GENERAL MERCHANDISE RETAILING IN AMERICA 1850-1980
This is the story of a great business rivalry – the century
long struggle for retailing leadership between Montgomery Ward and Sears,
Up to the 1850’s retailing in American consisted o
peddlers, general stores and specialty shops. The rural areas of 18th century
America were regularly visited by peddlers who carried their wares on their
backs or on the backs of their pack animals. In the nearest small town the American farmer could find a variety of high-priced
merchandise at the general store. And in the larger towns and cities, Americans
could shop at a variety of specialized shops or at temporary open-air stalls
manned by the urban cousins of the rural peddlers.
The situation cried for newer, more efficient distribution
methods. That cry was answered first in the large cities where there emerged a
new concept of retailing – the department store.
The early department stores grew out of small, dry goods
stores, most of them founded by persons of humble beginnings.
The first department store in the world was established by
Aristide Boucicaut in Paris, France. Boucicaut called his store the Bon Marche,
meaning cheap or a bargain. His original store was a small shop selling piece
goods, but by the early 1850’s his store had grown and assumed th
characteristics of a true department store.
In the United States the leading claimant to having founded
America’s first department is Alexander T. Stewart. This Irishman immigrate
the United States at the age of 20 after having been trained for the ministry.
He taught school for two years. While teaching he loaned a small sum of money
to a friend who wanted to start a small dry goods store. The friend went
bankrupt and A.T. Stewart was stuck with the store. Stewart decided to try his
hand at retailing. He liked it and was good at it. Between 1823 and 1848 his
business grew. In 1848 he built a large dry goods store for women. Dubbed the
Marble Dry Goods Palace, this departmentalized monster is viewed by some as the
nation’s first department store. In 1862 Stewart erected a larger store
catering to both men and women. Called the Cast Iron Palace, this store
contained 8 floors of 2 ½ acres each. It employed over 2,000 persons an
offered a wide variety of hard goods and soft goods. It was definitely a true
A second claimant to the title of founder of America’s
department store is Rowland Hussey Macy. Born in New England, Macy became a
seaman aboard a whaling ship at the age of 15. He returned to land and founded
six unsuccessful small retail businesses. In 1858 at the age of 36 he arrived
in New York for his seventh try at retailing. He believed that out of his
failures he had learned what was needed to succeed. And history proved him
right. His business expanded rapidly, new departments were added, and by 1866
the store employed 200 employees.
The department store concept made it possible for the middle
class in the cities to obtain better merchandise at a lower price than had
previously been possible. Volume purchases of merchandise reduced the cost per
unit paid by the department store; and volume sales, stimulated by heavy
advertising, a fixed price policy, and a money back guarantee made it possible
to pass those low costs on to the customer while still making a good profit.
Around the country other merchants followed the examples of
Stewart and Macy. In Philadelphia, an ex-secretary of the local YMCA founded a
small, men’s clothing store in 1861. The man’s name was John Wannamaker. H
business gradually expanded until in 1876 he opened the historic Grand Depot,
alleged to be, “the largest space in the world devoted to retail selling on
Wannamaker was an innovative merchant who claims many firsts
in American retailing. Among his credit are the first white sale, the first
restaurant on a department store’s premises , th
first use of pneumatic tubes, and the first health and recreation facilities
for employees. In 1896 Wannamaker bought A.T. Stewart’s Cast Iron Palace in
York. And when he died in 1824, Wannamaker was regarded by many as the greatest
American retailer of his generation.
In Salt Lake City, Utah, Mormon leader Brigham Young
conceived of the idea of a department store owned by the community. The result
was the Zions Cooperative Mercantile Institution, which opened its doors in
1869 and which also had a legitimate claim to be the first true department
store in America.
In Chicago, traveling wholesale dry good salesman, Marshall
Field, worked hard, slept in the company warehouse to save money, and with a
partner established a department store in 1868. Field placed great faith in
maintaining a “tone” to the store that would set it apart. His motto, “gi
lady what she wants” sought to capture that tone. For himself and his emplo
he preached the positive mental attitude philosophy. He summarized it with this
famous list of 12 things to remember as we go about our work:
1. The value of time
2. The success of perseverance.
3. The pleasure of working.
4. The dignity of simplicity.
5. The worth of character.
6. The power of kindness.
7. The influence of example.
8. The obligation of duty.
9. The wisdom of economy.
10. The virtue of patience.
11. The improvement of talent.
12. The joy of originating.
In Atlanta, Georgia, a Jewish emigrant from Hungary gave up
his job as a traveling peddler, borrowed $500 and started a retail dry goods
tore in 1867. Morris Rich added “southern hospitality” to the basic depart
store ingredients of the Yankees. Within a decade, Rich’s was emerging not
as a full-fledged department store, but also as a prominent Atlanta
The experience of Morris Rich is one of many examples of the
American economic system providing opportunities for dispossessed European Jews
to make successes of themselves. Among other Jewish emigrants who did so was
Adam Gimbel, who started as a pack peddler, then founded a small store in
Vincennes, Indiana, and finally started what became the famous Gimbel’
department store in New York City.
Aaron Montgomery Ward
While lower cost distribution entered American cities with
the arrival of department stores, rural America continued to suffer the higher
costs of small stores and peddling. But the developments in the cities caused
many retailers to wonder how similar low costs could be achieved for the
The first man to find and implement an answer was Aaron
Montgomery Ward. Ward had experience as a clerk in several wholesale
establishments and at Marshall Field and Company in Chicago. Out of this
experience grew a conviction that mail order was the answer for the
countryside. Catalogs describing the available merchandise could be sent to
farm families; the farmers could send their orders by mail; and the merchandise
they ordered could be mailed to them. In this way, Ward could eliminate the
costs of several middlemen and the cost savings could be passed on to the rural
In 1871 Ward drew down his accumulated savings to purchase a
batch of goods at wholesale. But before he could mail his advertisement to farm
customers, the Great Fire struck Chicago and destroyed the building where Ward
had stored his merchandise.
Chagrined, but not defeated, Ward worked and saved for one
more year. Then with his savings and the investments of two partners, he once
again bought merchandise at wholesale prices, printed a one-page price list and
sent it to Midwestern farmers.
The business was not an overnight success. Orders arrived
slowly – too slowly for Ward’s partners. In 1873 they sold their shares in
business to Ward and expressed their doubts that he would survive. A frustrated
Aaron Montgomery Ward carefully evaluated the situation. Since his merchandise
was of high quality and his prices were low, he concluded that his problem was
that of establishing credibility in the eyes of his farm customers. And so Ward
began to attend meetings of a large, farmers’ organization known as th
National Grange of the Patrons of Husbandry. At those meetings he promoted his
business, and, on at least one occasion, made a special offer to entertain
Grange order-takers in Chicago if the local Grange could obtain $300 worth of
orders. This strategy worked. Orders from the farmers’ clubs and the Grange
fueled a sharp expansion in orders and in 1874 Ward decided to devote himself
to the business on a full-time basis.
In 1875 Ward introduced a new sales tool, the money-back
guarantee. This tool had already been used by the new department stores in the
big cities, but Ward was the first to use it in the national mail order
Ward’s original price list of 1872 contained 163 items
1875 he was mailing his customers a thick catalog listing 3,899 items. The
business continued to grow and prosper, and new products were regularly added
to the catalog. But the basic business philosophy of quality merchandise at low
prices, backed by a money-back guarantee did not change.
In 1893 Aaron Montgomery Ward sold his controlling interest
in the business to his brother-in-law, George Thorne. Ward could look back with
satisfaction on his accomplishments. The mail order business, which he had
founded, had brought low cost distribution to rural areas that had previously
But Ward was not looking backward. He was too busy leading
one of the nation’s early environmentalist crusades. Ward had become convin
that Chicago’s lakefront should be transformed into a beautiful public park
available to all citizens. At that time the lakefront area served as a dumping
ground for trash and a home for penniless tramps. Ward’s proposals were no
warmly received by the public. He ended up spending 20 years of his time and a
substantial amount of his personal fortune waging the battle to clean up the
lakefront. Eventually, however, he won over the opposition. Today, Chicago’
lakefront park stands as a tribute to Ward’s vision.
Aaron Montgomery Ward formulated the basic principles of the
mail order business and founded a successful business based on those
principles. Richard Sears elaborated the principles and, with his flair for
sales promotions, built an even more successful mail order business.
As so often happens in the business world, Sears got into
the mail order business by accident, and then made the most of his good
fortune. He started work as a manual laborer at a Minnesota railroad station.
He was promoted to a position as a telegraph operator and then as station
manager. As manager he was encouraged to develop a trading business among local
farmers, Indians and townspeople. By accident he discovered that there was a lucrative
market for mail order watches. And he discovered that he had the ability to
write advertising that could tap that market. In 1886 he decided to quit
railroading and devote himself full-time to the direct mail selling of watches.
A year later Sears moved to Chicago and advertised for a watchmaker who could
assemble watches from components that Sears would buy. Young Alvah Curtis
Roebuck answered the ad and was hired on the spot.
The business of the new R.W. Sears Watch Company grew
rapidly. Roebuck assembled the watches and Sears sold them through heavy
advertising in farm magazines, and the provision of installment credit. He
began to add other jewelry items for sale and in 1889 a money-back guarantee
was added to his advertising. Despite the company’s success, Sears sold out
Roebuck in 1889 and tried a new career in banking. But banking did not provide
the excitement Sears had found in mail order. And so, in 1893, Sears rejoined
Roebuck. Their new partnership was named Sears, Roebuck and Company. By this
time the company had a mail order catalog of 196 pages advertising a wide range
of merchandise from jewelry to furniture and clothing to musical instruments.
Working a 12 hour day, 7 days a
week, Richard Sears set out to catch up with industry leader Montgomery Ward
and Company. The strategy was the same – low price, heavy advertising and
money-back guarantee. But Richard Sears was able to execute the strategy more
effectively and within 10 years he had caught up with and surpassed the sales volume
of Montgomery Ward and Company.
Sears was a promotional genius and a risk taker. A classic
example of these two talents at work is the 1901 cream separator promotion.
Nobody except Sears thought cream separators could be sold by mail. The product
was a complex piece of machinery requiring a local dealer to set it up and
service it. But Sears was willing to gamble on a hunch that farmers would buy
from his catalog if the price were low enough. He found a manufacturer willing
to mass-produce cream separators at one-half the going price. His advertising
overcame the fears of the customer, and his mail order company bypassed the
local agents to capture a large share of the cream separator market.
Richard Sears’ marketing skills were not balanced by a
abilities. He had trouble controlling costs. Liabilities rose to three times
the amount permitted by the company’s charter. Alvah Roebuck became concern
about his personal liability and decided to sell his interest in the company to
Sears in 1895 (unlike Richard Sears, Alvah Roebuck was not a risk taker). Sears
bought Roebuck’s stock and then sold part of it to a new partner, Juliu
With Sears promoting sales and Rosenwald providing efficient
administration, the company entered a decade of outstanding growth and
profitability. But there were tensions between Sears and Rosenwald. These came
to a head in 1907 when the nation experienced a severe financial panic and for
the first time in its history, Sears, Roebuck and Company failed to set a new
sales record. Richard Sears wanted to increase advertising to offset the
decline. Rosenwald, on the other hand, wanted to cut staff and other expenses
and await the general upturn of the national economy. The conflict was put to a
vote of top management. Rosenwald’s conservative, cost-cutting approach won
a result, the company’s profit performance improved in 1908, even though sa
declined as anticipated.
This episode, combined with Sears’ ill health, caused
resign as president of the company on November 21, 1908. He kept the title of
chairman of the board, but never attended a board meeting. For all practical
purposes, he had severed his ties with the company. Six years later, he died.
From 1908 to 1925 the dominant figure in the Sears story was
Julius Rosenwald. The company’s growth continued, but there was a major cha
in the company’s style. Rosenwald had been raised in a Jewish shopkeepin
tradition that emphasized full disclosure before a sale was made. Rosenwald
carried that tradition to Sears, Roebuck, and it became a source of tension
between Rosenwald and Richard Sears. Rosenwald disapproved of Sears
exaggerated advertising promises and fought a constant battle to bring the
promises in line with the actual performance.
Richard Sears correctly retorted that exaggeration was
needed to get the customer’s attention. Sears reasoned that when the custom
received the merchandise it would still be seen as a bargain for the money,
and, in those few cases where the customer was not satisfied, he could return
the merchandise and get his money back. In view of the fact that Sears,
Roebuck’s business was based on millions of repeat orders, Richard Sears mu
have been correct in his assessment of customer satisfaction.
Nevertheless, Rosenwald pushed for change. And once Sears
had departed, Rosenwald’s consumerism became apparent. The catalog copy fo
furs, for example, began to provide not only the trade names of the furs, but
also an identification of the type of animal whose fur was being used.
Similarly, the section on patent medicines was dropped from the catalog on the
grounds that there existed no solid evidence that such products were effective.
But Rosenwald never lost sight of the basic secret to Sears
success. He continued to employ the strategy of low price based on high volume,
which was achieved through large-scale sales promotions. He supplemented that
strategy by pushing for cost-cutting improvements in operations, improvements
in the quality of merchandise offered and improvements in the standards of
service. And he also concerned himself with employee welfare. His greatest
accomplishment in this regard was the introduction of an employee profit
sharing plan in 1916.
During World War I, Rosenwald delegated his presidential
duties to Albert Loeb and went to Washington where he performed various
executive chores for the United States Government. Returning to active
management in 1920 Rosenwald discovered that a degree of laxity permeated the
company, particularly in the purchasing area where inventories were dangerously
high by past standards. He was unable to rectify the situation before sales
started to fall in response to the post war recession of 1920-21. Sears
reported a loss for 1921. Worse yet, in December of that year, the company
faced a liquidity crisis that threatened the firm with bankruptcy. Unable to
raise funds elsewhere, Rosenwald dipped into his own fortune, purchasing some
of the company’s Chicago real estate for $16 million and giving the company
worth of Sears stock. These actions snatched the company from the brink of
bankruptcy and the company returned to its profitable ways in 1922.
Changes at Montgomery Ward
While Julius Rosenwald was managing the affairs at Sears,
there were management changes at Montgomery Ward. Aaron Montgomery Ward’
partner, George Thorne, had turned active management of the company over to his
sons after buying out Ward in 1893. The company grew steadily if not
spectacularly during the following two decades. But, as had occurred at Sears,
Montgomery Ward was caught with excessive inventories at the end of World War
I. The company reported the first loss in its history in 1920. The board of
directors prevailed upon the Thornes to retire from active management and
Theodore Merseles was appointed president with a mandate to restore
Merseles cut employment and closed several unprofitable
manufacturing subsidiaries. Then he and his merchandise vice president, Robert
Wood, set their sights on catching up with Sears. Vice president Wood had a
unique ability to find sources of merchandise and contract with them on
favorable terms. He was particularly skillful at developing sources to
manufacture products with the Montgomery Ward label. Products which were developed
in this way, such as the Montgomery Ward automobile tire, began to gain market
share in competition with Sears. Suddenly it appeared that Montgomery Ward
might eventually catch up with Sears in sales volume.
It was not to be. The key figure in Ward’s success, vi
president Wood, had a fixation with retail stores. He was convinced that the
long run survival of each and every mail order firm depended upon the opening
of retail stores. But not many mail order men of those days shared his vision. Ward’
president, Merseles was one who couldn’t accept Wood’s conclusion. He reje
Wood’s requests for an experimental opening of retail stores and tried t
convince Wood that Ward’s business was mail order, not retail stores. Th
disagreement between the two became bitter and finally, in 1924, Merseles fired
Wood. Wood quickly found a new job as a vice president at Sears.
The difference between Wood and Merseles illustrates the
power and importance of properly defining the purpose of a business. Merseles
defined Ward’s purpose as running a mail order business. Given that definit
there was clearly no place for retail stores. Robert Wood defined Ward’
purpose as providing the American middle class with general merchandise. How
that merchandise was delivered – mail order or store – was secondary. Wood
definition made it possible to consider retail stores.
Robert Wood was an unlikely candidate for merchandising
leadership. He graduated from the United States Military Academy in 1900 and
proceeded to spend 10 years of his active military service in Panama with the
troops constructing the Panama Canal. There he became chief quartermaster with
responsibility for purchasing and distributing supplies. When America entered
World War I, Wood was put in charge of purchasing all Army supplies except
ordinance and aircraft. At the end of the war he emerged with the rank of
brigadier general. During the war Wood worked closely with officials from
Montgomery Ward and Company. After the war he accepted an offer from that
retailer to become their general merchandise manager.
Unable to convince Ward’s management that his idea ha
merit, Wood was fired and took a job as vice president in charge of factories
and retail stores at Sears Roebuck and Company. At Sears, only two other
executives favored the retail stores concept. But they were the two whose
opinions counted – chairman Julius Rosenwald, who recruited Wood, and ne
president Kittle, whom Rosenwald had also recently recruited. Neither man was
particularly enthusiastic about Wood’s idea. But they were willing to let h
try the concept. And so it was that in 1925 Sears,
Roebuck opened its first retail store.
Seven more followed that year. By the end of 1927 the
company was operating 27 stores. By the end of 1929 there were 319 retail
stores in operation and total retail sales volume was beginning to approach
that of the mail order business.
General Wood had definite ideas regarding the nature of the
retail stores that Sears was opening. He wanted to locate the main stores not
in the traditional downtown shopping areas but rather in the outlying areas
where adequate free parking could be made available. His reading of The
Statistical Abstract and his observation of trends in the 1920’s convinced
that the urban American shopper would be attracted by a department store with
easy parking access.
Another idea was to make the Sears store a place where the
family could shop for “hard goods”. The cities where Sears was building i
stores had populations of 100,000 or more and were, therefore, inevitably being
served by existing department stores. But those stores, located in crowded
central locations, emphasized the hard lines — hardware, sporting goods
appliances – and home furnishings. These goods tended to be purchased by me
by husband and wife making a joint decision. Here was a merchandising gap
waiting to be filled in the big cities.
President Kittle died unexpectedly in 1928 and General
Robert Wood succeeded him as president. Wood proceeded to introduce two
additional innovations that solidified the early gains Sears was making with
its retail structure. Wood firmly believed that the local retail store manager
needed much freedom to make decisions. Only with such autonomy could the
manager meet and beat local competitors under special local conditions. But
Wood also believed that centralized purchasing and standardized operating
procedures controlled from headquarters were essential. He created a system
that judiciously mixed local autonomy with central directions.
The other innovation introduced by General Wood was to
standardize the procedures of the buying organization. An overall merchandise
design was developed in which all departments were to offer three basic quality
categories – Good, Better and Best. And an emphasis was put on merchandis
development. This meant setting forth of specifications wanted in a product and
then finding manufacturers who can meet the specifications at competitive
The first major effort at merchandise development was in
automobile tires. Sears designed the tire, awarded the contract to a
manufacturer to make the tire; and conducted a nationwide contest to name the
tire. A draftsman from North Dakota won the contest with the name “Allstate
Robert Wood’s retail store gamble paid off handsomely.
So did his decision to enter the insurance business in the
early 1930’s. The decision was made by a reluctant board of directors tha
wanted to say “no” but yielded to Wood’s plea that if they had any respec
his managerial abilities they would give him a chance to prove his point. Once
again, history proved Wood correct. In fact, in the late 1970’s the profit
from the Allstate insurance business exceeded total retailing profits.
Perhaps the greatest of Wood’s gambles was his decisio
embark upon a major store building effort after World War II. As the war drew
to a close, many learned economists were predicting a post war depression, and
some leading rivals of Sears, such as Montgomery Ward and Company, decided to
postpone post war expansion until after the depression.
But Wood didn’t believe the economists. His reading of
Statistical Abstract of the United States convinced him that after the war
postponed marriages would take place in unprecedented numbers. He was convinced
that America was about to experience a “baby boom” that would produce a ge
of economic growth.
Wood guessed correctly. The post war economy expanded
rapidly as Americans welcomed peace with a spending spree and family raising
spurt that continued for two decades. Sears, Roebuck gained a major step on the
competition as sales doubled during the first two years after the war and
earnings soared. Robert Wood’s gamble provided a push that kept Sears far a
of the competition for the next two decades.
While Sears, Roebuck was prospering under the leadership of
Robert Wood, Montgomery Ward was attempting to recover from its slow start in
opening retail stores. President Merseles cautiously opened 8 retail stores in
1927, two years after Sears had entered the business. Merseles resigned in 1928
and was succeeded by George Everitt. Everitt accelerated the opening of retail
stores. By the end of 1929 Ward’s had 531 of them, located primarily in sma
or medium size towns.
In 1930 Ward’s opened 49 new stores but closed 24. The
year the company posted a loss of almost nine million dollars. A worried board
of directors brought in a new chief executive officer, Sewell Avery. Avery
shook up the organization, putting practical chain store executives in charge
of the retail stores and reorganizing to eliminate conflicts between the mail
order and retail operations. By 1933 Avery had Ward showing a profit.
Performance continued to be good for the rest of the 1930s. By 1939 Ward had
618 retail stores and catalog sales had recovered to their 1926 peak.
Nineteen-thirty-nine was also the year that a writer in Ward’s advertisin
department created the fictional children’s story character named Rudolph t
Red-Nosed Reindeer. Rudolph was created for use in a Montgomery Ward Christmas
give-away program of that year.
With the approach of World War II, Avery struck a defensive
posture and called for a halt to store expansion in 1941. When the war ended,
Avery agreed with the predictions of prominent economists that a major
depression would follow the war. As a result, Avery refused to invest in new
stores and modernization of existing stores. Instead, he put Ward’s cash in
government securities and short-term bank deposits. As the anticipated
depression failed to materialize, other retailers followed Sears and expanded
their operations. But Avery continued to hold back. Many of Ward’s top mana
became disillusioned. Two presidents at Ward’s quit between 1946 and 1948.
1952, 100 store managers quit Ward’s. Still Avery refused to open any ne
stores. He proudly pointed to Ward’s nest egg of $300 million in short-ter
investments and predicted that when the depression came, he would have the last
In 1954 Ward’s lackluster performance attracted a take
specialist named Louis Wolfson. Wolfson launched a campaign to gain control of
Montgomery Ward. Wolfson was only able to gain a minority of seats on the
board, but the campaign convinced 81-year-old Sewell Avery that he should
resign as board chairman. He did so in 1955.
Ward’s board of directors elected company attorney Joh
to the position of president. Barr immediately reversed directions. In 1956
eight million dollars were spent to modernize stores and in 1957 the company
opened its first new store since 1941. While opening new stores, Barr also
looked for a merchandising man to replace him and lead Montgomery Ward in its
turnaround effort. In 1961 he hired Robert Brooker as president. Brooker had
been a vice president of Sears and a president of Whirlpool Corporation.
Brooker brought in a number of key new management people, including Edward
Donnell, former manager of Sears’ Los Angeles stores.
Ward’s new management team then achieved an impressiv
turnaround. One of the keys to their success was in the purchasing area. They
reduced the number of suppliers from 15,000 to 7,000 and the number of brands
being carried dropped from 168 to 16. Ward’s private brands were given 9
percent of the volume compared with 40 percent in 1960. The results of these
changes were lower handling costs and higher quality standards.
Another key to Ward’s successful turnaround was the cl
strategy in metropolitan areas. Clusters of modern new stores were built to
serve each of a number of metropolitan areas Each group of stores was centrally
managed, carried the same merchandise and participated in a coordinated program
of promotion and advertising.
Brooker’s strategy worked and Montgomery Ward began it
comeback. But the company’s stock was slow to reflect the turn around an
Brooker became worried about the possibility of a takeover by an outside firm,
particularly one of the conglomerates that were actively acquiring major
corporations in the 1960’s. Brooker looked for a friendly merger partner t
increase the size of the corporation and thereby give it protection against an
outside takeover. He finally found one in the form of the Container Corporation
of America. The two firms merged in 1968. The new holding company was named
MARCOR. A decade later, MARCOR was acquired by the Mobil Oil (Under Mobil’
management Montgomery began to lose its competitiveness. In 1986 Mobil sold it
to management in a leveraged buy-out.)
The turnaround at Montgomery Ward and Company was one of a
number of developments in the late 1950’s and 1960’s which together create
environment of unprecedented competition for industry leader Sears, Roebuck and
Company. Other key developments were a bold change of direction of J.C. Penney,
the emergence of nationwide discounting , and
increased competitiveness by the old-line department stores.
J.C. Penney was a nationwide chain of soft goods stores that
had traditionally emphasized the small and medium size towns of America. The
company founder, James Cash Penney, established his first store at Kemmerer,
Wyoming, on April 1, 1902. His previous experience as a clerk in dry goods
stores in Missouri, Colorado and Wyoming had convinced him that he had the
ability to purchase the right soft goods at the right price for the small town customer. His Christian upbringing led him to
believe that an emphasis on Christian fair dealing would create a loyal group
He called his first store the Golden Rule Store, and he laid
down in print the Christian principles that the customer could expect to find
in practice at his store.
The success of that store made James Cash Penney dream of
expansion. He solved the twin problems of raising cash and training manager for
expansion by developing a partnership system. Every Golden Rule Store manager
would be given a chance to open and own a portion of his own Golden Rule Store.
First, he had to train a man to replace him. Once this was done he could put up
1/3 of the capital needed for the new store. Penney would put up the other 2/3
and the two of them would be in business as partners. Using this concept,
Penney expanded his operation to 34 stores by 1912. At that time the name of
the company was changed to J.C. Penney and Company because other firms had
begun to use the Golden Rule theme.
The company continued to expand and prosper over the next
four decades. To be sure there were changes. One of the most significant was
the decision in 1927 to abandon the old partnership concept and replace it with
a salary plus a commission based on profit. Another was the decision to move
corporate headquarters to New York. But the company continued to emphasize
rural and small town markets, to sell for cash and
shun credit and to focus on soft goods. And the company continued to stress the
development of a corporate ethos or way of doing things based on James Cash
Penney’s Christian concepts.
In 1957 the assistant to the president of Penney’s ris
his job by writing a lengthy, critical memo to the board of directors. In the
memo William Batten expressed his belief that Penney was being by-passed by
developments in the marketplace. In order to remain a major factor in American
retailing, he argued, Penney’s would have to expand its merchandise offerin
and become a full line department store, it would have to move into the urban
malls that were beginning to spring up, it would have to offer customer credit,
and it would have to start a catalog operation. Penney’s board agreed wit
Batten’s views. They hired him to implement his ideas. And over the nex
decade, J.C. Penney and Company suddenly became a serious competitor for Sears.
(At the time of Batten’s memo, Penney’s sales were only 28 percent as larg
Sears. By 1974 Penney’s sales represented 33 percent of Sears’ sales.)
Even more threatening to Sears was the emergence of
discounting. The movement’s most glamorous company in the early years was E
Korvette. That firm was founded by Eugene Ferkauf in 1948. He began with a
small luggage shop and a big idea – selling hard goods at prices 10 to 4
percent below those found in department stores.
The concept worked and Ferkauf began to add appliances and
other items. Sales mushroomed in the 1950’s rising from $55 million a year
$750 million a year over a ten-year period. At one point in the early 1960’
Korvette was opening one huge new store every seven weeks.
But the Korvette story had a sad ending. Ferkauf and his
home office executives began to have trouble administering the operation as it
got larger. Mistakes were made and costs began to rise. When soft goods were
added, Korvette’s managers discovered that they didn’t know how to handle
problems of obsolescence, and markdowns. Similar problems were encountered when
Korvette added supermarkets. In 1966 Korvette merged with Spartan Industries, a
soft goods chain. Eugene Ferkauf was eased out of management and the Spartan
management tried to turn things around. Five years later the firm was sold to
Arlen Realty. Arlen later sold it to a French firm. And in 1980 the French firm
basically closed down the once proud Korvette.
The most successful of the discounters turned out to be the
most unlikely – K Mart. This firm was founded as a 5 and 10 cents store i
1897. Company founder Sebastian S. Kresge took his life savings to start the
company, which he called S.S. Kresge. By 1929 when founder Kresge stepped down
as president, S.S. Kresge was a nationwide chain with almost 600 stores. Growth
continued for the next three decades. But by the early 1950’s compan
executives began to be concerned by the fact that sales were growing slowly and
profits were declining.
By then Kresge had become a variety store chain. In 1959 a
new president took over. Harry Blair Cunningham had started to work for Kresge
as a 90 hour a week stock boy after graduating from college with a journalism
degree. He worked his way up to a vice presidential position by 1957. During
the next two years he was given the freedom to travel and study the chain and
its competitive environment. When he became president in 1959, he had decided
upon a new direction for Kresge. “We must go into discounting,” he said. A
then he added, “Our organizational strengths give us a
made corps of store managers; our real estate department can pick free
standing sites away from the high cost shopping centers. And if we adopt a policy
of selling branded merchandise a t a discount, we can become a major department
store chain.” The Kresge board accepted Cunningham’s recommendations. The
discount stores were called K-Marts. The first was opened in 1962. Over the
next two decades the K-Mart concept expanded faster than any of its
competitors, and by 1979 the chain was the second largest department store
chain, behind Sears, Roebuck.
It was also in the 1970’s that Wal-Mart began to attra
attention. Founder Sam Walton began his career as a J.C. Penney employee in the
1930’s. In 1945 he started his own store, a Ben Franklin franchise in Newpo
Arkansas. He opened 14 more Ben Franklin stores between 1951 and 1962. Most
were in small towns with populations of 5,000 or less. Walton attempted to make
those stores into discounters. But Ben Franklin wouldn’t support that strat
So Walton tried a different approach. He opened his
first independent Wal-Mart Discount City in Rogers, Arkansas in 1962. That
experiment was repeated in hundreds of Midwestern small towns over the next 18
years. By 1980 Wal-Mart was poised to move into larger communities. It would
become the fastest growing general merchandiser in the 1980’s.
Resurgent Department Stores
In addition to the resurgence of Ward’s and Penney’s
emergence of the discount department store, a third change in the environment
increased the competitive pressures on Sears Roebuck. This third change was a
new aggressiveness on the part of the old-line big city department stores. The
major stores in the large cities began to open full line department stores in
the malls that were springing up in the suburbs of the major cities. This move
brought the department stores into direct competition with Sears in the
suburbs. In addition some of the stores strengthened
their positions through merger. For example, Detroit’s Hudson chair merged
Minnesota’s Dayton chain to form the Dayton-Hudson Corporation. Many year
earlier, Boston’s Filenes joined with Columbus Ohio’s F. and R. Lazarus, A
Rich’s and other stores to form Federated Department Stores. And in the pos
war period, Federated emerged as an aggressive
competitor. These and other department store consolidations began to challenge
Sears in the 1960’s and 1970’s.
Sears’ Loss of Competitive Edge
Sears, Roebuck and Company continued to follow the strategy
laid down by general Wood until the mid-1960’s. Then management adopted a m
change in strategy. They reasoned that the American middle class was getting
sufficiently affluent to cut back on the purchase of low price, low quality
merchandise and to increase purchases of higher price, higher quality
merchandise. A new strategy of following this trend was adopted. This meant
cutting back and eventually dropping the bottom of the line merchandise, which
Sears had always referred to as “good” in its price line of good, better a
best. The new strategy also meant adding a fashion line. And so, whereas the
old Sears offered customers a selection of good, better or best merchandise,
the new Sears was to offer the customer a selection of better, best or fashion
merchandise. At the time the strategy began to be implemented in the
mid-1960’s, the strategy made some sense. But contrary to the predictions o
most economists, the American economy in the 1970’s failed to provide th
anticipated gains in real income. American consumers therefore became more cost
conscious than Sears anticipated. And with Sears having deliberately given up
the low price end of the market, the discounters, particularly
K-Mart, moved in and grew at the expense of Sears.
Included with the new Sears strategy of the 1960’s was
decision to place greater emphasis on profit. Management incentive systems were
reworked to induce local managers to place greater emphasis on profits rather
than merely increasing sales. This, too, allowed the competition to gain market
share at Sears’ expense.
For a while Sears’ strategy seemed to be working. But
the worldwide recession of 1974-75, it became clear that something was amiss,
as sales failed to keep up with inflation. A self-study was conducted in 1975.
This was followed by a reorganization and the development of a new strategy
which involved reintroducing the low price merchandise
and changing the incentive system to encourage store managers to increase sales
volume in addition to meeting profit targets. As the 1980’s began retailing
biggest, unanswered question was, “Will the new Sears strategy work?”.
The answer to the questioned turned out to be “no”. S
was unable to regain its competitiveness in the 1980’s. By 1990 both K-Mart
Wal-Mart were poised to pass Sears in general merchandise sales and profits.
The reasons for Sears’ failure and its rivals’ successes must remain t
subject of another article.
*Copyright 1985. The American National Business Hall of
Fame. All rights reserved. No portion of ANBHF may be duplicated, redistributed
or manipulated without the expressed permission of the ANBHF.
1. Emmet, Buris and John E. Jeneck. Catalogues and Counters:
A History of Sears, Roebuck and Company. Chicago: The University of Illinois
2. Katz, Donald R. The Big Store. New York: Viking Penguin.
3. Hendrickson, Robert. The Grand Emporiums: The Illustrated
History of America’s Great Department Stores. New York: Stein and Day. 1979
4. Worthy, James R. Shaping an American Institution: Robert
E. Wood and Sears, Roebuck. Urbana, Illinois. University of Illinois Press.
Copyright © 2016, American National Business Hall of F ame, ANBHF