet. It was rated the third-most recognized glass brand among U.S. consumers, after Waterford and Baccarat, in a 2006 survey by the Luxury Institute.

But will Steuben jobs follow the glass sales overseas, to a plant where the workers and maintenance cost less than they do in Corning? "Like everyone else, if he thinks he can produce it overseas at a better rate, I'm not sure he would hesitate to do it," says Harvey Miller, a partner at Weil Gotshal who specializes in bankruptcy law and is familiar with the Schottensteins' operations.

Jay Schottenstein says that won't happen. "I've made a commitment to grow Steuben and to keep Steuben in Corning," he says in a brief phone interview. "We have the best glass workers in the world."

Source: BusinessWeekAuthor: admin

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