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Substance Before Style

Changes in Retailing Affect Malls and Main Street from Minneapolis to Missoula

September 1, 1992


Josephine Marcotty Staff Writer, Minneapolis Star Tribune
Substance Before Style

Whenever Lillian Maresch sees a penny, she picks it up. A nickel is a real find, and a quarter, well, that's a treasure to be added to her jar of found coins.

Last year she found $75, mostly in lost and abandoned pennies. It was enough for a guilt-free splurge on an evening out.

Though she might sound like someone who learned the value of money by surviving the Great Depression—penny-wise, pound foolish and all that—she's not.

Maresch is a baby boomer and president of Generation Insights, a marketing and consulting firm that researches generational behavior. She recognizes in herself a trend that applies to the whole population, and one that has helped spur the phenomenal growth of discount retailing.

She's talking about penny pinching gone nationwide, a shift in standards from status and materialism to simplicity and value. Saving a few dollars here and there has become a lot more important than where you spend it.

Discount stores have been around in one form or another since the 1950s. But that shift in values has combined with economic and technological trends that increasingly make discount stores the norm as opposed to the exception. A glut in commercial space has created tremendous competitive pricing pressures on retailers, personal income has flattened, and consumers are suffering from a recession-induced anxiety that has them wondering whether their next paycheck could be their last.

At the same time, retailers have at their fingertips incredible data gathering technology that creates efficiencies and economies of scale that they can immediately roll back into lower pricing. And that motherlode of information has taught them that discount retailing, which needs huge volumes to make profits, can even work in sparsely populated regions. People will drive a long way if they believe they are getting variety and good value at a good price.

So whether it's a Wal-Mart with its everyday low prices, a no-frills wholesale club with rock-bottom prices or a department store that has a sale every week, discounting has become the expected way of life.

And it is pervasive, from the streets of Minneapolis, to the wheat fields of North and South Dakota, and even to the mountains of Montana.

The Filene's Basement discount clothier expected to open this year in downtown Minneapolis will help dress the working urban woman in designer clothes at polyester prices. A Cub Foods store that seems to overwhelm the South Dakota horizon will sell groceries to rural residents from a 100-mile radius.

And Wal-Mart, the biggest and most successful discounter of all, is popping up in South Dakota and encroaching on Target Stores' home turf of Minnesota. Wal-Mart has even found a home in Montana, which because of its sparse population of 800,000 is one of the last states in the country to see the rise of discounters. Yet even there discounting is becoming a competitive business. Wal-Mart is building four of its stores in different corners of the state at one time, and Super Valu Stores Inc. has extended its County Market concept to grocery retailers in Montana as well.

"We are finding a strong competitive situation in general merchandise as well as the grocery field," said Charles Brooks, executive director of the Montana Retailers Association. "The market is certainly going to be divided as Wal-Mart builds up their chain."

As huge discount retailers have come to dominate the industry, small operators that charge what has come to be known as "full retail" prices are squeezed in the middle. Increasingly, they find it hard to compete with national companies that make their profits on volume and have the deep pockets to pay for efficiencies and market research.

It is impossible to determine to what extent which one of the convergent economic and demographic trends is most responsible for the metamorphosis of the retailing industry.

But in the latter half of the 20th century, most trends can be traced to the behavior of the baby boom generation, that massive cohort born between the end of World War II and the late 1950s that makes up one third of the population.

Because the baby boom is so influential—"When the baby boom catches cold, the whole country sneezes"—the entire country has always been swayed by its changing values. Now, the baby boom is "mid-lifing," Maresch said, making a transition that all generations experience.

Put simply, substance (for a good price) has become more important than style.

"The new symbols of status are basic—function, simple lines, durability, no glitz—the core values of what you need," Maresch said. "Discounters have always known that. Now the value added is not the Gucci label or the BMW. Now status is the 10- or 20-year warranty, zero percent financing, free Scotch Guarding."

Baby boomers, however, are loath to part with the quality they were raised to expect. They can do without the big-name label, but whatever they buy has to do the job.

"I remember the first time I saw this several years ago," said Mike Mulligan, vice president of communications for Super Valu Stores Inc. "An ad agency came in and said that in the coming years, people wouldn't want to own a BMW. They wanted to own a car that did what BMW did, but they wouldn't want to pay the same money for it. It is more fashionable to buy smart than to buy conspicuously."

While the entire population creates these sea changes, different regions experience them at different levels of intensity. The Midwest, for example, has always placed a strong emphasis on value and functionality, Maresch said. So in the Midwest those "value swings" were smaller than on the East and West coasts.

"New York and L.A. went boom with the boom, placing higher values and more emphasis on image," she said. "That's one of the reasons I moved here from California."

An appreciation for value and functionality is an attitude that the parents of the baby boom always had, learned during the Depression years that preceded World War II. Now, it is one that the children of the baby boom are learning from their parents.

The net effect is that everybody expects a deal—even in Yankton, S.D. The city has a population of 13,000 and, at first glance, would not appear to be a haven of retail competition. But officials consider Yankton's regional trade area to be 80,000 strong.

"We have a unique location in the state because of our proximity to Nebraska," said Bonnie Unterreiner, executive vice president economic development for Yankton's Chamber of Commerce. "We have always been a service territory, and we've seen definite growth in retail sales because of it."

Yankton provides an example of how discount retailing can generate its own momentum for growth. Kmart has been a fixture in Yankton since 1979. But the mid to late 1980s saw a sudden spurt in the number and names of discount retailers building stores in that town—Pamida, Wal-Mart, Save-U- More.

The more discount retailing grew, the more people it drew in from a wider geographic area, creating a market for yet another general discount store, or another retailing niche.

Campbell's Supplies has recently opened its doors in Yankton to sell farm and ranch products at discount prices, a concept uniquely designed to meet the Nebraska and South Dakota market.

It's gotten to the point "where we hear a lot of people say they don't want any more discount stores" like Kmart or Wal-Mart, Unterreiner said. "Now they want variety in other areas."

In a few years, she said, she expects to see fashion clothing discounters like Marshall's or TJ Maxx enter the market to satisfy shoppers who now go to Sioux Falls to buy their wardrobes.

In part, the growth of discount retailing in towns like Yankton demonstrates as well that there are far greater numbers of people who need or want a deal. Almost one-half of the U.S. households have incomes of less than $25,000 annually, and during the last decade personal income has flattened. Since 1984 average disposable income in 1987 dollars has hovered between $13,000 and $14,000 annually.

But that didn't necessarily slow retail sales. During the 1970s and 1980s, when both the men and women of the baby boom were entering the work force, buying homes and starting families, retail sales grew by 4 percent annually as consumers bought cars, appliances, work clothes and furniture.

The square footage of shopping space grew in lock step, increasing by more than 200 percent between 1972 and 1984, according to estimates by Salomon Brothers. In 1975 there was nine square feet of retail space for every American, and last year there was 18 square feet per person.

Demand by materialistic baby boomers was not the only culprit in that explosive expansion of retail space during the last two decades. Real estate values soared, financial institutions were eager to lend, and tax incentives favored investment in commercial real estate ventures.

At the same time, the success of retailers inspired venture capitalist and other lenders to finance the rapid growth of new retail concepts. They were "constrained by neither money nor by real estate, whether or not the companies involved had the manpower or the systems to support the growth," wrote Margaret Gilliam, director of equity research for First Boston Corp. in New York in an article for Discount Merchandiser.

It got worse. Obsolete retail concepts were not allowed to die because investors, in the mistaken belief that the underlying value of the real estate would bail the business out, acquired tired stores and tried to keep them going.

The recent recession, Gilliam said, has brought a day of reckoning. Last year 17,000 retailers filed for bankruptcy, including some of the venerated department store chains like Macy's and Bloomingdales. This year analysts expect retail sales to grow by only a modest 1.5 percent, anemic compared to the heady days of the 1980s, but considerably better than the declines they experienced during the recession.

It is testament to the growing strength of the big retail discounters that as a group their sales grew 6.4 percent in 1990, during the height of the recession. Wal-Mart, which outstripped Kmart to officially become the nation's largest retailer, posted sales gains of 21.5 percent in 1990, up to $25 billion. Kmart sales grew by 1.5 percent and Target, the discount retailing subsidiary of Minneapolis-based Dayton Hudson Corp., had sales gains of 8.8 percent.

During a recession, discount stores generally gain market share as people try to save money on everyday essentials. But the recessionary induced shopping habits have fed into the growing financial conservatism of the population. Once shoppers start buying Tide and kids shoes at discount prices, they are not likely to go back to paying full price, regardless of the economy.

Discounters—the ones that do not keep up with retailing trends, competitive pricing or product mix—have not been immune from these economic forces. The bankruptcy courts are littered with some of their bodies as well.

The giant discount retailer, Ames Department Stores Inc., filed for protection of the bankruptcy court in 1990 after its $788 million acquisition of the Zayre chain doubled its size, transforming it into the nation's fourth-largest discounter. But saddling itself both with debt and a sagging chain proved to be too much of a financial burden.

During recent years the general discounters have also been pressured by the rise of the specialty discounter. Toys "R" Us is marching across the world, Circuit City sells electronics at bargain basement prices, BizMart sells discounted office supplies. Name the product, and there is probably a discount store that specializes in it.

And let us not forget the factory outlet malls, the latest wrinkle in low-price shopping.

There are more than 260 factory outlet centers across the country. Last year, analysts estimate that sales were more than $6 billion and that store sales rose almost 12 percent—about double that of traditional retailers.

According to Value Retail News, an industry newsletter, the outlet industry's average sales per square foot were $235 in 1990, compared with $161 for conventional malls. In 1984, outlet mall sales were only $149 per square foot.

So how do they do it? Why have Target, Wal-Mart, Kmart, Cub Foods and Rainbow, and other successful discounters not only survived, but prospered during a period of excess retail capacity and intense competition?

Certainly, their prices are important. Nonetheless, they still must not only please an increasingly finicky customer who wants both a low price and quality—they have to make profits as well.

The answer comes down to volume and technology. These giant retailers frequently deal in enough product that they can virtually dictate terms to the manufacturers.

"If I am prepared to buy 10,000 gross in skirts, I may say 'you put them on my rack,' and maybe you will even press them," said Dick Guidera, a retail and real estate consultant in Minneapolis.

Wal-Mart has become the undisputed leader in the discount game, in part because it micro-manages that combination of volume and technology to squeeze the last particle of productivity out of every transaction. It refuses to deal with middle-men in its purchases from vendors. It buys only direct, to keep prices low and to protect its own profit margins.

In fact, Wal-Mart makes enormous demands on its vendors. More than 2,500 are electronically connected to Wal-Mart to receive orders directly and instantaneously. Last year the retailer started a program wherein a handful of vendors that supply fast-moving items received point-of-sale data directly from Wal-Mart. The system provided an automatic replenishment of merchandise, and direct store delivery. The program doubled sales and the turn of inventory, according to Goldman Sachs Investment Research.

Wal-Mart has taken the process one step further, and in some cases vendors receive inventory data directly from individual stores. In effect, Wal-Mart has made its vendors partners in merchandising.

Though Wal-Mart sets the example, it is by no means alone in applying technology to inventory control and management. All the discounters in one way or another are adding technological productivity to their operations.

It's one of the reasons why today shoppers can find star fruit at a Cub warehouse grocery store.

"The warehouse store has been around for a long time," said Mulligan of Super Valu. "Before, it was a place where stuff was on pallets, and you could go in there and save money. But the questions was, how much you had to give up to save money."

What consumers sacrificed was quality and variety of merchandise. To keep costs down, warehouse grocery stores bought relatively few items in huge volumes, and stored it in warehouses or the back of the store.

Star fruit does not fare well with that kind of treatment.

"You couldn't sell enough of it to keep it fresh," Mulligan said.

There was a time when warehouse stores handled only 12,000 to 13,000 different items—a paltry number compared to the 30,000 that typically grace the shelves of stores today. And this year the industry expects that another 10,000 or so new products will be introduced to the food retailing market.

Shelf space has become one of the most valuable pieces of real estate in the country, and how grocery retailers—who typically have profit margins of one or two percent—manage it makes the difference between success and failure.

Again, technology provides the key. Today, individual Cub stores electronically place orders to warehouse distributions systems and sometimes even vendors on a daily basis. The orders go out at 7 a.m., and the food is in the store by 3 p.m., ready for the evening rush of customers. It used to take several days.

Consequently, individual stores need less storage space and they can devote more of the store to shelf space, increasing inventory turnover and volume.

An electronic history on point-of-sale data can accurately predict exactly how many boxes of Cheerios or what kind of chili peppers to order on any given day of the year. Even more importantly, that electronic history can tell an individual store manager whether chili peppers will sell at all.

Retailers are creating research data bases that allow them to market individual stores on a region-by-region basis. The name on the front might be the same, but the merchandise inside will vary incrementally, depending on what people who shop that particular store would like.

It is a phenomenon that has contributed to the prospering of discount retailing in sparsely populated areas.

Guidera gives this example. In the small town near his summer cabin there are a variety of discounters, including a Fleet Farm, a Wal-Mart and a warehouse grocery store. "I needed a .22 (rifle) for my cabin," he said. "You know where I bought it? At the grocery store. Can you imagine that?"

He also noticed that he could buy certain farm-related tools and other agriculturally oriented products, and his wife could buy a garment.

Meanwhile, in a northern suburb of Chicago, Super Valu is planning a new store that will offer far more produce than average because the largely Hispanic people in the area prefer it.

Retailers can also micro-manage stores to decide the perfect size for a given market. When Super Valu acquired Cub in 1980, it viewed it as largely a metropolitan strategy. But the company has created a sister concept called County Market designed for small towns and regional shopping hubs in rural areas. They are essentially discount warehouse stores that are about two-thirds the size of the 65,000 square-foot Cub stores.

"It uses Cub merchandising techniques and Cub operational systems on a smaller scale," Mulligan said.

The growth of the discounters and the power they carry in the marketplace—both with consumers and manufacturers—ultimately proves the old adage that in business, only the big survive.

Small retailers cannot afford the technological power or demand the attention of vendors who are furiously trying to keep their much bigger customers happy. "This is a giant deep pocket fight for share of market," Guidera said. "The guy that gets hurt is Ma and Pa."

The survival of those small operators will depend largely on their ability to think smart, according to retailing experts. Those merchants that do will not only survive, they will flourish.

"I am convinced that a small merchant can survive, but he has to re- think strategies and appeal to a certain niche in the marketplace," said Brooks of the Montana retailing association. "We are living in times of rapid change in retailing, and if you are not willing to adapt and change, you will not survive."

Different survival strategies will work for different situations. Brooks offers this example as inspiration.

A Shopko store opened up across the street from a small, traditional hardware and lumber retailer. The owner of the small store saw his customers, attracted by the low prices that he could not provide, increasingly turning into the Shopko parking lot.

His solution was to provide the things that Shopko could not.

He dropped the more common lines of power tools, for example, and began stocking a higher-quality line. He offered to custom mix paints, and even launched 'how-to' classes for his customers. In short, though some of his prices were higher, which seems to fly in the face of recent retail trends, he provided service and quality that Shopko could not.

"He is set to meet the competition," Brooks said.