25001 Industrial Boulevard
Hayward, California 94545
Fax: (510) 786-7791
Wholly Owned Subsidiary of Dayton Hudson Corporation
Sales: $4.4 billion
SICs: SIC 5611 Men’s and Boys’ Clothing and Accessory Stores; SIC 5621 Women’s Clothing Stores; SIC 5632 Women’s Accessory and Specialty Stores; SIC 5641 Children’s and Infants’ Wear Stores
Mervyn’s, one of the largest retailers in the western United States, operates over 280 department stores throughout the country. While most Mervyn’s stores are located on the Pacific Coast and in the Southwest—nearly half in California, with just over half of those concentrated in the greater Los Angeles and San Francisco Bay areas—the company also operates outlets in Michigan, Florida, and Georgia. Mervyn’s is a middle-market department store offering “trend-right” apparel and home fashions at moderate prices.
Mervyn’s 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 Mervyn’s merchandise was a line of private-label family apparel, which Morris sold in season at prices higher than a discount retailer’s 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 Mervyn’s products represented good value. Innovative advertising also helped keep Mervyn’s 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 Mervyn’s 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, Mervyn’s 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.
Mervyn’s success attracted the interest of Dayton Hudson, a midwestern retailer known primarily for operating the upscale Dayton’s and Hudson’s store chains. Both Dayton’s and Hudson’s had venerable histories as big-city department stores. Hudson’s 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. Dayton’s was founded in Minneapolis in 1902 by George Dayton, a former banker. In 1956, the company built Southdale, the world’s first fully enclosed shopping mall, in Minneapolis. In 1962, Dayton’s created two subsidiaries that would prove highly successful, the Target chain of discount retailers, and the B. Dalton chain of bookstores.
Dayton’s went public in 1966, acquiring Hudson’s, 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 Mervyn’s in a stock swap valued at over $280 million.
Mervin Morris became a director at Dayton Hudson, and his family became one of the company’s largest stockholders as a result of the deal. John Kilmartin replaced Morris as CEO of Mervyn’s, overseeing a period of impressive growth. Backed by Dayton Hudson’s financial resources, Mervyn’s embarked on a remarkable course of expansion. By the mid-1980s, the chain was operating 148 stores. In 1984, Mervyn’s opened nine stores in Texas—its first adventure outside the western United States—and posted a $223.3 million profit on sales of over $2 billion. The following year, Mervyn’s contributed 37 percent of Dayton Hudson’s operating profit. Impressed with this success, Dayton Hudson planned to allocate approximately half of its capital investment budget from 1986 through 1990 for new Mervyn’s stores.
Mervyn’s 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 Mervyn’s rivals retooled themselves, adopting many of Mervyn’s best ideas. Most notably, J.C. Penney abandoned its old identity as a full-line department store, and, like Mervyn’s, focused on apparel and soft goods. Moreover, competitors began publishing their own tabloid advertisements, imitating the marketing tactic Mervyn’s 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, Mervyn’s business began to taper off, particularly when factory outlet stores started becoming popular.
During this time, Mervyn’s 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. Mervyn’s 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 Mervyn’s 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, Mervyn’s began to recalibrate its merchandise lines. Since low prices and good values no longer made Mervyn’s 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 couldn’t be dominant in them without sacrificing potential in our core businesses,” Walter Rossi commented. Even within its apparel lines, Mervyn’s sacrificed variety to concentrate on its bestsell-ing items. For instance, it pared in half the number of women’s blouses that it offered, leaving only the most popular ones.
Mervyn’s 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 chain’s most popular clothing lines was its men’s and women’s sweat clothes. Mervyn’s sweats, however, tended to shrink substantially in washing and did not have a reputation as high-quality garments. Mervyn’s 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, Mervyn’s offered a broader range of colors and more fashionable designs.
As a result of these changes, Mervyn’s sales and profits rebounded in 1988 and 1989. In the 1990s, however, the chain’s 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 Mervyn’s received five new top executives, including three transfers from Target.
Mervyn’s continued to struggle in the mid-1990s. Dayton Hudson’s 1993 annual report characterized Mervyn’s performance as disappointing, and that year Moody’s announced that it was considering lowering Dayton Hudson’s debt rating due to Mervyn’s financial problems. Some analysts were skeptical as to Mervyn’s ability to overcome its losses. Despite its reputation for innovation in the industry, Mervyn’s faced a formidable challenge in seeking to survive the competition.
Barmash, Isadore, “A Turnaround at Dayton Hudson,” New York Times, May 28, 1989.