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Discount Stores

DISCOUNT STORES

Discount stores are often defined as retail outlets that sell brand-name and private-brand merchandise at prices significantly lower than prices at conventional retailers. To offset the lower prices, a number of different strategies and tactics are used, depending on the type of discount retailer. Some of these strategies and tactics include: maintaining a high sales volume; keeping expenses down; negotiating lower wholesale prices; and cutting profit margins. Other tactics are: using inexpensive fixtures, decorations, and displays; minimizing free customer services and maximizing the use of self-service; carrying overstocks and discontinued products from other retailers and producers; and stocking off-season merchandise.

In addition, improvement of operational efficiency is continually sought to control costs. Modern discount stores may range from specialty shops (such as discount bookstores) to major discount chains that typically sell a wide variety of products including hard goods (e.g., major electronics, automobile supplies, toys, and small appliances), soft goods (e.g., apparel, bedding, and bath products), groceries, and other general merchandise.

HISTORY OF DISCOUNT STORES

Discount stores evolved from a series of retailing changes that began in the United States in the late nineteenth century. Following the Civil War (18611865), the development of mass-production processes and a mass-distribution system, along with population increases, paved the way for a new approach to retailingmass merchandising. The first type of mass-merchandising operation was the department store. The second was the chain store, which included variety stores and "junior department stores." The third was the mail-order house. These patterns for mass merchandising remained relatively constant through the 1920s. The genesis of discount retailers, known as "undersellers," also occurred in the early 1900s. S. Kline (1912), J. W. May (1924), and Alexander's (1928) were the early undersellers of soft goods (e.g., apparel).

The Great Depression of the 1930s and the accompanying economic hardships set the stage for another retailing change and the further emergences of discount operations. Grocery supermarkets, the fourth type of mass-merchandising operation, appeared in 1930s. Early supermarkets, pioneered by Fred Meyer (1922) and Hendrik Meijer (1934), were comprehensive grocery stores that were designed for self-service and consumer accessibility. Size and low-cost facilities enabled these supermarkets to operate on low margins and sell below the competition. The inventories of supermarkets expanded to include nonprescription drugs during this time. The starting point for the fifth type of mass merchandising, discount stores, is often traced to the opening of a radio and appliance store by the Masters brothers in Manhattan in 1937.

The development of supermarkets, chain stores, and the predecessors of the discount stores that caused greater price competition in the 1930s, and concern, in the midst of the Depression, for maintaining employment brought about legislative constraints in several states to protect small retailers. These resale-price-maintenance, or "fair-trade," laws provided that manufacturers could establish retail prices for products that carried their brand name, thus legally fixing prices. In 1937 these laws were strengthened by federal legislation, the Miller-Tydings Resale Price Maintenance Act. Even though the laws were difficult to enforce, they would present a major challenge to discount merchandisers over the years to come.

After World War II (19391945), discount merchandising grew rapidly. This explosion in growth was fueled by consumer bargain hunting in the face of rising prices, the pent-up demand for goods created by wartime shortages, and the establishment of homes and families by returning GIs. Many consider E. J. Korvette, opened in 1948 by Eugene Ferkauf, as the first discount store. Soon regional discount stores, such as Zayres, Arlans, Gibson's and Two Guys, sprang up across the country to satisfy the demand for consumer goods, including television sets and other new products. Many of these new discounters sold their merchandise out of other existing businesses or set up in low-cost facilities such as abandoned factories and lofts. Despite these often makeshift origins, the modern discount industry was beginning to take shape.

Sparked by increased consumer confidence in discount stores and increased availability of goods from manufacturers, discounting continued to grow rapidly during the 1950s and became an important part of the retail landscape. New chains were drawn to the field, and established chains opened new outlets. Variety stores, specialty retailers, traditional department stores, and supermarkets were looking into discounting and, in some cases, launching ventures.

Mid-Twentieth Century

The look of discount stores also began to change in the 1950s as leading discounters (e.g., Masters, Two Guys, Korvette) took on a department-store-like appearance by adding household goods, apparel, and other soft goods. "Mill store" discount operations further contributed to this change as they began to surface with their base of soft goods.

In addition to the national and regional chains that entered the industry in the 1950s, several others opened their doors in the early 1960s. Many of the new additions were inexperienced and underfinanced, but among the new entries were four that would become the giants of the industry: Kmart, Woolco, Target, and Wal-Mart. All four began their operations in 1962.

Kmart was formed by Kresge, one of the nation's leading chain stores, in response to competition from drugstores, supermarkets, and the new discount stores. Kresge's new venture was unique in two respects. First, the marketing plan was based on the idea of offering quality merchandisepredominantly national brandsat discounted prices. Second, the location strategy was to "surround" cities with their stores.

Woolco was organized by Woolworth, another longtime leader among variety stores. Faced with the same problem as Kresge, they also responded by shifting their efforts to discounting. Their strategy was built around carrying department store merchandise, auto parts and accessories, and soft goods, all at discount prices.

Target was a spin-off of the Dayton Corporation, a Minneapolis-based regional department-store chain. It was conceived as a chain of regional upscale discount stores designed to attract affluent suburbanites. The product lines were higher quality and higher priced, with an emphasis on furniture and household appliances.

Wal-Mart was started from scratch by Sam Walton, the owner of a group of Ben Franklin variety stores in the south-central states. Walton's strategy was to establish stores only in small- and medium-size towns so that he could capture a substantial part of the total local market. His key policy was to sell at "everyday low prices," rather than hold periodic sales.

In addition to their marketing innovations, these four industry leaders played a major role in setting the pattern for other aspects of the industry. In particular, they established large facilities with standardized layouts in or near shopping centers. Their merchandise lines included both hard and soft goods and once they were established, they reduced the number of leased departments to a minimum.

Many discount businesses failed in the early 1960s because of the fierce competition brought on by the proliferation of new discounters and the experimentation of other retailers in discounting. In spite of the failures, the industry continued to expand in the mid-1960s, both in terms of number of stores and amount of sales.

The 1970s were a decade of expansion for the successful chains. Woolco and Kmart focused on national expansion and by 1974 Kmart had become the first truly national chain, with stores in each of the forty-eight contiguous states. Wal-Mart expanded into the Southeast and Midwest and Target established a strong presence in the Midwest. Some chains were forced into bankruptcy by the recessions of the 1970s, but their stores were bought up by the major chains and others. The decade also witnessed the end of federal fair-trade laws.

Late Twentieth and Early Twenty-first Centuries

Two distinct trends were underway as the discount industry entered the 1990s. One was the bankruptcy of several remaining discounters. The other was the spectacular growth of the (now) three major players: Target, Kmart, and Wal-Mart. Target sales more than doubled between 1987 and 1993. Kmart sales grew by more than $8.3 billion during the period 19881993. Meanwhile, in 1991 Wal-Mart passed Sears to become the nation's largest retailer. Their combined sales had increased by more than $46.7 billion during the period 19881993. As a result of these trends, the industry fragmented into four segments: the three major chains and a group of regional operators.

The beginning of the twenty-first century finds continued growth and consolidation as well as new applications in the discount retail business. Electronic commerce discount retailing has grown significantly, rapidly changing the shape of discounting and affecting the current industry members. Along with the departure of a number of discounters and the acquisition of others by stronger chains, new kinds of discounters have emerged.

TYPES OF DISCOUNT STORES

Although the full-line department-discount retailers such as Wal-Mart and Target are what first come to mind when discussing discount stores, there are as number of other types of discount stores. The following are the common types of discount retailers.

Food-Oriented

Box (limited line) stores:

Limited number of product lines; very limited assortment of brands and sizes; few national brands; few perishables; products displayed in boxes with sides and tops cut off; very low prices; little atmosphere and few services; very little promotion (e.g., Aldi and Save-a-Lot).

Warehouse stores:

Moderate number of product lines but a low depth of assortments; carry manufacturer's brands bought discount wholesale at very low prices; limited atmosphere; few services; minimal promotion (e.g., Cub Foods).

General Merchandise

Full-line discount stores:

Extensive width and depth of assortments; average-to-good-quality products, often less fashionable; very competitive prices; average atmosphere and minimal services; significant advertising (e.g., Wal-Mart, Target, and Kmart).

Off-price chains:

Moderate width and very low depth of assortments; average to good quality; lower continuity; low prices; little atmosphere and few services; some limited promotion (e.g., T.J. Maxx and Burlington Coat Factory).

Selected discount stores listed in the Top 100 Retailers with their rank
Rank Retailer 2004 Revenues (000's)
source: Triversity Top 100 Retailers. (2005) Stores. Retrieved October 24, 2005 from http://www.stores.org
Discount department store
1 Wal-Mart $288,189,000
5 Target $46,839,000
14 Kmart $19,701,000
28 Meijer $11,500,000
72 Mervyn's $3,200,000
Wholesale clubs
4 Costco $47,145,712
38 BJ's Wholesale Club $7,375,301
Internet discount sites
40 Amazon.com $6,921,124
Off-Price
21 TJX $14,913,483
Discount variety store
36 Dollar General $7,660,927
47 Family Dollar $5,281,888
75 Dollar Tree Stores $3,126,009
Closeout merchandise
54 Big Lots $4,375,072
October 24, 2005 from http://www.stores.org

Factory outlets:

Owned and operated by the manufacturer; often located in outlet malls; moderate width but poor depth of assortment; some irregular merchandise; lower continuity; very low prices; some atmosphere and service; some promotion (e.g., Bass, Levi's, and Totes).

Membership clubs:

Often referred to as wholesale clubs; charge a modest membership fee; broad assortment of food and nonfood items; lower continuity; low to very low prices; some atmosphere and service; some promotion (e.g., Costco, Sam's, and BJ's Wholesale).

Closeout retailers:

Broad, but inconsistent, assortment of general merchandise and apparel; low prices; little atmosphere and service; some limited promotion (e.g., Big Lots and Tuesday Morning).

Discount variety store:

Sometimes referred to as value retailers; limited assortment of foods and general merchandise; caters to the lower-income market; low prices; little atmosphere and few services; minimal promotion (e.g., Dollar Tree, Family Dollar Store, and Dollar General).

Internet discount sites:

Electronic discount retailing, also called e-tailing; sells at discount prices over the Internet; large assortment of merchandise; good service; generally delivered by mail or parcel service (e.g., Amazon.com).

Figure 1 shows the gross revenues of selected major discount retailers in each of the different types. The ranking is the rank of the retailer in the Top 100 Retailers listed in Stores in July 2005.

see also Market Segmentation; Retailers

bibliography

Berman, Barry, and Evans, Joel R. (2004). Retail management: A strategic approach (9th ed.). Upper Saddle River, NJ: Prentice Hall.

Boone, Louis E., and Kurtz, David L. (2004). Contemporary marketing (11th ed.). Mason, OH: Thomson South-Western.

Discounting: Chronicles of its evolution (30 years of discounting). (1992, September). Discount Store News, pp. 4950.

Discount Stores Information at Business.com. http://www.business.com/directory/retail_and_consumer_services/conglomerates/discount_stores

Hoffman, K. Douglass (2006). Marketing principles and best practices (3rd ed.). Mason, OH: Thomson South-Western.

Kotler, Philip, and Armstrong, Gary (2006). Principles of marketing (11th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.

Levy, Michael, and Weitz, Barton A. (2004). Retailing management (5th ed.). New York: McGraw-Hill/Irwin.

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Triversity. (2005, July). Top 100 retailers. Stores. Retrieved March 1, 2006 from http://www.stores.org

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Thomas Baird

Earl C. Meyer

Winifred L. Green

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Discount Stores

DISCOUNT STORES

DISCOUNT STORES. SeeRetailing Industry .

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