Tag Archives: discounting

Payless: A Brief Obituary

Back in 1956, there were a couple of events that helped shape the course of globalization. One, about which I wrote in my book The Box, was the first modern containership voyage. This would eventually lead to the behemoths, some carrying more cargo than 10,000 full-size trucks, that move much of the world’s trade today. The other was the most prosaic development one could imagine, the opening of a shoe store in Topeka, Kansas, by two entrepreneurial cousins, Louis and Shaol Pozez. Sixty-three years later, that company is about to go out of business, the victim of the globalization it played a small role in bringing about.

My family knew both Pozez families and we shopped in their store. Payless-National, as they ambitiously called it, aimed to offer quality shoes at discounted prices. It did so by keeping costs low. The floor was covered with linoleum, not carpet, and the wooden shelves weren’t even painted. Payless laid out its merchandise in shoeboxes. Sales clerks were few; customers were expected to find their size and try on the shoes themselves. In return for putting up with these rather austere conditions, shoppers could buy two pairs of shoes for five dollars.

The Pozez cousins were able to undercut their competitors thanks to a series of court decisions in the early 1950s that effectively prohibited manufacturers from fixing retail prices. Importing was not part of their strategy: the United States imported very little footwear in 1956. Although shoes cost far less to make in many other countries, the United States still had a vibrant shoemaking industry, with 1,900 factories employing more than a quarter-million people in places like Endicott, New York, and St. Louis, Missouri. Thousands more people were employed in tanneries and in factories that made synthetic shoe materials.

But while making footwear provided plenty of jobs, those jobs came at a cost. By today’s standards, shoes were expensive. Men’s dress shoes from Florsheim started at $18.95 a pair. That’s about $170 in today’s prices—which is far more than an equivalent shoe from Florsheim costs today. A pair of men’s loafers from Sears for went for $8.65, or about $77 in today’s money—nearly twice the price of the loafers available right now on Sears’ website. StepMaster children’s shoes cost $5.50 a pair. No wonder Payless’s offer of two pairs of shoes for five dollars seemed like a good deal to a bus driver or factory worker earning two bucks an hour. Payless became a huge success, operating thousands of stores. It was purchased by a big department store chain in the 1970s, then spun off as a publicly traded company, and  eventually ended up in the hands of private equity funds.

Footwear manufacturing has proven difficult to automate, making labor costs the single most important factor in choosing production locations. As factories in low-wage Asian countries filled millions of containers with cheap plastic and synthetic shoes and shipped them across the pacific at only a few cents per pair, the U.S. shoe industry couldn’t come close on price; today, about 98 percent of the shoes sold in the United States are imported, mainly from China. To keep its lead in the discount shoe business, Payless became one of the largest shoe importers. For it, as for many other companies, globalization was not a choice, but the only alternative.

What killed it, at the end, was the same thing that made it a success—the constant quest for lower prices. According to the Bureau of Labor Statistics, the average consumer price of footwear has gone up all of 8 percent over the past 25 years. Rent and workers’ wages, meager though those may be, have been rising much faster, squeezing shoe retailers’ margins. In that environment, even globalizers can end up as road kill.

Of Sears and the Great A&P

The death of a major retailer rarely comes as a surprise. You can usually see the signs years ahead: the half-empty shelves, the dreary displays, the dim lighting, the odd combinations of merchandise as store managers struggle to fill space on the floor. The impending demise of Sears is no different. While the courts may have to decide whether Eddie Lampert, its chairman, has looted the company, as some investors claim, the truth is that by the time he took Sears over, in 2004, even a merchandising genius couldn’t have turned the chain around. Lampert made a bad situation worse when he combined Sears with Kmart, but he would have been hard-pressed to make it better.

Lampert is a financial guy, and like most financial guys he keeps his eye on the balance sheet. When it comes to retailing, though, the balance sheet doesn’t reveal the whole story. It will tell you about cash on hand — a valuable piece of information, to be sure — and about leases and credit card receivables, but it doesn’t capture the worth of a retailer’s most valuable asset, its brand.

There was a time when the Sears brand connoted reliability: whether you shopped in the store or ordered from the catalog, you expected quality merchandise at a reasonable price. It started to lose that reputation in the 1980s, when management was seduced by the glamour of selling stocks and real estate and lost interest in toys and underwear. By the time Wal-Mart began its nationwide expansion, in the 1990s, Sears had already forfeited much of its standing. Middle-class shoppers still went there for Craftsman tools and Kenmore appliances, but the rest of the business began to die.

The recovery plan involved buying Land’s End, the mail-order clothing retailer, in 2002. Land’s End, slightly trendy but definitely not haute couture, offered a plausible way to infuse a bit of excitement into Sears’s fashion offering without driving away long-time customers. But Sears couldn’t figure out what to do with it. Should Land’s End live alongside store apparel departments? Should it be the Sears apparel business? Management couldn’t decide, squandering an opportunity to restore a bit of the company’s diminished luster. All this occurred before Eddie Lampert loaded the company up with debt and Amazon induced consumers to do much of their shopping online. By the time of those events, Sears was already yesterday’s store.

To someone who has studied the rise and fall of the Great A&P, this story is familiar. Like Sears, A&P terrified its competitors for decades. Its stores were everywhere, and its commitment to low prices and its uncanny feel for changing consumer tastes made it the world’s largest retailer for more than 40 years. But in the 1950s, under managers who preferred to collect fat profits rather than investing in the business, A&P lost its edge. Customers complained that the stores were dowdy, and store brands like Ann Page and Jane Parker lacked the allure of the brands advertised prominently on national television. A&P became the place where grandma shopped, its name in such disrepute that the company tried to disguise its ownership of chains like Waldbaum’s and Food Emporium. No business strategy had a prayer of bringing A&P back.

Whatever the bankruptcy courts decide to do with Sears, I expect that the company will follow A&P to that great retail graveyard in the sky. A place where no one wants to be seen shopping doesn’t have much of a future in retailing.

Amazon, Whole Foods, and The Great A&P

A lot of people are concerned that if Amazon.com’s purchase of Whole Foods Market goes through, Amazon will be able to use its might and technological savvy to monopolize the grocery business. I’m not concerned about that myself, because I think the grocery business is pretty difficult to monopolize. Even the Great A&P, the subject of one of my books, never managed to amass enough power to force up the price of food; indeed, when a federal court found it guilty of violating antitrust law in 1946, the charge was that it was using its size to sell food too cheaply, not to raise prices unfairly.

So when the New York Times asked me to write about Amazon and Whole Foods in mid-June, I used my space to wonder why Amazon, which reports precious little profit from all the goods it sells, wants to go into the low-profit grocery business.  Perhaps, I suggested, Amazon should take a portion of the space in Whole Foods’ stores, most of which are in affluent neighborhoods, and turn it into an exciting retail concept that sells exclusive merchandise at a high mark-up. I was thinking of something similar to the Apple Store, which is a far more profitable retail venture than Amazon.com.

Amazon.com hasn’t yet offered me a consulting contract, so it apparently didn’t think much of my idea. Jeff Bezos seems to be a pretty smart guy, so if he thinks his company can make billions shaking up the stodgy grocery industry, perhaps he’s right.  But the list of others who have thought the same thing is very long indeed.

End of the Road for an American Icon

The July 20 bankruptcy filing by the Great Atlantic & Pacific Tea Company marks the end of the road for one of the icons of American business. The filing was in no sense a surprise: A&P has spent more than half a century driving itself out of business, shrinking over the years from a nationwide retailer to a small regional grocery chain. Few people, aside from its remaining employees, will grieve. Indeed, most people who think of A&P at all today remember it mainly as the dim and dowdy place where their Grandma used to shop.

But in its day, A&P transformed American retailing several times over. The company, then known as the Great American Tea Company, introduced mail-order shopping in the 1860s. In the 1890s, it developed the concept of handing out reward coupons with each purchase, an idea that soon had millions of housewives collecting trading stamps to exchange for lamps and crockery. Discount shopping as we know it today originated with A&P in 1912, despite the objections of Boston attorney Louis D. Brandeis, not yet on the Supreme Court, who thought consumers would be confused if a product did not sell at the same price everywhere. “The evil results of price-cutting are far-reaching,” Brandeis warned.

For more than four decades, from 1920 into the 1960s, A&P was the largest retailer in the world. It may also have been the most controversial. With stores in 3,800 towns, supplied by its own state-of-the-art bakeries and macaroni plants, dairies and salmon canneries, it squeezed costs out of the food distribution system and consistently undercut mom-and-pop grocers. A&P put fear into the hearts of small-town merchants. The earliest radio talk show hosts built their audiences by inveighing against it. State legislatures tried to tax it out of business. When that did not stop it from cutting prices, many states limited discounting by requiring minimum mark-ups on every single item in the store.

Washington got into the act, too. The literature lionizing Franklin Roosevelt as the first pro-consumer president ignores his support for a 1936 law intended to prohibit manufacturers from granting volume discounts, as well as the fact that his Justice Department sued A&P for selling food too cheaply—and won in court. As late as the 1950s, the federal government was still trying to break A&P into pieces, claiming that it was “impervious to competition.”

Washington needn’t have bothered. Competition carried the day. More aggressive grocers pushed A&P to the sidelines, but now they, too, are being pushed aside. The supermarket, a format A&P pioneered in the 1930s, is old hat. A host of innovators, from deep discounters to organic food chains to drug stores touting packaged foods to glitzy gourmet emporia, has the food retail industry in turmoil. If you shop for groceries, this is a wonderful development. If you’re trying to sell them, life won’t get any easier.

Chain Stores in Chains

Chain stores have a lot of advantages over mom and pop. By purchasing in enormous quantities, they can obtain volume discounts from manufacturers. By signing contracts to ship thousands of containers, they pay far less for freight than a retailer that ships only a handful. By maintaining strong credit ratings, they can lease better locations, at lower rents, than smaller competitors. All of this can help the chains keep customers coming through the door.

Yet chains face some disadvantages, too. Sheer size is foremost among them. When a chain does something wrong–which is to say, something that fails to satisfy customers–the problem can be very hard to fix, because it affects hundreds or even thousands of stores and may have irritated millions of shoppers.

There have been many recent examples of this challenge. Tesco, which only a few years ago fancied itself a challenger to Walmart for global retail leadership, still can’t figure out how to respond to British shoppers’ unexpected attraction to discount grocery stores. Wet Seal, which sells clothes to teenage girls, couldn’t cope with the fact that shopping malls are out of fashion; it has filed for bankruptcy and closed 338 stores. Target Stores, which marched noisily into Canada two years ago, is abruptly leaving with the admission that it failed to please Canadian shoppers. And then there is Walmart itself, which is struggling with U.S. consumers’ newfound preference for shopping close to home rather than in gigantic outlets miles away–a change of taste that presents an obvious problem for a company that has 606 million square feet of space tied up in “supercenters” across the United States.

Last week, at the annual meeting of the Transportation Research Board, a Walmart distribution executive, Douglas Estrada, provided some interesting color about how Walmart is trying to adjust to this trend. The company is opening smaller supercenters to fit in reviving urban neighborhoods, he said, but the company’s growth in the United States is likely to involve opening traditional grocery stores, small grocery stores with limited stock, and even convenience stores with gas pumps out front. Kiosks, now being tested, may compete with e-commerce, allowing a shopper to order anything available in a nearby supercenter and have it delivered to the small neighborhood store the same day.

This sort of innovation is a nightmare for Walmart’s distribution department. Walmart has more than 170 distribution centers across the United States. They are extraordinarily efficient at what they are designed to do: take in containers by the trainload, sort the contents, and pack merchandise into the 53-foot trucks that deliver full truckloads to each supercenter three or four times a day. But they are far less efficient when it comes to loading 28-foot trucks to deliver to urban grocery stores, and even less so in loading 16-foot trucks to replenish inventory at convenience stores. Walmart is trying to cope with this challenge, Mr. Estrada said, by using its supercenters for the purpose. The small-format stores will receive deliveries from a distribution center only once or twice a week; the rest of the time, they will be resupplied by vans coming from the nearest supercenter, often with merchandise picked directly from the supercenter’s shelves.

This means, of course, that goods headed for a smaller store will be handled more than goods going to a supercenter. Can Walmart do this and still offer the low prices its customers expect? Or will the small stores come to be treated as an inferior sort of Walmart, with higher prices and less selection than the real thing? Its distribution costs may determine whether the company succeeds in loosening the chains that bind its chains.

The Limits of Co-ops

I recently gave a talk to some retailers with a problem. For many years, these mom-and-pop shopkeepers have belonged to a cooperative. The co-op functions as their distributor: it supplies them with merchandise cheaply enough to make them competitive with chain stores, it controls brand names that consumers know, it advises them how to display their merchandise and plan special events, it represents them when new government regulations pose a threat.

So what’s the problem? The co-op hasn’t been doing terrifically of late, as competition in the retail market is changing. The shop owners want to keep it, because they value its services. But they also are the co-op’s shareholders, and they know that their personal wealth will take a hit if the co-op goes into decline. The question is what to do.

This is actually an old question. Retail co-ops have been around since the industrial revolution; Britain’s Co-operative Group dates its birth to 1844. In the United States, they began around World War I, when chain stores began taking a significant share of the grocery market. Chain grocers, back in those days, could underprice mom and pop largely because they could buy directly from manufacturers, obtaining volume discounts and avoiding payment of commissions to wholesalers. Some of them, such as A&P, a company I’ve written about, also developed powerful brands. Co-ops provided these same benefits to small stores. By banding together, small retailers could buy in quantity, and the co-ops could build brands just as chains did.

The co-op movement was highly successful in some areas of retailing, notably groceries, drugs, and hardware. IGA–the Independent Grocers Alliance–was a household name in the town where I grew up. I suspect that few of the people in New Jersey and Connecticut who buy their food at ShopRite realize that it really isn’t a chain, but a group of separately owned stores that all receive their goods from, and use the brands of, Wakefern Foods, which in turn is owned cooperatively by the store owners.

Co-ops thrived for decades, and they arguably helped mom-and-pop stores survive the chain store onslaught. But many of them have gone by the boards, largely for reasons beyond their control. Their retailer-members, largely small merchants, often lacked the cash to build big, modern stores like the chains owned. If a retailer-member failed to keep its store looking good, the co-op could usually do little about it. With the arrival of television advertising in the 1950s, consumers were persuaded that nationally advertised products were better than the goods in their local store. As a result, co-ops’ brands became associated with outdated, down-market stores and low-quality products.Some retailer-owned co-ops have managed to overcome these obstacles, but many have not.

Today, the incredible rate of change in retailing poses a daunting challenge for co-ops. Almost by definition, co-ops move slowly. Management cannot make major changes without the approval of a board comprised of retailer-members, many of whom may not see the need. Repositioning the brand requires convincing the members of the urgency of drastic change, a process that can take years.

So while I’d like to be optimistic about the future of retailer co-ops, that’s not easy. Co-ops have played an important role in retailing, and in helping independent retailers stay in business. There are a handful of exceptionally well-run operations, which I very much admire. But for the most part, the retailer co-ops’ day has passed. I think it’s better to recognize that, and to look for alternatives, rather than to wait for the good old days to come back.

Can WalMart Shrink Its Stores?

Chain stores have some obvious advantages, such as well-known brand names and the ability to command volume discounts from suppliers. But they have some less obvious disadvantages. High among them is that having a lot of stores makes it hard to change direction when things aren’t going so well.

An interesting article in today’s Wall Street Journal, in which WalMart Stores obviously cooperated, discusses CEO Doug McMillon’s effort to reshape the company in the face of customers’ changing tastes. WalMart has been the leader in developing gigantic stores, which it calls supercenters. In the United States, it runs more than 3,300 of them, averaging more than 180,000 square feet in size. Three football fields could fit into a store like that, complete with end zones and goal posts, and still leave room to spare.

Trouble is, customers don’t want to go to a supercenter every time they need a can of bug spray, or even a television. Some shoppers prefer to visit smaller stores, at least some of the time. Others would rather shop online, but might be persuaded to pick up their online purchases in a store if that’s faster or cheaper than having them delivered to the house.  As a result of shoppers’ fast-changing preferences, WalMart owns a lot of real estate that isn’t very productive. It needs to reshape its portfolio.

I wrote about this problem in my book The Great A&P. The Great Atlantic & Pacific Tea Company, then by far the largest retailer in the world, was slow to develop supermarkets in the 1930s. The innovators were wild-eyed marketers without much to lose, not established grocers. But by 1936, A&P’s president, John A. Hartford, was convinced that larger self-service stores would prove more profitable than the relatively small outlets A&P owned all over the country. His more conservative brother George, the company’s chairman, initially disagreed. But by early 1937, the brothers ordered a concerted effort to replace small, underperforming stores with supermarkets.

And then…nothing happened. Although the Hartfords owned almost all of the company’s shares and exercised total control, their executives knew that opening big stores would hurt business at small ones, forcing the layoffs of loyal managers whose stores would be closed. They stalled until the Hartfords pounded the boardroom table. In late 1937, in the face of diminished profits, the reluctant executives began to yield. Over a two-year period, the Hartfords relentlessly drove their team to open 750 large stores and close 4,000 small ones, lowering costs and prices, restoring growth, and winning back customers who had abandoned A&P for the likes of Big Bear and Big Bull.

Walmart will have to achieve something similar.  It’s a good bet that managers of its biggest supercenters earn a whole lot more money than managers of its much smaller discount and grocery stores, and won’t be eager to take a step down the ladder. And regional managers and execs in the supercenter division may not have incentives to see their sales wander off to other divisions operating other store formats. Mr. McMillion may have the right strategy, but convincing his own employees to embrace it may be even harder than jousting with Target and Kroger.

Bad Brands, or just Bad Management?

“Brands are finding it hard to adapt to an age of skepticism,” The Economist declared a couple of weeks ago. “Brands have never been more fragile,” James Surowiecki agreed in The New Yorker. I don’t buy the story. In an age when consumers suffer under ceaseless blather and excessive choice, brands matter more than ever–unless their owners devalue them.

In my book The Great A&P, I wrote about one of the very first brands, a tea called Thea-Nectar. It was introduced in 1870 by The Great Atlantic & Pacific Tea Company, which operated a chain of tea stores and also sold teas by mail. The company’s challenge was that its young hyson and Souchong teas, sold loose by the pound, were identical to the teas sold by others. Thea-Nectar, by contrast, was sold prepackaged, in half-pound or pound boxes with a picture on the front. It was said to be a unique mixture of teas that were dried on porcelain, with no coloring or impurities. Thea Nectar was a hit, throwing the tea trade into turmoil and helping the Great Atlantic & Pacific distinguish itself from dozens of competing tea companies. 2012-03-20_TheaNectar

The arrival of other branded products from companies such as H.J. Heinz and Kellogg allowed  grocery stores to offer something besides bulk products. It also permitted chains to prosper, as they could take advantage of volume discounts in dealing with manufacturers. By the early twentieth century, the Great A&P was already using store brands to segment the market, offering its customers a choice of good (Iona lima beans), better (Sultana lima beans), and best (A&P lima beans). House brands like Ann Page and Eight O’Clock Coffee became powerful tools for drawing shoppers into A&P’s stores.

Obviously, a few things have changed since those days, and the new case against brands is that consumers don’t need them. Once, brands stood as guarantors of quality, the argument goes; now, however, consumers can check reviews online before they go shopping, so brand names are no longer necessary to provide a signal of quality.

I think that analysis is off base. Brands lose value not because consumers no longer want them, but because managers abuse them. Let me offer a few examples.

One is Sony. In the 1980s and early ’90s, Sony’s Trinitron TVs were among the best on the market, and were priced accordingly. Sony tried to extend its brand into personal computers, which it sold at a premium price. Unlike its TVs, though, Sony computers were not demonstrably better than other computers. Sony might well have built a successful business by selling its branded machines at the same prices as its competitors, picking up volume that would allow it to lower per-unit manufacturing costs. But rather than offering a name brand at the same price as a no-name, its managers persisted in charging a premium price without offering a premium product. Consumers walked away.

A second example stems from the recurrent cases of salmonella in ground beef, which have caused numerous illnesses and too many deaths in recent years. In one of those episodes, a couple of years ago, it was revealed that beef suppliers’  standard contracts with supermarkets prohibited the retailers from testing for salmonella. I understand why a meat processor would propose such a contract, but I don’t understand why a retailer would sign it. It’s in the retailer’s interest for shoppers to assume that it goes to extra lengths to sell only high-quality merchandise. For a retailer to admit that it cannot monitor the quality of the goods it sells is to tell customers to look only at the price, which in general is not a wise business strategy.

A third example concerns a shoe manufacturer, for whose products I used to pay dear. One day I was in its store and found men’s dress shoes, made in China, selling for $49 under the same brand name as the $250 shoes I was contemplating. Naturally that set me to doubting the quality of the $250 shoes I was about to buy. I left the store. I still by brand-name shoes, but from another company that does not bestow its brand on cheap shoes from China.

In each of these cases, the issue was not that the brands lacked value, but that their owners  succeeded in devaluing them. The same, unfortunately, has been true of A&P. The company is still around, but after decades of mismanagement it has pretty much destroyed the value of its brands. The giveaway: at most of its stores you’ll be hard pressed to find the A&P name on a single product, much less above the door.

A Century of Discounting

The other day I was in Macy’s. Wherever I turned, there were signs promoting 20%, 40%, 50% off. Everything, it seemed, was on sale.

My shopping trip reminded me of a centennial that we all forgot to celebrate. One hundred holiday seasons have passed since America’s leading consumer advocate startled the country with an outspoken attack on a great evil of the day – discounting.

That advocate was Louis D. Brandeis. A Boston attorney and a graduate of Harvard Law School, Brandeis won fame at the turn of the twentieth century for standing up for the average citizen. He attacked abusive bankers and life insurers, convinced the U.S. Supreme Court to allow limits on women’s work hours, advocated for a minimum wage, and endorsed cooperatives and credit unions. The idea that our Constitution creates a right to privacy goes back to Brandeis as well.

But Brandeis had a peculiar blind spot when it came to the average citizen’s welfare. He did not think consumers benefited from saving money at the store.

Between 1908 and 1913, three Supreme Court decisions held that manufacturers could not dictate retail prices of their products; once a retailer had taken ownership, it could set the consumer price as it pleased. Wholesalers and small retailers saw this as an authorization for chain stores to cut prices and drive mom-and-pop retailers out of business, and Brandeis was on their side.

In November 1913, Brandeis used the pages of Harper’s Weekly, an influential magazine, to launch an assault against discounting. “When a trade-marked article is advertised to be sold at less than the standard price, it is generally done to attract persons to the particular store by the offer of an obviously extraordinary bargain,” he wrote. “It is a bait—called by the dealers a ‘leader.’ But the cut-price article would more appropriately be termed a ‘mis-leader’; because ordinarily the very purpose of the cut-price is to create a false impression.” The shopper would become confused as to the true value of the item, Brandeis warned. “[A] single prominent price-cutter can ruin a market for both the producer and the regular retailer,” he asserted. “And the loss to the retailer is serious. On the other hand, the consumer’s gain from price-cutting is only sporadic and temporary.” Eventually, manufacturers would have to cheapen their products so retailers could sell them profitably at discounted prices, and consumers would suffer from being unable to buy the goods they wanted.

In other words, Brandeis, perhaps the first nationally prominent advocate of consumer interests, thought shoppers were better off paying more for their purchases rather than less. Today, most economists would find this an odd form of consumerism, but Brandeis was sincere. If he’d had his way, we wouldn’t be trawling for sale merchandise one hundred Christmases later.