Cheap (7 page)

But not everything came cheap. Appliances were costly things in 1950. A freezer sold for close to $400 when a loaf of bread cost only 14 cents, and the median annual income for a family was $3,319. Customers wanted discounts on what they desired most: refrigerators, deep freezers, and 20-inch color television sets. So Ferkauf bought piles of appliances, slashed the prices to just above cost, and stood back once again. His store did $700,000 in sales its first year, an incredible volume.

Ferkauf was well acquainted with the anti-price-cutting provisions of the Miller-Tydings Act. His dodge was clever: making Korvette technically a “membership store.” To qualify for this loophole, Korvette was closed to the general public, but only by a nose. The threshold to membership was low: There was no application policy or admissions fee or initiation rite. Flashing a union card or a driver’s license was validation enough but even customers without identification could join, since Ferkauf and his wife Estelle blanketed nearby office buildings with thousands of free “membership cards.” Korvette employees passed out more cards to pass ersby on the street. It was almost impossible to walk down 43rd Street and not become a Korvette member; indeed, avoiding it required a powerful act of will. Yet, thanks to its members-only status, Korvette could legally skirt fair-trade laws and accept deep discounts from its suppliers—deep discounts that were forbidden to competing department stores such as Macy’s and Gimbels.

Ferkauf’s cut-rate logic was this: If he could make a one-dollar profit selling one refrigerator, he could make a million-dollar profit selling a million refrigerators. Such arrogance did not endear him to the competition. Traditional retailers scorned Ferkauf as a “parasite and a bootlegger” and, most degrading of all, a “discounter.” Understandably, they feared for their livelihoods. This offended Ferkauf. An almost pathologically honorable man, his aim was simply to help customers who were unwilling or unable to shop at full-price stores. Many people could not afford to pay retail for an electric mixer or a suitcase, he reasoned, and for these poor folks low prices were simply realistic. Unsure of their ability to compete with such “realism,” rival department stores pressured distributors to stop selling to Ferkauf, and some did. When these sanctions threatened to reduce his inventory, Ferkauf simply switched suppliers. Many manufacturers and wholesalers were happy to do business with him, because they knew that attempts to enforce the fair-trade laws were easily thwarted. Over a period of five years Ferkauf dodged nearly a hundred lawsuits. The threat of impending litigation seemed only to encourage him. Newspaper reports of the lawsuits were essentially free advertising, leading potential customers to suspect that Ferkauf was hawking hot goods. (A similar scenario is played out by urban street vendors today who claim that the Rolex and Cartier watches lining their jackets are not counterfeits but somehow “fell off a truck” on their way to Neiman Marcus.) By 1950, Korvette was turning over $2 million worth of merchandise a year, and Ferkauf was plowing a good portion of the profits into new stores on more leased sites.

Most discount houses of the time were buried deep in urban centers, dark dens with a whiff of the illicit about them. But the mass urban exodus of the 1950s lured retail out of the city centers and into suburban malls, and eventually, discounters followed. The malls were something new. No one knew what to expect of them, and discounters found them particularly congenial. Ferkauf was among the first to follow the money. In addition to his four Manhattan locations he had a store in White Plains and another in Hempstead. But to Ferkauf’s eyes the Hempstead store was a dump; it occupied a former Grand Union supermarket and faced a cemetery. He wanted better.

Ferkauf saw his future in suburbia serving a burgeoning young middle class shrugging off the stale values of their parents. Dealing with this new generation was not, as it had been for his father, a lengthy give-and-take in which merchants knew their customers’ specific needs and met them. These buyers had big new homes to fill and knew perfectly well what they wanted to fill them with. Ferkauf rushed to their service with a 90,000-square-foot “super store” in Westbury, Long Island, complete with an appliance store, a supermarket, and a toy store. It was one-stop shopping, just the thing for young families on the go. December 2, 1953, was opening day, and more than a thousand customers showed up. By Christmas the place had done an almost inconceivable $2 million in sales.

FERKAUF
pulled a low-margin, low-service, high-turnover, down-and-dirty discount model out of the shadows and onto the cover of
Fortune
magazine. Many others were to follow. Upstarts such as Two Guys, G.E.M. G.E.X., Zayre, Spartan, FedMart, and Bargain City built sprawling 70,000-to 200,000-square-foot discount stores in New York, Philadelphia, Detroit, and Chicago, and in medium-sized cities such as Canton, Mississippi, and Yakima, Washington. Like Ferkauf many of these operators leased their land and buildings. This freed up capital and made it easy to pick up and move when and where the shoppers did. These stores were free agents without loyalty to any particular community, and they held no loyalty to any particular supplier. Price was the determining factor in most of their transactions. Massive amounts of merchandise moved through the system. For the first time in history observers enthused; the United States had matched mass manufacture with mass distribution: Retailers could sell stuff as fast as manufacturers could make it. When his chain caught Professor McNair’s attention in 1962, Ferkauf’s operations boasted $240 million annually in sales. The immigrant’s boy from Brooklyn was worth $50 million.

Not to be outdone, well-established companies such as Grand Union, Allied Stores, and S. S. Kresge either acquired or created their own discount chains. (Kresge’s bargain division was, of course, Kmart.) Dayton Hudson opened Target stores, and J. C. Penney christened its Treasure Island stores. In its 1961 annual report, Woolworth Company, then the country’s seventh largest retailer, described the “consumer willingness to dispense with certain services in exchange for cash saving and the shopping for all manner of goods under a single roof, with self-selection and checkout counters.” Responding to this trend, the company announced the opening the following year of Woolco Department Stores, a low-margin, self-service, mass-merchandising chain geared mostly to the suburban trade. In its report, Woolworth outlined some of the major elements then emerging as the discounting standard: an oversized freestanding store with acres of free parking and the promise of one-stop shopping for a wide selection of merchandise at the lowest possible price. Typically the décor was Spartan; cement wall exteriors encasing cavernous warehouse-like spaces with exposed metal roof beams striped with fluorescent light fixtures and pipe rack shelving piled wide with merchandise. Dignity was not a priority. Loudspeakers barked intermittently to announce fifteen-minute specials (in the case of Kmart, “blue light specials” signaled revolving police-style lighting fixtures) sending impulse buyers from one end of the store to another in a Pavlovian stampede. Labor-intensive customer service was replaced by customer
self
service, not all of it felicitous.

In traditional department stores, electronic cash registers were thoughtfully positioned department by department to expedite the checkout process for customers. Clerks, many of them quite experienced and knowledgeable, worked with “clients” to help them find precisely what they wanted in the right color, size, and style. The sales staff then held the purchases until the customer’s shopping was complete, packaged everything carefully for transport home, and rang up the sale. Sometimes the loot was actually carried to the customer’s car. (Letitia Baldrige, White House social secretary and chief of staff to Jackie Kennedy, offered in the pages of the
New York Times
a quaintly nostalgic if somewhat frightening look back at how department store sales staff once treated their clients. “The salespeople never forgot you. They made little notes on you, your family and where you were in life each time you stopped to buy or to custom order their merchandise. It was such a safe, predictable world. It was also intensely personal—everything directed at you and no one else.”)

At discount chains, customers paid with their time. Sales assistants were sometimes ignorant or absent. Cash registers were clumped at the exits, supermarket style, and in some cases customers were herded through a labyrinth of roped-off “squeeze shoots,” like so many cattle. Purchases were not wrapped and certainly not carried to the customer’s car. Still, many consumers—particularly younger ones—preferred this. They had confidence in their ability to make their own purchasing decisions, a confidence boosted by advertising. They knew—or thought they knew—what they wanted and enjoyed foraging on their own without having to cope with a hovering sales staff.

THE BEAUTY PART was this: By cutting back on customer service and most other frills, discounters not only saved money but created the impression that their merchandise was cheap due not to low quality but to low overhead. This was partially true. Discount stores had the advantage of being relatively inexpensive to run and certainly less expensive to build and operate than other stores. In the 1960s construction costs of discount stores ran $5 to $10 a square foot compared with $14 to $18 a square foot for standard department stores. Payroll at the stores was tightly controlled, with wages and benefits set at just 6 to 7 percent of sales compared with about 18 percent at traditional stores. And thanks to their size and reach, discount chains were in a powerful position to bargain with wholesalers, and they used that power to strong-arm ever lower wholesale prices. Long before Wal-Mart was born, suppliers were being continually pressured to wring out every drop of cost from their products before they reached the store floor.

 

 

 

WHETHER
ALL or even most of these savings trickled down to consumers in the form of good deals was a matter of heated debate. Discounters boasted of prices that were 30 percent or more below department store prices, and to the customer on the store floor this appeared to be a valid claim. But competing merchants argued that this was a specious comparison since discounters stocked lots of off-brand and store-brand merchandise, the actual price of which was anyone’s guess. And discounters carried only 40 to 50 percent of the assortment carried by the full-service department stores. Consider shirts, for example. Macy’s boasted 129 different men’s styles, priced from $1.99 to $14.09. Korvette, by contrast, stocked only 35 styles of men’s shirts, priced from $1.49 to $6.99. While it was difficult to pin down precise numbers, Korvette’s “bargain” prices were at least in part a reflection of its relatively paltry selection. Neither the $1.99 shirt from Macy’s nor the $1.49 shirt from Korvette was likely to be of the highest quality, and it was impossible to know which of the two offered the best value. But Macy’s customers had the opportunity to compare a $1.99 shirt with a $14.09 shirt, while Korvette shoppers were limited to the low end of the category. For Korvette this had the advantage of shielding customers from top-of-the-line goods that by comparison may have made their largely low-end lines appear shabby. For Korvette customers to make truly informed buying decisions was nearly impossible.

The discount store of the 1960s adapted many principles from the classic supermarket model, most notably the self-service ideal. Charles Saunders, who opened the first fully self-service grocery in 1916 in Mem phis, showed how costs could be dramatically lowered by eliminating butchers, bakers, and experienced clerks. Stock workers simply piled the shelves and refrigerator cases with factory-packaged goods, and customers helped themselves. Shopping carts, also adapted from supermarkets, were a discount store staple and a surprisingly effective one. Sylvan Goldman, owner of the Humpty Dumpty supermarket chain in Oklahoma City, introduced the carts in 1937 to ward off the problem of shoppers retreating to the checkout line when their arms were too tired from carrying handheld baskets. His original design involved a metal folding chair rigged out with wheels, but the device tended to collapse whenever it snagged as much as a misplaced hairpin. Goldman successfully stiffened the design and touted his invention as the “no basket carrying plan.” Customers were not impressed; men found the carts effeminate, and women found them insulting. As one female customer complained, “I’ve pushed my last baby buggy.” A keen student of the “monkey see, monkey do” school of human nature, Goldman hired burly men and attractive women to pose as customers and dutifully roll shopping carts up and down the aisles of his stores. The ruse worked: Customer reluctance faded, and later that year Goldman founded the Folding Basket Carrier Corporation. Soon shopping carts were commonplace, although not in department stores where they were considered undignified, and impractical because they tended to get stalled on escalators and took up too much space in elevators. But discount stores, with their stripped-down ambience, sprawling single-floor layout, and acres of parking, were perfectly suited to shopping carts and adopted them with relish. The impact of the carts was immediate and profound: Analysts estimate that shoppers buy on average one more item per visit when they have a shopping cart to put it in. Today few discount stores operate without them.