The Revolutionists of Retailing (Fortune Classics, 1962)

August 7, 2011: 9:57 AM ET

Editor's note: Every week, Fortune.com publishes a favorite story from our magazine archives. This week, we take you back to 1962, when retailing was only beginning to change the way it worked with suppliers in order to bring customers lower prices. It was the year that five-and-dime shops finally grew up -- although this story doesn't mention it, 1962 was also the year Wal-Mart (WMT) was founded. No doubt Sam Walton read this Fortune article with great interest.

They are the discounters, who are growing so fast statistics can't keep up with them. Risk-takers and innovators, they are shaking up the whole system of getting goods from manufacturer to consumer.

By Charles E. Silberman

The Distribution Upheaval I

FORTUNE -- In a mood of reflection some months ago, Professor Malcolm McNair of Harvard Business School, the dean of U.S. authorities on retailing, nominated the six greatest merchants in U.S. history. The six men are Frank W. Woolworth; John Wanamaker; J. C. Penney (JCP); General Robert E. Wood, who in the 1920's and 1930's converted Sears, Roebuck (SHLD) from a mail-order house into the world's largest retailer; Michael Cullen, the "inventor" of the food supermarket; and a diffident young man of forty-one named Eugene Ferkauf.

The name, which means "sell" in German, is only dimly known even in retailing circles. But Ferkauf's influence has been explosive. He is the founder and controlling stockholder of E. J. 'Korvette, the nation's largest "discount house." Korvette started operations in 1948, selling luggage and appliances' at less than list price in an upstairs loft on New York's East Forty-sixth Street.  Today Korvette sells a full line of department-store merchandise, from sheets to shirts to furniture, at prices 10 to 30 per cent below the prevailing level, in seventeen department stores in New York, New Jersey, Connecticut, and Pennsylvania. The company has opened four stores since August, and plans seven to ten more over the next two years; next month it will open a store at Fifth Avenue and Forty-seventh Street in New York, two blocks down from Saks Fifth Avenue (SKS), in the building formerly occupied by W. & J. Sloane, the hundred-year-old furniture store.

Ferkauf rates a place on Professor McNair's list of great merchants not because of the fortune he has accumulated, although that is considerable. In the fiscal year ending July 31, Korvette's sales will run to about $240 million vs. $180 million last year; Ferkauf's stockholdings in the company are worth about $50 million. Ferkauf's prestige is due to the chain reaction he helped set off. Only a few years ago, the discount house was a familiar but marginal figure on the retail scene, limited, for the most part, to the appliance trade in the downtown sections of a few large cities. Ferkauf saw that the same low-margin, low-service, high-turnover technique that had sold appliances could sell every other kind of merchandise as well.

Korvette opened its first department store in Westbury, Long Island, a heavily populated suburb of New York, in 1954. Since then, in the suburbs of every large metropolitan Area -- New York, Boston, Philadelphia, Detroit, Chicago, Houston, Los Angeles -- in almost every medium-sized city, e.g., Springfield, Massachusetts, Nashville, Tennessee, Akron, Ohio, and in small towns like Canton, Mississippi, Kokomo, Indiana, and Yakima, Washington, huge new discount stores of 70,000 to 200,000 square feet have sprung up, and more are on the way. Most of them are being built by firms as new to retailing as Korvette and bearing such unfamiliar (and frequently unlikely) names as Two Guys from Harrison, Gem, GEX, Zayre's, Spartan, Fed-Mart, Unimart, Bargain City, Bargain Town USA. But a growing number of discount houses are being put up by some of the oldest and most respected names in retailing -- firms like F. W. Woolworth, S. S. Kresge, Grand Union, Jewel Tea, Food Fair, Allied Stores, City Stores, L. S. Ayres, Dayton Co., which have either acquired going discount chains or have set up their own discount-house subsidiaries.

E.J. Korvette

Eugene Ferkauf, owner of E. J. Korvette department store, standing outside by storefront on Fifth Avenue

The discount house, says Lester F. Davis, general manager of Woolworth's new Woolco Department Stores division, which is building eighteen discount houses in the next eighteen months, "is now at the stage that supermarkets were at twenty-five years ago." Whether or not they achieve the same market penetration, it is clear that discount houses have already made a lasting imprint on U.S. retailing. "'The discount house," says one retailing consultant, "is producing the greatest deflation of stuffed shirts ever to hit American business."

Retailers of every description – department stores, five-and-dimes, specialty shops, supermarkets -- are being forced to examine, and frequently to change, their store hours, prices, accounting techniques, inventory selection, and merchandising policies. The changes at the retail level, in turn, are forcing manufacturers of consumer goods to take a fresh look at their distribution policies.

The discount house is itself a response to the explosive growth of suburbs and to the enormous shift in the distribution of income during the last two decades – forces that are reshaping every aspect of American society and of the U.S. economy. In the process, some profound changes are taking place throughout the entire system by which goods are distributed from manufacturers to ultimate consumers.

The great cornucopia

Just how many discount houses there are in the U.S. and what sales volume they do, are matters of some uncertainty. Trade sources put the number of full-line discount houses at between 1,500 and 2,400, and estimate their 1961 sales volume at $4 billion to $4.5 billion. The figures are at best rough estimates, though they undoubtedly indicate the right order of magnitude. There are no government statistics on discount-store sales; the Census Bureau and Federal Reserve Board statisticians responsible for retail-trade data have not yet recognized the discount house as an independent phenomenon. (The government's Standard Industrial Classification contains no category for discount houses, and the government statisticians take the position that what's not in the S.I.C. doesn't really exist.) One reason the trade sources differ so widely on the number of stores is that it's sometimes hard to determine who is and who is not a discounter; the popularity of discounting has led a good many conventional retailers to try to use the "discount" label. ("It's like shopping at a discount store when you buy a car at Duckler Pontiac," Milwaukee radio audiences are being told these days.)

The fact is, however, that the new full-line discount department stores (which are the ones that are causing all the furor) are as recognizable -- and virtually as indistinguishable one from another -- as Howard Johnson restaurants. The typical discount house is a cavernous, free-standing, one-story building with plenty of parking space, located on a well-traveled suburban street or highway. The roof beams are usually exposed, as are the fluorescent fixtures, and the general decor is, to use a polite term, spare. To be sure, a considerable number of discounters are trying to upgrade the appearances of their new stores -- to make them, as they stoutly insist, "as attractive as a regular department store." They have a long way to go; any shopper, put down in the middle of the most upgraded discount store, would know he wasn't in Marshall Field's.

The overwhelming impression is of an enormous cornucopia: the unadorned shelves, pipe racks, and other fixtures are filled to overflowing with goods of every description -- men's, women's, and children's apparel; sheets, towels, curtains, and other home furnishings; drugs and cosmetics, toys, records, appliances, hardware, auto accessories --and, in a substantial number of discount houses, food. The customers serve themselves, loading their merchandise into wire supermarket carts." Loudspeakers blare away at frequent intervals", offering "fifteen-minute specials," the signal for bargain hunters to stampede to one department or another. Transactions are generally cash-and-carry, though most discount stores offer home delivery for a charge, and a growing number are offering credit -- also for a charge. Needless to say, merchandise is not gift-wrapped.

Most discounters assiduously cultivate what retailing consultant Perry Meyers calls a "family fair" atmosphere. Women shop in slacks or shorts and bring the children and their husbands along. Newer stores frequently have a small nursery equipped with TV sets, tables and "benches, crayons, and baby-sitters. In one enormous new discount house in Long Island's Levittown, the babysitter's principal function is to make change so that the small fry can play the pinball machines.

Frugal decor and almost total absence of sales service are what enable discounters to operate at considerably lower costs than most conventional retailers. According to estimates by Fairchild Publications, construction costs of discount houses run from $5 to $10 per square foot, compared to a typical range of $14 to $18 per square foot for department stores, and the discounters' fixtures average $1.50 to $3 per square foot as against $5 to $8 per square foot for department stores. And the discounters' payroll costs average only 6 to 7 per cent of sales, compared to an average 18.25 per cent for department stores.

Just how much of this saving in costs is passed on to the consumer in lower prices is a matter of heated debate. Discounters claim to sell 10 to 30 per cent below the prices prevailing in conventional stores; conventional retailers argue that price comparisons are misleading, since in their view discount houses carry inferior merchandise. But in a considerable number of departments – e.g., small and large appliances, tires and auto accessories, cameras, books, records, toys, sporting goods, drugs and cosmetics -- advertised brands constitute the principal stock in trade, and the merchandise consequently is the same in both groups of stores. In these departments, which account for one-third or more of discount-store nonfood volume, the discounters' prices unquestionably are lower on average, although the differential is beginning to narrow now that department stores and other retailers find it necessary to meet discount-house competition. Discount-house food prices also tend to be somewhat lower than prices in conventional supermarkets, especially for canned and packaged foods. For one thing," a good many discount houses run their entire food department as a "loss leader" operation, in order to generate traffic for the rest of the store. But discounters' food-department costs are lower, too, by 3, to 5 per cent, and so prices are usually lower even where the food department is run at a profit by a lessee, which is frequently a large supermarket chain. The food departments that Kroger runs for Gem International in St. Louis, for example, undersell Kroger's own supermarkets in that area.

However, when it comes to soft goods (men's, women's, and children's apparel, sheets, curtains, etc.) and to furniture, price comparisons are more difficult. Branded merchandise accounts for only a small proportion of sales of these items, and discounters generally have been unable to gain access to the major branded lines -- e.g., Arrow shirts. To the" casual eye, the quality of the apparel found in the average discount house is not so high as that found in the better department stores. But the discount houses aren't competing against the better department stores; they are competing against the department store basement or budget shopd and against the popular-priced apparel and variety chains and the so-called "junior department stores." To be sure, the merchandise varies widely from store to store, and some alleged discount houses -- like some conventional stores -- are in reality "schlock" operations offering manufacturers' "seconds" at inflated prices. But discount chains like Korvette, Interstate, Gem, Zayre's, and Spartan, and most, if not all, of the independents carry largely first-line merchandise, and their soft-goods prices do run 10 to 25 per cent under the prices in conventional stores or basements that cater to the same market. All told, the discounters operate on gross margins of 18 to 25 per cent (calculated as a percentage of selling price, not cost of merchandise), compared to 36.4 per cent for department stores, 38.5 per cent for specialty stores, and 37.2 per cent for variety chains.

The battle in the suburbs

Like all revolutions, the one wrought by discount houses cannot be measured by statistics alone. Their impact is considerably greater than the sales figure of $4 billion to $4.5 billion out of total U.S. retail sales of $220 billion suggests. For one thing, the discounters' competition is being felt principally by two types of conventional stores: apparel, home-goods, and general-merchandise stores, which are the ones most people think of when they talk about retailing; and grocery stores.

Food sales through discount houses account for 4 per cent of the $50-billion total retail food sales; their impact on supermarket profits is considerably greater, since so many discount houses use food as a loss leader. And discounters now account for 6 to 8 per cent of sales in the $50-billion apparel, home-goods, general-merchandise market. Discount-house sales are already considerably larger than total sales by variety (five-and-dime) chains or by mail-order firms, and they are roughly one-quarter as large as total department-store sales.

Moreover, discount houses are heavily concentrated in the suburbs of major metropolitan areas. It is therefore the suburban branches of department stores and variety and apparel chains -- and even more, the independent specialty shops in large suburban shopping centers – that are feeling most sharply the heat of discount-house competition. And the heat hurts; the downtown department stores and the downtown branches of the large chains had been suffering from shrinking volume and profits for a decade or more before the discount-house competition began, because their customers were moving to the suburbs. They had come to rely on suburban branches to supply most of the sales growth and the profits. But no sooner had the department stores made their move to the suburbs than they began to meet discount-house competition.

Now the competition is really getting keen. Of the eight large discount houses in Milwaukee, for example, seven opened last year, and another four are planned for this year. Twenty large discount stores opened in Los Angeles in 1961, doubling the number of major units; in the suburb of Covina alone -- a community of 100,000 families – there are eight discount stores averaging 100,000 square feet each. Twelve discount department stores opened in Detroit last year, and another eleven are planned for this year. In Springfield, Massachusetts, where the number of discounters jumped from one to ten in just two years, the discount stores now account for perhaps 20 to 25 per cent of total sales in the apparel, home-goods, general merchandise market. All told, according to estimates by F'airchild Publications, some 400 new full-line discount department stores were built last year, totaling 28 million square feet, and 500 more stores will be built this year, totaling 40 million square feet. (Discount houses may account for one-quarter or even one-third of total store construction in the apparel, home-goods, general-merchandise category.) For example, Korvette is opening seven new stores this year ranging in size from 145,000 to 250,000 square feet. Spartan is opening twenty-eight new stores, Interstate twenty, Zayre's twenty, Gem International twelve. By the end of this year, discount-house sales might well be up some 50 per cent from last year, and be running at a $6-billion to $7-billion annual rate.

The new millionaires

This dizzy pace of expansion is possible in large part because the discounters -- in sharp contrast to the cautious bureaucrats who run most old-line retailing organizations -- are entrepreneurs who delight in taking risks and in playing the long shot. So far, at least, the long shots have paid off well; the discount business has spawned a number of millionaires besides Gene Ferkauf of Korvette. For example, Ollie Cohen and Murray Candib, the soft-spoken partners who started King's Department Stores in an empty motorcycle plant in Springfield, Massachusetts, in 1949, have parlayed initial investments of $30,000 each into stock now worth $8 million each.

Their high rate of return on invested capital also enables the discount chains to finance a considerable rate of expansion out of earnings alone. Last year, for example, Korvette earned 18.5 per cent on net worth, after taxes. Indeed, Sol Cantor, president of Interstate Department Stores, insists that "if you can't earn at least 20 per cent on capital, you don't belong in the discount business." By comparison, Federated Department Stores -- the largest, and by general consensus the best-managed department-store chain in the U.S. -- earned 12.9 per cent on capital in 1960, and department stores as a group earned 7.2 per cent. (Variety chains earned even less.) To be sure, the discount firms tend to be undercapitalized, with much higher debt in relation to capital than department stores. But their profitability is impressive nonetheless.

Glamour in Wall Street

Discount firms, moreover, are able to open new stores with surprisingly small cash outlays. For one thing, they almost invariably rent their stores, and they have had little difficulty finding real-estate operators who are willing and able to finance the construction. (Shopping-center promoters, in fact, are now eagerly seeking discount-house tenants, because of the traffic they attract; indeed, in one West Coast shopping center, which includes a branch of a large department store, several national chains made their leases conditional on the presence of a large discount store as well.) A good many discount stores rent even their fixtures. And a substantial proportion of discount firms, especially among the independents and smaller chains, do not directly operate their merchandise departments. Instead, they lease most or all of the departments to other entrepreneurs, many of whom run departments for a number of different discount houses and chains.

The discount-store owner who leases out his departments has no inventory expense and only a small payroll; he is primarily a contractor who provides a number of central staff services, e.g., advertising and promotion, and exercises a certain amount of supervision and control, the amount varying from firm to firm. Gem International, Consumers Mart of America, Towers Marts, Floyd Bennett Stores, among others, all lease most or all of their operating departments; Woolworth plans to lease many of the soft-goods and hard-goods departments in its new Woolco discount stores, and City Stores (an old department-store chain) is planning to lease a large number of departments in the new discount store it is opening in downtown Boston. But even the discount firms that operate most departments directly, e.g., Korvette, Interstate, Zayre's, Spartan, have little difficulty financing their inventory requirements. They turn over their stocks so rapidly -- seven times a year for Korvette, compared to a department- store average of less than four -- that they sometimes are able to sell most of their opening stock before the merchandise has to be paid for.

The discounters' profitability and rate of growth have given them ready access to the capital markets; discount department-store operators have replaced electronics and space companies as Wall Street's most glamorous stock issues. Last year, for example, Korvette enjoyed the largest percentage gain of any stock listed on the New York Stock Exchange; it rose 309 per cent, from 31 ½  to 128 7/8 before splitting three for one.  (In 1960, Korvette had sold as low as 14 3/4.) At recent prices the market is valuing Korvette at nearly $200 million -- more than the giant Allied Stores, third-largest conventional department-store chain, whose sales are nearly quadruple Korvette's. On the Big Board, also, Interstate Department Stores last year went from 17 1/8 to 52 ¼ and Spartans Industries from 27 to 51 ½ ; Vornado (operating Two Guys from Harrison), which was listed on the N.Y.S.E. this January, had shot up from 12 3/8 to 45 on the American Stock Exchange. The popularity of discount house stocks has made it relatively easy for discounters and operators of leased departments in discount stores to sell stock to the public; a dozen firms "went public" last year, and a number of others are in registration now.

Catering to the new masses

To understand why the discount house is having such an impact on retailing it is necessary to understand why it has been able to gain such broad and rapid acceptance from the consuming public. For one thing, most of the new suburbs have been "understored," notwithstanding all the shopping-center construction of recent years; except for supermarkets, store building just didn't keep pace with population growth. The discounters have been filling the vacuum; with no previous background in retailing, they had no investments to protect, hence were able to go wherever: the customers were.

More important, the discounters recognized that the suburbs were changing character as well as growing -- specifically, that they were becoming the home of the blue-collar as well as the white-collar class. Department stores have always catered to the low and low-middle income groups through their basement stores, which account for 10 to 20 per cent of store sales and a much larger proportion of profits. During the flush years of the early postwar period, however, store managers became infatuated with the explosive growth of the middle-income group and the consequent possibilities for "trading up." When they built their suburban branches, therefore; the department stores usually left their basements behind; they failed to see that their basement customers were moving to the suburbs, too. As a result, they left unsatisfied a substantial demand for low-priced staples and semi-staples children's clothing, sheets, towels, women's lingerie, men's sport shirts, etc. These are precisely the soft-goods lines with which the discounters have had the greatest success.

But the discount house appeals to more than just the bottom income group. In a study of Springfield, Massachusetts, for example, Perry Meyers discovered that, while the discounters' greatest appeal was to the $5,000-a-year group, nearly everybody in the area did some shopping at the discount stores. Among middle and upper-income families, the discounters have gained their best acceptance in children's clothing and domestics (towels, sheets, etc.), and in housewares, small appliances, and toys. The middle and upper-income groups are least inclined to shop at discount houses for fashion merchandise -- i.e., dresses, coats, and suits -- but their inclination is growing.

In view of the trend of rising income and the general emphasis on "trading up," this broad acceptance of the discount house may seem an anomaly. Actually, it is deeply rooted in the sociology of the consumer market. There was a time, not too long ago, when a worker's spending pattern was rigidly circumscribed by the traditions of working-class culture and by the relative paucity of goods and services available to the blue-collar family. When incomes rose suddenly, as they did during World War I, the extra went for silk shirts or beer.

No longer; the prosperity of the last two decades has shattered, once and for all, the old differences between the blue-collar and white-collar styles of life. The great emphasis on trading up during the 1940's and 1950's, and the impression of uniformity that resulted, simply reflected the fact that the workers were shedding their old working-class spending patterns in favor of the habits of the middle class. "The man in the Ivy League suit," as FORTUNE put it three years ago, "may be a millionaire or a skilled machinist, and so may the man at the wheel of the sports car and the man on the beach in Miami. To the spectator, this may look like a new uniformity; to the machinist, it involves a new diversity."

Now, as a result, the consumer market has entered a new and wholly different phase, in which "trading down" is as important as "trading up." For most Americans, the 1950's produced an explosive widening of, choice, as mass "markets developed for a long list of goods and services that formerly were the prerogatives of the well-to-do. Nouveaux riches always become prudent and discriminating in time, and so the new masses are becoming more discriminating about the way they spend their rising incomes. Far from being sated with goods and services, as critics like John Kenneth Galbraith have suggested, Americans are finding it difficult to accommodate all their desires even within their rising incomes, and so they stint where stinting is possible. Consumers who want a new car, a boat, a trip to Paris, and a college education for their children are likely to go out of their way to save 10 to 20 per cent on the children's underwear.

"Fireworks and location"

But price is not the only reason consumers patronize the discount house; strange as the notion may seem to devotees of Marshall Field's or Neiman-Marcus, a good many Americans actually enjoy shopping in discount houses. "The discount store's growth," says architect-industrial designer William Snaith of Raymond Loewy/William Snaith Inc., "is not so much due to its prices as to its fireworks and location.  The discount store has brought a large, exciting store into decentralized shopping areas." Indeed, in the Meyers survey, price was fairly far down the list of reasons people gave for patronizing the discount stores. Convenient location, good parking, self-servIce, and the opportunity to browse without being browbeaten by a clerk were mentioned more frequently, though price, of course, was always mentioned.

Discount houses also capitalize on the fact that most suburbanites are unwilling to travel very far to shop and are reluctant to spend much time shopping. To the suburban wife who has to attend a P.T.A. meeting, chauffeur the children to the Boy Scouts, and hold down a part-time job to meet the payments on the house or boat, shopping has become a chore to be finished as quickly as possible, not a recreation for a leisurely afternoon. The discount houses offer the convenience of location of the neighborhood store, together with the range of merchandise previously available in the suburbs only in the large regional shopping center. They offer more convenient hours: discount stores are open every night and frequently on Sundays as well. (In a number of states, e.g., Missouri, authorities have recently started to enforce old "blue laws"; in a number other cities and states local merchant associations have been pressing for enactment of new legislation.) And they offer self-service, which speeds shopping and which has been accepted as a matter of course by a younger generation brought up to buy food in supermarkets and to carry laundry to a Laundromat. Self-service makes it possible for discounters to lengthen hours without a commensurate increase in costs; conventional retailers have resisted night and Sunday hours in part because owners and managers don't want to work at those times, in part because the longer hours would raise costs substantially.

Their informal atmosphere enables the discount stores to attract considerable numbers of male shoppers, especially blue-collar workers who feel out of place in the more sedate department-store atmosphere. This adds to store volume, for men are notoriously, susceptible impulse buyers. (The discount stores have found auto-supply, sporting-goods, and hardware departments to be excellent means of generating more male traffic, besides being profitable operations in their own right.) Here, too, the discount stores are capitalizing on a more general trend -- toward more male participation in the shopping process. It didn't used to occur to men to take an interest in shopping; they were too absorbed in their jobs, and besides, with a six-day week, they didn't have time to shop. Today men naturally become interested in shopping, for consumption has become too important to be left exclusively to the women.

Jayne Mansfield and 9-cent coffee

But the discounters are not only providing convenient locations and hours; they are flamboyant and unorthodox merchants. Unlike the old hard-goods discounters, the new discounters strongly believe in advertising, and they draw large crowds with razzle-dazzle promotions. This winter, in each of its stores, Consumers Mart of America featured a drawing for a thirteen-day trip to Acapulco. And when it opened its 132,000-square-foot store in Phoenix, Arizona, last November, for example, C.M.A. arranged for personal appearances by Jayne Mansfield and George Raft. More to the point, perhaps, it offered coffee at 9 cents a pound, eggs at 29 cents a dozen, Coke at 9 cents a carton. (Employees of the company are currently involved in a test case of a newly amended California law barring loss-leader sales below cost where the quantity per customer is limited.)

"Traffic" is important to most discounters because they depend on impulse buying rather than personal selling to move their merchandise. "If you bring enough people into the right kind of store," says C. M. A. President J. A. Keilly, "they'll buy everything." For self-service, as the discounters (and the supermarket operators before them) have demonstrated, is not simply a means of cutting labor costs; it also tends to increase sales by bringing the merchandise out where the customer can see it and feel it. More often than not in the conventional store, the salesclerk is simply an obstacle between the customer and the merchandise.

There is, however, one group of discounters who rely less on traffic and more on customer loyalty to build up sales volume. These are the so-called "closed-door discount stores," which admit only "members," who pay a $2 or $3 initiation fee (and in some instances, a $1 annual renewal fee) for the privilege of shopping. The stores make quite a ritual of the membership; to be admitted, shoppers must show their membership cards to a guard at the door, and again with each purchase. (There are an estimated five million card-carrying shoppers, and perhaps eighty closed-door stores, in the U.S.) The closed door and the ritual are designed to create an in-group psychology that will lead customers to buy everything they need in "their" store, instead of shopping around from discount house to discount house. The experiment has had mixed results. Some firms, e.g., Gem International, have been quite successful; but in the past year a number of closed-door firms have opened their doors.

The discounter's greatest advantage – his faster turnover of inventory -- comes from a radically different approach to merchandising. The department-store operation too often resembles the proverbial old-maid librarian, who cherishes her books but resents letting them out; as Perry Meyers puts it, the department store tends to treat each piece of merchandise as if it were a precious jewel. The discounter, on the other hand, sees the store not as a place to display merchandise but simply as the channel through which the goods move as rapidly as possible from manufacturer to customer.

"Thick on the best"

More important, the discounter -- consciously or not – recognizes the most fundamental law of distribution: that whatever the line, a very small number of items will account for the great bulk of sales.  "Instead of the traditional department-store motto of 'Thick on the best, thin on the rest,' " says Sol Cantor of Interstate Department Stores, "the discount operator says 'Thick on the best, to hell with the rest.' " Cantor finds that his discount stores can cut 50 to 60 per cent out of what his department stores consider a conventional assortment. To take another example, Macy's New York carries 129 separate styles of men's white dress shirts, ranging in price from $1.99 to $14.09; Korvette carries thirty-five styles ranging from $1.49 to $6.99. Macy's carries nineteen sizes of flat and twenty-two sizes of fitted sheets ranging from $1.49 a sheet to $69.50 for a set consisting of one sheet and two pillowcases; Korvette carries six sizes of flat and four sizes of fitted sheets, ranging in price from $1.29 to $3.69.

How to lose a sale

The discounters thus have reversed the retailing trend of the last fifteen years, which saw an enormous proliferation of types of merchandise and of models, colors, styles, etc., in every branch of retailing. The discounter's policy grew out of his mode of operation. Self-service means that, by and large, a store can sell only what it can display; conversely, the discounter can afford to display only those items that will sell. But small quantities of an item tend to be lost in the vast jumble of goods; hence the discounter needs a lot of whatever he does stock. Merchandise consultant Fred M. Glass suggests as a general rule of thumb that discounters should buy only quantities large enough to cover at least a five-foot display.

It is a mistake, however, to assume that the discount house merely concentrates on the "hot" items. On the contrary, by narrowing the choice to a few items offered in depth, the discounter creates fast-moving items. One of the oldest rules of retail selling -- a rule the department stores and supermarkets have tended to forget -- is that the sale is lost if the customer is given more than three or four choices.

The discounter's "thick on the best, to hell with the rest" not only speeds his inventory turns but leads to economies at the manufacturing level as well. When he analyzed incoming orders, for example, Charles C. Bassine, chairman of Spartans Industries, a large manufacturer of low-priced apparel, discovered that discount stores typically bought five to ten times as much of a given item as conventional retailers of the same size. That is to say, a fifty-dozen order from a conventional store would be spread over five to ten styles, while the same size order from a discounter would cover just one or two styles. Bassine was so struck by the economies in handling the discounters' orders that he commissioned engineering studies of what would happen if Spartans were to ship its entire output to discounters; the studies suggested enormous potential reductions in the costs of packaging, paper work, warehousing, and seIling, as well as in manufacturing itself. The indicated cost reductions, Bassine says, were "frightening, they were so large." As a result, Spartans began building its own chain of discount stores in November, 1960; the firm expects to have fifty stores in operation by the end of this year, doing a retail volume in excess of $175 million.

"The only crap game"

There are limits, of course, to discount-house expansion. The discount store will never fully replace the department store or specialty shop or supermarket; the U.S. consumer market is too huge and varied and complex for any form of retailing ever to predominate. And so discount chains cannot go on indefinitely building stores at the current pace. Indeed, current expansion programs are bound to lead to oversaturation in some cities, and to stiffening competition in every city.

This new competition will force a lot of changes on the discount Industry. Until recently, as Interstate's Sol Cantor puts it, most discounters had been operating "the only crap game in town." .Under these conditions, it seemed as though discounters could do no wrong; almost any kind of merchandise seemed to sell in almost any kind of environment. It won't any more. As the new stores now on the drawing boards open their doors, and as old-line retailers begin to fight back, discounters will have to find some means of distinguishing themselves from their competitors if they are to continue to attract customers.

The search is already on. A good many discounters are trying to improve the appearance of the new stores they build; a small expenditure on paint, for example, can make a big difference in the "feel" of a store. Some stores are using food as a "loss leader"; some stores are venturing into fashion merchandise, in order to broaden their appeal; others are adding new service departments -- e.g., gas stations, barbershops, dry-cleaning establishments, and even, in one Long Island discount store, a mutual-fund sales booth. There are, in short, a great many different strategies that the discount chains and the independents are following; these will be analyzed in the second article of this series next month.

In the fight for supremacy that's shaping up, quite a few of the discounters will find the going rough. But it is too early to call the shake-out now, as a number of pessimists are doing. Even Barron's weekly, which knocked discount stocks out of bed this winter with a bearish article, had grudgingly to admit that "to date, earnings of the discount-house specialists give little indication of an approaching shake-out." Nor is there yet any indication of serious overbuilding. To be sure, in Springfield, Massachusetts, where the number of discount houses jumped from one to ten in just two years, Towers Marts found the going so rough that it sold its two stores to Bradlee's, the discount-house division of the Stop & Shop supermarket chain. But what made this deal possible was that Bradlee's was anxious to expand in Springfield. If the Springfield experience proves anything, therefore, it is not that the city is overstored with discounters, but that intense competition will enable the stronger firms to take over· the weaker ones.

There will be plenty of business for the strong firms to feed on. Discount stores as a group are likely to continue expanding their share of the market for some time to come. By 1965 the discounters may well have captured 20 per cent of an expanded apparel, home-goods, general-merchandise market, which would mean sales of about $12 billion-more than three timed last year's nonfood volume. And by 1970, in the opinion of Perry Meyers, discount-store sales, excluding food, could very well exceed $20 billion. This would represent 30 per cent of the market, which is as large a share as department stores now enjoy. The 1960's clearly will be an interesting decade for U.S. retailers -- and consumers.

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