Industry Profiles: General Merchandise Stores

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Industry Profiles: General Merchandise Stores

Overview

Merchandise stores are dominated by two retail categories: department stores, which include the likes of Sears, Roebuck and Company and J.C. Penney; and discount mass merchandisers, sometimes called variety stores, such as Wal-Mart Stores, Inc. and Kmart Corporation. While the distinctions have begun to blur as stores diversify, these categories are distinguished from food and grocery stores and from specialized merchandise shops like apparel and electronics stores. Together, all U.S. general merchandise stores sold an estimated $430 billion worth of products in 2001.


History of the Industry

Department Stores The department store became one of the most durable creations of modern American life. Created in the heart of emerging business districts, department stores gradually became part of the landscape. The first department stores opened as early as 1846 in New York City. Although they primarily catered to the city's elite, early merchants also wanted to make themselves accessible to women of all classes. So instead of keeping their goods behind the counter, they openly displayed merchandise on the floor to encourage browsing.

Stores with elaborate decor and fancy window displays created a new kind of entertainment for the masses. Even if people could not afford to buy the merchandise, they still came to the department store to peer in the windows to see what they might attain someday. The traditional department stores sold "soft goods," such as apparel and linens, as well as "hard goods," including furniture, appliances, and housewares.

The now defunct "notions aisle"—the place for button hooks, thread, sewing needles, linens, laces, and silks—was the original foundation of the department store. Notions were first sold by peddlers who traveled by foot through the rural South and Midwest. Eventually they gained a horse and buggy and then graduated to a small store front—the prototype department store.

Another innovation that emerged in the late nineteenth century was the budget floor. Filene's obtained legendary status with its Automatic Bargain Basement, where it sold cashmeres salvaged from a fire at Neiman-Marcus and Schiaparelli and Chanel gowns evacuated from Paris showrooms at the start of World War II.

Credit began in 1911, when Sears Roebuck offered payment plans to farmers for large mail-order purchases. By the 1920s, "layaway" installment plans were common. The introduction of department store charge plates encouraged customer loyalty since that was the only form of consumer credit available at the time.

From the earliest days, merchants catered to women. By 1915, nearly 90 percent of all department store customers were female. Women also began to take the place of men on the selling floor, offering fashion advice and fittings.

Department stores were considered a fantasy land for toy vendors and children alike. Stores became famous for their elaborate Christmas decor. No one knows exactly when Santa Claus began to show up on the scene, but in 1939, Montgomery Ward's started to give away a book featuring a character first called Rollo, then Reginald, and finally Rudolph—a reindeer with a red nose. Rudolph's signature song was recorded by Gene Autry in 1949, and the famous reindeer became a Christmas icon.

Department store managers also influenced other major American holidays. In the past, Thanksgiving was held on the last Thursday in November. In 1939, the holiday fell on the 30th, leaving only 24 days for Christmas shopping. Ohio merchant Fred Lazarus, Jr. led a campaign to move the holiday to the fourth Thursday in November. President Franklin D. Roosevelt complied, and Thanksgiving has remained on that date ever since.

After World War II, department stores began their expansion into the suburbs, following the flight of their customers. By the 1950s, most department stores turned to upscale clients and merchandise, doing away with the low-end, bargain basement sales. This decision opened the way for discount operations like Kmart to enter the market. Customer loyalty quickly dissipated as the arrival of bank credit cards in the 1960s allowed consumers to shop on credit virtually anywhere. In due time, the costs of suburban expansion plus the lack of experience or interest on the part of third or fourth generation family members drove many department store owners to sell their operations.

By the 1980s, many department stores were in fairly poor shape. Although consumer spending was up, the stores found fierce competition from discounters, specialty stores with numerous outlets, and mail order houses, which sent out 14 billion pieces of mail annually. In an attempt to lure back customers, department stores engaged in competitive price-cutting. The result was a frenzied period of leveraged buyouts (LBOs), mergers, and acquisitions. Of the eight companies that composed the Standard & Poor's index at the beginning of 1986, four were acquired or taken private, while a fifth company undertook major restructuring.

As of the mid-1990s, department stores changed their product mix somewhat. "White goods"—appliances such as stoves and refrigerators—were less emphasized to make room for more apparel items. Sears adopted the slogan, "Come see the softer side of Sears," emphasizing that power tools and lawn equipment were not the only items you would see in the store. J.C. Penney upgraded their store merchandising, emphasizing more apparel also.


Discount Stores Although discounted sales have existed since the early 1900s, the discount variety store industry picked up shortly after World War II. During this time, according to Discount Store News, entrepreneurs were prompted to open large variety stores due to the increasing demand for consumer goods, including such new products as record players and television sets. In the northeastern part of the country, in particular, large facilities became available to potential variety store owners when several mills were vacated by manufacturers moving their operations to the South. Taking over such facilities for their retail operations, variety store owners found that their proximity to those mills that had remained in operation facilitated the timely restocking of their stores with apparel and domestic items.

By 1962, the industry leaders and a typical store format were well established. Discount department stores were formed by the Dayton Company, which pioneered the Target chain; Kmart stores, an offshoot of S.S. Kresge; the F.W. Woolworth Company's Woolco stores; and Sam Walton's Wal-Mart. These new stores transformed the variety store business into large, low-price, self-service stores, featuring both hard goods and apparel.

Several mergers occurred in the late 1960s and early 1970s, as chains sought to expand quickly through acquisitions. During this time, Kmart became the decided leader with more than 300 stores, which was more than double the number of the next largest chain. While over a dozen discount stores filed for Chapter 11, attributable to economic recession, Kmart and Woolco grew into national companies, while Wal-Mart expanded in the Southeast and Target in the Midwest.

During the 1970s, discount stores began exploring advances in technology, using computers, electronic registers, UPC bar coding systems, POS scanning, and satellite communication systems. Wal-Mart's explosive growth in particular was attributed to its successful implementation of computer technology. The company established highly automated distribution centers, which cut shipping costs and delivery time, and installed an advanced computer system to track inventory and speed up checkout and reordering. As a result, Wal-Mart increased its retail establishments from 18 in 1970 to 270 in 1980.

By the end of the 1980s, Kmart, Target, and Wal-Mart dominated the industry, a pattern that would continue through the late 1990s. At the same time, other chains had filed for bankruptcy, among them Woolco, FedMart, Memco, Twin Fair, Zayre, Zodys, Kings, Ames, and Hills. Regional operators experiencing moderate success included Jamesway, Caldor, and Bradlees in the East; Rose's in the South; Clover in Philadelphia; Fred Meyer in the Pacific Northwest; Fedco in southern California; and Venture, Meijer, and Value City in the Midwest.


Significant Events Affecting the Industry

In the 1990s, many of the discount stores, especially Wal-Mart, continued to flourish, while the traditional department stores largely stagnated. By the mid-1990s, Wal-Mart had become the world's largest retailer of any kind; and by the early 2000s, it accounted for more than 44 percent of the industry's sales. Target also enjoyed strong growth. However, Kmart was mired in a sales and image slump that forced restructuring. A similar problem existed at Sears, which began a program of divestitures of its peripheral businesses and explored new retail specialty formats. The trend was decidedly toward the discounters, which increasingly offered more diverse product lines, better prices, and maintained a more cost-efficient structure.


Key Competitors

Wal-Mart Stores Inc. has become the industry's runaway success and the primary beneficiary of the business that more stolid retailers like Sears have lost. With sales of $219.8 billion for the fiscal year ending 2002, the company operated 4,440 stores in 10 countries that year, but the overwhelming majority of its business comes from the United States. It is the world's largest retailer and the United States' largest company by revenues, leading the Fortune 500 list in 2002. That year, the discounter's workforce of 1.4 million made it the largest U.S. employer. In the mid-1990s, Wal-Mart initiated a push to open large-format combination food and general merchandise stores known as supercenters. By the early 2000s, the company had opened more than 1,000 super-centers and was expanding its chain of smaller Neighborhood Market grocery stores in select areas. These stores proved successful at pulling market share away from conventional grocery stores and, by 2001, Wal-Mart had established itself as the leading grocer in terms of sales. Wal-Mart also operates a chain of membership warehouse clubs that sell discounted merchandise in quantity to members.

Sears, Roebuck and Company had once dominated U.S. merchandise retailing, but it began to fade in the 1980s and 1990s as consumers were increasingly drawn to discount stores and the new category, "killer" formats like Home Depot and Best Buy. In the early and mid-1990s, Sears sold off many of its financial services, including the Discover card, Allstate insurance, and the Dean Witter investment brokerage. A more symbolic change occurred in 1993 when the company ceased production of its annual catalog, which had been a staple of U.S. retailing for nearly a century. In 2001, the company recorded $41.1 billion in sales, a paltry 0.3-percent increase over the previous year. This figure remained far below the $57.3 billion Sears brought in during 1991, when it still owned many non-retail businesses. Sears has tried to recoup sales and market share by investing in specialty stores such as the NTB chain of automotive gear stores. In 2002, the retailer was in the process of buying Land's End.

Target Corporation was another successful mass merchandiser in the early 2000s. Formerly known as Dayton Hudson, the company posted sales of $39.9 billion in fiscal year 2002, an eight percent improvement over the previous year. At that time, Target operated stores under the Mervyn's and Marshall Field's names. However, more than 80 percent of the company's sales came from its namesake Target stores. The retailer is known for selling somewhat more upscale merchandise, such as trendy housewares, making it a popular outlet for wedding gift registry. The company continues an aggressive expansion program to compete with its main rivals Wal-Mart and Kmart, and has introduced its own supercenters, Target Greatland and SuperTarget, which offer food items.

Other industry leaders include Kmart Corp., which had $36.2 billion in sales for the period ending January 2002; J.C. Penney Company, Inc., with $32.0 billion; and Federated Department Stores, Inc., with $15.7 billion.


Industry Projections

In the early 2000s, industry sales were growing at approximately six percent annually. Sales at some leading firms, however, were growing much faster as they added new stores and upgraded existing ones. But as the industry growth trend suggests, much of these retailers' growth would come at the expense of other companies.


Global Presence

Some merchandise retailers have eyed foreign markets with considerable interest, as they expect non-U.S. demand to grow more rapidly than that in the increasingly saturated U.S. market. Wal-Mart in particular has begun to aggressively develop its international business. The retail giant almost doubled the number of international stores it operates from 314 in 1997 to 601 in 1998. Since then, Wal-Mart continued to grow globally, and by 2002 operated 1,167 stores outside of the United States in 10 countries including Mexico, where it operates some 550 stores. It has likewise moved into South America, China, and Europe through both new store openings and acquisitions of local chains.


Employment in the Industry

From 1990 to 1997, employment at general merchandise stores increased 10 percent to 2.97 million people. However, by 2000 this number had decreased slightly to 2.94 million. Most of these positions tend to be low paying. The average non-management wage in 2000 was $9.45 per hour.


Sources for Further Study

"retail store industry." value line investment survey, 21 february 1997.

"retail trade." u.s. industry and trade outlook. new york: mcgraw-hill and u.s. department of commerce, 1998.

"retailing: general." standard & poor's industry surveys, 1998.

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Industry Profiles: General Merchandise Stores