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25001 Industrial Boulevard
Hayward, California 94545
(510) 785-8800
Fax: (510) 786-7791

Wholly Owned Subsidiary of Dayton Hudson Corporation
Incorporated: 1949
Employees: 38,000
Sales: $4.4 billion
SICs: SIC 5611 Mens and Boys Clothing and Accessory Stores; SIC 5621 Womens Clothing Stores; SIC 5632 Womens Accessory and Specialty Stores; SIC 5641 Childrens and Infants Wear Stores

Mervyns, one of the largest retailers in the western United States, operates over 280 department stores throughout the country. While most Mervyns stores are located on the Pacific Coast and in the Southwestnearly half in California, with just over half of those concentrated in the greater Los Angeles and San Francisco Bay areasthe company also operates outlets in Michigan, Florida, and Georgia. Mervyns is a middle-market department store offering trend-right apparel and home fashions at moderate prices.

Mervyns was founded in 1949 in northern California by Mervin Morris, who took the advice of those who told him that exchanging the i in his first name for a y would add flair to the department store that he named after himself. The centerpiece of Mervyns merchandise was a line of private-label family apparel, which Morris sold in season at prices higher than a discount retailers but still below what his customers would pay for similar goods in other department stores.

Morris relied on rapid inventory turnover to secure profits, maintaining a loyal customer base by ensuring that Mervyns products represented good value. Innovative advertising also helped keep Mervyns in the public eye. For many years, it was the only retailer in California to publish its own tabloid advertisement. The tabloid, which was distributed in the stores and through the Sunday newspapers, pushed weekly promotions and helped establish Mervyns reputation as a value-oriented retailer.

This emphasis on providing customers with value, rather than on offering a luxurious shopping experience, was an unusual concept at a time when the full-service department store was still the standard in general merchandise retailing. However, it proved profitable, and Morris gained a reputation as a pioneer in the industry. By the early 1970s the company was in a position to expand considerably. In 1971 it went public, raising $5.4 million over the counter to retire all of its outstanding debt. Then, between 1972 and 1978, Mervyns nearly quadrupled in size, opening 31 stores, all of them in California and Nevada. In 1977, the company earned $11.8 million on sales of $264 million.

Mervyns success attracted the interest of Dayton Hudson, a midwestern retailer known primarily for operating the upscale Daytons and Hudsons store chains. Both Daytons and Hudsons had venerable histories as big-city department stores. Hudsons began as a haberdashery established in Detroit in 1881 by Joseph L. Hudson, who was looking for a way to rebuild his fortune after going bankrupt in the panic of 1873. In 1954, the company built Northland, then the largest shopping center in the United States, in suburban Detroit. Daytons was founded in Minneapolis in 1902 by George Dayton, a former banker. In 1956, the company built Southdale, the worlds first fully enclosed shopping mall, in Minneapolis. In 1962, Daytons created two subsidiaries that would prove highly successful, the Target chain of discount retailers, and the B. Dalton chain of bookstores.

Daytons went public in 1966, acquiring Hudsons, which was then still privately owned, three years later. Dayton Hudson promptly expanded by acquiring shopping malls and specialty retailers. Despite this aggressive course of expansion, however, the company was not well known outside the upper Midwest. With its B. Dalton stores well established in California, Dayton Hudson sought to introduce its department stores on the West Coast, and, in 1978, the company acquired Mervyns in a stock swap valued at over $280 million.

Mervin Morris became a director at Dayton Hudson, and his family became one of the companys largest stockholders as a result of the deal. John Kilmartin replaced Morris as CEO of Mervyns, overseeing a period of impressive growth. Backed by Dayton Hudsons financial resources, Mervyns embarked on a remarkable course of expansion. By the mid-1980s, the chain was operating 148 stores. In 1984, Mervyns opened nine stores in Texasits first adventure outside the western United Statesand posted a $223.3 million profit on sales of over $2 billion. The following year, Mervyns contributed 37 percent of Dayton Hudsons operating profit. Impressed with this success, Dayton Hudson planned to allocate approximately half of its capital investment budget from 1986 through 1990 for new Mervyns stores.

Mervyns was highly regarded in the retail industry in the mid-1980s, when many of its competitors for the mid-range department store customer were floundering. During this time, many of Mervyns rivals retooled themselves, adopting many of Mervyns best ideas. Most notably, J.C. Penney abandoned its old identity as a full-line department store, and, like Mervyns, focused on apparel and soft goods. Moreover, competitors began publishing their own tabloid advertisements, imitating the marketing tactic Mervyns had used for decades. Perhaps most importantly, several retailers all across the retailing spectrum began selling department store-quality goods at discounted prices. Faced with increased competition, Mervyns business began to taper off, particularly when factory outlet stores started becoming popular.

During this time, Mervyns made no aggressive moves to stay ahead of the competition. Dayton Hudson executives later admitted that they did not pay close enough attention to their star performer. Mervyns profits sank sharply in 1986 and remained depressed in 1987, despite continuing strong revenues. Earnings at Dayton Hudson sank correspondingly, and speculation surfaced in the financial press that the company might become a takeover target as a result of this weakness.

In 1986 Mervyns centralized its buying operations, which had previously been split between its stores in the West and its fledgling stores in Texas. Consolidating buying operations in California speeded up inventory replenishment and cut costs. The chain also contained costs by focusing more of its resources on product quality control and by installing checkout scanners to help manage inventory, among other things.

More importantly, though, Mervyns began to recalibrate its merchandise lines. Since low prices and good values no longer made Mervyns unique, in an era when Kmart became the largest retailer in the United States and intramural rival Target prospered, the company had to find a way to distinguish itself once more. The chain responded by focusing its attention even more closely on apparel, which had largely been responsible for founder Morris success in the first place. We dropped toys, infants furniture and draperies because we couldnt be dominant in them without sacrificing potential in our core businesses, Walter Rossi commented. Even within its apparel lines, Mervyns sacrificed variety to concentrate on its bestsell-ing items. For instance, it pared in half the number of womens blouses that it offered, leaving only the most popular ones.

Mervyns also responded to heavy price competition from its rivals by trying to upgrade the quality of its clothing, even when that meant raising prices slightly. One of the chains most popular clothing lines was its mens and womens sweat clothes. Mervyns sweats, however, tended to shrink substantially in washing and did not have a reputation as high-quality garments. Mervyns decided to size them more generously and upgrade the fabric and the sewing, even though it meant a price increase of nearly 20 percent. To compensate for the price hike, Mervyns offered a broader range of colors and more fashionable designs.

As a result of these changes, Mervyns sales and profits rebounded in 1988 and 1989. In the 1990s, however, the chains recovery stalled, hurt by the sharp downturn in the California economy. Sales flattened out during the first half of the decade, and profits dropped sharply from $284 million in 1991 and 1992 to $179 million in 1993. During this time, Rossi was succeeded as CEO by Joe Vesce, and then Mervyns received five new top executives, including three transfers from Target.

Mervyns continued to struggle in the mid-1990s. Dayton Hudsons 1993 annual report characterized Mervyns performance as disappointing, and that year Moodys announced that it was considering lowering Dayton Hudsons debt rating due to Mervyns financial problems. Some analysts were skeptical as to Mervyns ability to overcome its losses. Despite its reputation for innovation in the industry, Mervyns faced a formidable challenge in seeking to survive the competition.

Further Reading:

Barmash, Isadore, A Turnaround at Dayton Hudson, New York Times, May 28, 1989.

Douglas Sun