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.
By Charles E. Silberman
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.
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. More
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