Threshold Resistance (9 page)

That's one important reason why Taubman malls have always been focused on luxury and fashion merchandise. For any retail enterprise, the farther away from Wal-Mart you are, the better! And you can't get any further away than the world of fashion.

So what about off-price outlets that carry designer goods for less? Don't they offer all the magic of fashion merchandise at much lower prices? If Wal-Mart isn't going to put the higher-end malls and department stores out of business, won't the discount malls at least do some damage?

It's time for another universal truth:
There can be no off-price without full price.
In other words, what makes the purchase of a 100 percent
cotton Polo tennis shirt for $30 so special is the fact that somewhere else a Polo tennis shirt is selling for $75. Close Polo's mall shops and take Polo products out of the men's department at Neiman Marcus, and you destroy the entire enterprise, including the appeal of the off-price outlets.

A quick story to illustrate this very important point.

Years ago, there was a successful line of affordable silverware marketed as Wm. Rogers silver. The company's silver-plated flatware, which came in a broad selection of styles, from colonial to contemporary, was sold exclusively in jewelry stores. Young couples would sit across from the jewelers, learning about the various designs and determining the right pattern for their lifestyles. Like most consumers, the young couples lacked confidence in their ability to make such important purchase decisions without assistance from a knowledgeable salesperson. The jeweler conveniently played that role (chances are, the couple was buying their wedding rings and registering many of the wedding gifts they wanted at this same jeweler).

In the late 1960s, management decided to strengthen sales by also offering their product through the E. J. Korvette discount chain. Customers could purchase the flatware for almost 30 percent less than they would have to pay in their local jewelry store. At first, Wm. Rogers silverware flew off the shelves. The company was pleased with this new mass distribution channel.

Of course, the jewelers were not so pleased. Increasingly, young couples would come into the jewelers for the helpful tutorial, then go across town to Korvette's and purchase at discount the pattern they decided on with the patient jeweler's assistance. Within months, jewelers stopped devoting any counter space or sales time to Wm. Rogers. Couples could try to get some help from the clueless Korvette's sales people (if they could get their attention at all), but in the truest sense, they were on their own. Samples of the various patterns were routinely stolen off cheap-looking display boards.

Within a very short time, Wm. Rogers ceased to exist. The company learned the hard way that there can be no off-price without full-price. Once the jewelers abandoned the product, Wm. Rogers silver became just another discount brand, not the special heirloom purchase newlyweds felt confident about making.

So how does a retailer maintain a sustainable balance between its full-price and off-price merchandise? In the days of the dominant, massive downtown department stores, the answer was as close as the basement. These merchants had enough room right in their stores to offer last season's and other stale merchandise on the lower level of the building. This outlet level allowed the department store to clear out the upper floors for new merchandise, while controlling the presentation of their marked-down items. The lower-level display space was far less opulent, and there were fewer salespeople on hand to assist. But shoppers could be confident that the store stood behind every purchase, and manufacturers could be confident that the store was still presenting their brands appropriately.

As department store companies built smaller, basement-less suburban branch stores, there was no space for these outlet operations. Recognizing an outstanding opportunity, chain discounters like Marshalls and T. J. Maxx took over the distribution of this off-price merchandise, paying the department stores cents on the dollar. Manufacturers, as you might guess, were far less comfortable with this arrangement. The further away from their control the merchandise got, and the deeper the discounts became, the more difficult it was to maintain a strong brand image. The delicate balance between full price and off-price was spinning out of control.

That's when manufacturers and department stores decided to open their own branded off-price outlet stores. Outlet malls sprang up in the 1980s and 1990s, usually comfortable distances from traditional mall properties, featuring such attractive outlets as Saks's Off 5th, Neiman Marcus's Last Call Clearance Center, Nordstrom Rack,
and numerous manufacturer stores. The retailers felt good about these new locations, just as they felt good decades earlier about the off-price operations in their basements.

But the challenge remains: The delicate balance between full price and off-price must be maintained. Knowing just when the balance goes out of kilter is more art than science. But as many retailers have found out, paying attention to the recipe is critical to the survival of even the strongest brands. This reality may be the single most important governor of the future growth of Costco and Sam's Club.

T
hroughout the early years of my career, as I made enough money to look beyond the basic needs of my family, my passion for art grew into a pretty substantial art collection. In the 1950s, I was a regular visitor to the Green Galleries on West 57th Street in New York, where a rickety elevator took you to the fourth floor. There, dealer Richard Bellamy proudly introduced you to fresh works by the likes of Robert Indiana, Jasper Johns, and Francis Bacon. I started buying modern artists like Frank Stella and Robert Rauschenberg. Later, I bought from Leo Castelli.

Much of what I collected I purchased on credit, and I studied hard enough to develop a good eye for quality. As my business became more successful, I became a regular customer of art dealers and auction houses around the world. At the same time, I was honored to serve on the boards of the Whitney Museum of American Art in New York, the Smithsonian Institution's Archives of American Art, and the Detroit Institute of Arts, where I have proudly fulfilled the responsibilities of arts commissioner of the city of Detroit (the closest I ever want to come to elected office, for more than twenty years).

So I was not entirely in the dark when I received an interesting phone call in the spring of 1983—just weeks after I completed the sale
of my stake in the Irvine Ranch—from David Westmorland, former chairman of Sotheby's, international auction house. The Earl of Westmorland explained he had heard from a mutual friend, David Metcalfe, that I might be interested in promising investment opportunities. He asked if I would be available to meet with him regarding Sotheby's, and offered to come to Detroit at my earliest convenience.

Of course, David Metcalfe had already introduced me to another wonderful opportunity in my life. About a year earlier, David, who provided insurance services to the Taubman Company, called me to arrange an interview for a young woman named Judith Rounick. I had seen Judy at a few dinner parties but had never had the chance to speak with her at any length. All I knew was that she always was the most beautiful woman in the room.

We met for lunch at La Côte Basque in New York for what was intended to be a discussion of her career direction (Judy was in the middle of a divorce and wanted to pursue new interests). She was very intelligent and all business. I was mesmerized. She had grown up in Israel, spoke several languages, and was the mother of two children. She carried herself with extraordinary grace and, of course, was the most beautiful woman in the room. I'm sure my advice, like my concentration, was worthless that day. All I could think about through lunch was the next time I could see her.

At the time I had been divorced for five years. Reva and I had grown apart, mostly because I had buried myself in my business and spent far too much time away from home. Reva was a terrific mother, and I had been a far better father than husband. Sure, I missed more than my share of parent-teacher conferences, student plays, and football games, but I included my children in my life whenever I had the chance. My son Bobby fondly remembers “taking picnics on construction sites,” and Billy remembers “attacking” my briefcase whenever I came home. And I'm confident my daughter, Gayle, developed her love of art during our many visits to museums around the world.
Whenever I'm asked to identify my greatest accomplishment, it's always the same answer: my children.

In 1977, with little animosity, Reva and I decided to go our own ways after twenty-nine years of marriage. At the final divorce meeting with our respective attorneys, I turned over documents declaring my net worth. It was a pretty substantial number. Reva's reaction confirmed for me that we were making the right decision. Examining the papers, she turned to her counsel and said, “He's always showing off. He's not worth anywhere near that amount.” Reva was not a negotiator.

After five years as a bachelor, I was convinced that I would never marry again. And then everything changed at La Côte Basque. Judy and I dated for a couple of months, but I could never convince her to visit me at my home in Palm Beach. I think she thought that was too much of a commitment so soon in our relationship. She even turned me down when I invited her to attend a small dinner party for Henry Ford II at Estée Lauder's Palm Beach home. After I called Estée (one of the most successful, talented women in the world) to explain that I would be coming alone, she immediately asked for Judy's phone number. I figured that it wouldn't hurt to get a character reference from Estée Lauder. And it worked. Judy agreed to accompany me to the party. After that weekend, I was determined to keep her in my life. We were married four months later.

So when Lord Westmorland called with the Sotheby's opportunity at the recommendation of David Metcalfe, I agreed to meet. I can't say that I was immediately enthusiastic. Sotheby's was surely a venerable company and an outstanding brand. Samuel Baker, the uncle of John Sotheby, held his first auction of books in London in 1744, which makes Sotheby's older than the United States of America, not to mention older than its archrival, Christie's.

Despite its dominant position as one of only two truly international art auction houses, Sotheby's had been regularly operating in
the red and was embroiled in a contentious takeover battle with American investors Marshall Cogan and Stephen Swid. (The company had gone public in 1977.) Sotheby's insiders—publicly expressing outrage with more than a touch of anti-Semitism—had taken to calling the unfriendly raiders “Toboggan and Skid.” One of the company's senior experts promised to resign if a sale to the Americans were consummated; another threatened to commit suicide. How would these Brits feel about a Jewish shopping center developer from Detroit?

The meeting at my home in Bloomfield Hills with the very distinguished Lord Westmorland went well. The board was not pleased with Cogan and Swid and did not agree with their vision for the company. Business reforms and cost reductions put in place by Sotheby's new chairman, Gordon Brunton—an executive on loan from the successful Thomson publishing empire—were showing results. And the company was looking for a white knight (the same role I would be thrust into with Woodies).

Throughout my life I had thought of myself in all sorts of roles: father, husband, businessman, soldier, developer, golfer (well, sort of), even art collector. But a white knight? I didn't own a set of armor and was not great on horseback. And I kept reminding myself that for every fair maiden a white knight encountered, there were dragons, sorcerers, and legions of warriors wanting his head!

Next, Peter Wilson, who had led Sotheby's through its most successful years of growth and profitability, visited with me in my New York apartment. He was a tall, inspiring character and an amazing salesman. I remember his magnificent voice and the sincere passion he expressed for the business. I promised to take a hard look at the company.

The harder I looked, the more I liked the opportunity. At the time, there was an annual turnover of fine art around the world of approximately $25 billion. Yet with all that art changing hands every
year, Sotheby's and Christie's together accounted for less than $1 billion in sales. That left a tremendous share of the art market up for grabs. Sotheby's had a unique franchise, a strong worldwide reputation for expertise, and there were enormous barriers to entry in the art auction business. You couldn't just print a catalog, rent a hall, and hold an auction in this rarified world of art, authenticity, and prestige. As a customer, I thought I knew just where improvements could be made to build on the company's assets. Sotheby's wasn't a retail business like the retailers I had come to know as a landlord and investor—and therein lay an opportunity.

Like all other auction houses, Sotheby's had always catered primarily to dealers, or as they say, the trade. Professional art dealers would purchase items at auction for essentially wholesale prices and mark them up substantially for retail sale in their shops. Only a relatively small number of individuals—usually very wealthy individuals—had the confidence to buy directly at auction. Those who did, found the experience to be fun and rewarding.

I was one of those individuals, and I was convinced that a much broader market of potential auction customers existed in the United States and around the world. Every day, at our centers, I saw the growing interest among a broad swathe of consumers in design, in fashion, in mass luxury. Now, Sotheby's could never attract the volume of traffic that thronged to Woodfield every day. But there was more to the auction house than million-dollar impressionist and old master paintings. People buying wall-to-wall carpeting for their living rooms could instead bid on unique 150-year-old Persian carpets. Unlike factory-made carpets, these beautiful heirlooms would continue to gain in value over the years and stimulate conversation at every dinner party. People wanting to enliven their homes with antiques could meet with Sotheby's experts to experience the joys of collecting. People seeking enriching entertainment could attend Sotheby's exhibitions and participate in exciting, glamorous auctions in energy-filled auction rooms.

As I saw it, Sotheby's also had some distinct advantages over retailers. The items (or lots) auctioned at Sotheby's were sold on consignment, which meant the business operated without the normal, and very real, inventory risks experienced by traditional retailers. Unlike Macy's or Woodward & Lothrop, Sotheby's did not have to lay out significant capital for inventory and hope that things would sell. The auction house was simply creating a marketplace for the exchange of other people's property.

I really shouldn't use the word “simply.” Creating a vibrant, rational worldwide marketplace for art is anything but simple. Sotheby's had been working at it for more than two centuries. But there was a powerful force keeping individuals out of the auction rooms and holding Sotheby's back from dramatically increasing its business and market share: threshold resistance.

I had experienced it myself at both Sotheby's and Christie's. Even though I was a good customer, an avid collector, and financially well-off, representatives at both houses were rude, unresponsive, and often condescending. Had they been shoe salesmen, they wouldn't have lasted long in any store in any Taubman mall. God help you if you had the nerve to visit an auction house expert seeking an opinion about Grandma's silver or Uncle Frank's sporting picture. It's hard to overstate the level of consumer angst created by these institutions. Buying art at auction was perceived as a rich person's sport. Unless you were a dealer or a duke, stepping over the threshold of a major auction house took real courage and self-confidence. An appointment at the dentist was far more appealing. At least the dentist doesn't question your taste and insult your possessions.

“Christie's are gentlemen trying to be businessmen, and Sotheby's are businessmen trying to be gentlemen,” a popular line went. But I couldn't find much evidence that either house was particularly gentlemanly or businesslike. And the auction process itself, for most people, was drenched in threshold resistance. What if I sneeze? Will I
own the Van Gogh? Didn't that happen to Lucy and Ethel on an episode of
I Love Lucy
? And what should my strategy be in the salesroom? Should I bid early, or wait for the last possible moment to raise my paddle for the first time?

I believed that if we could break down the threshold resistance, the auction business could be transformed into a far broader, more profitable enterprise. And this could be accomplished without jeopardizing any of the glitz, glamour, or prestige of the business or the company. But would the leadership of Sotheby's trust me to make some fundamental changes to their attitude and business without taking their own lives?

For whatever reason, I was immediately more palatable than “Toboggan and Skid.” Having earned a name for themselves by acquiring and repositioning undervalued companies, Cogan and Swid were proud owners of General Felt Industries and Knoll Group, a respected manufacturer of modern furniture. Cogan was on the board of the Museum of Modern Art. Lord Westmorland informed me, however, that Sotheby's first face-to-face meeting with the American entrepreneurs had been a disaster. He assured me, however, that the boys on New Bond Street (where the company had been headquartered since 1917) were looking forward to meeting me.

It turned out to be one of the strangest encounters of my life. My attorney and trusted adviser, Jeffrey Miro, and I were invited to dinner in London with a dozen or so Sotheby's directors, officers, and experts. Physically, Jeffrey and I could be described as an odd couple. I am six feet two inches tall and have been described by the never very sensitive press as “burly,” “portly,” and “bear-like.” Jeffrey, on the other hand, is about five-six and boyishly thin. I wear three-piece suits; he prefers blazers and bow ties.

We all gathered in the jewelry department, across the street from Sotheby's London headquarters. There was a large rectangular table in the wood-paneled room. As we took our assigned seats, Gordon
Brunton announced that Jeffrey and I would stay put at our places across from each other throughout the meal, but that every fifteen minutes, when a bell rang, Sotheby's personnel would shift one seat to their left with their plates, glasses, and utensils. This unusual version of musical chairs was designed to create the opportunity for each executive to chat directly with “the Americans” during dinner.

Chat we did, for several hours. It actually turned out to be informative and fun. As my wife, Judy, will tell you, I always eat too fast and enjoy talking through dinner. Jeffrey and I would exchange reassuring glances with each rotation, taking advantage of the momentary lull to swallow some food. We learned a lot about Sotheby's with each new conversation, and they learned as much or more about us. Other than trying to get a better idea of my taste and knowledge of art, their top concern was stability—would I commit to stick around and provide the financial strength to operate in something other than crisis mode. (They grilled Jeffrey, too, who held his own just fine. His wife, Marsha, was the arts editor at the
Detroit Free Press,
and Jeffrey has an extraordinary business mind.)