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DISCOUNT CENTERS - A CHALLENGE TO CHANGE

by

JOHN L. DIETERLE

MAJOR PAPER

Submitted to the College of Business and Public Service
of Michigan State University of Agriculture and
Applied Science in partial fulfillment of
the requirements for the degree of

 

MASTER OF BUSINESS ADMINISTRATION

Department of Marketing and Transportation Administration

Programs in Food Marketing Management

1961

Approved: Director

CHAPTER
I.

II.

III.

IV.

V.

TABLE OF CONTENTS

INTRODUCTION . . . . . . . . . . . .
Definition . . . . . . . . . . . .
MORE DISCOUNT HOUSES EVERYWHERE . .
The Illegitimate Discounter . . .
The Regulated Discounter . . . . .
The Competitive Discounter . . .
Entry Into Discounting . . . . .
Summary . . . . . . . . . . . . .
EXISTING DISCOUNT FOOD OPERATIONS .
Summary . . . . . . . . . . . . .
THE MASS MARKET . . . . . . . . . .
Acceptance of the Discount Center
Re-evaluation of Spending Habits .
The Sophisticated Consumer . . . .
Summary . . . . . . . . . . . . .
MASS MARKET MERCHANDISE . . . . . .
National Brand Merchandise . . . .
Controlled Label Merchandise . . .
Private Label Merchandise . . . .

Summary . . . . . . . . . . . . .

PAGE

0000\on4r

12
13
15
23
25
26
29
3O
35
36
36
#2
us
#9

11.

CHAPTER PAGE
VI. THE EMERGENCE OF MASS MARKETING . . . 51
Acquisitions and Mergers . . . . . 51

Sensitivity of Merchandise to Disposable
Personal Income . . . . . . . . 53

S‘mmary e e o o o e o e o e e o e e 55
VII. CONCLUSION . . . . . . . . . . . . . . 56
BIBLIOGRAPHY O O 0 O O O O O O O O O I O O 0 60

APPENDIX A - Speech presented by Stephen Meters,
President, Masters, Inc., New York, N.Y. 6%

APPENDIX B - Quotations of Industry leaders on
the question of new store expansion . 76

 

ACKNOWLEDGMENTS

The author wishes to express his appreciation to the
Grocery Industry which made possible four years of college
through the availability of part-time employment. The
author is particularly grateful to the National Tea Company
for making possible this year of study at Michigan State
university.

Grateful appreciation is extended to Dr. Edward M.
Barnet, Director of Programs in Food Marketing Management
at Michigan State University for his understanding, guidance,

and encouragement during this year.

CHAPTER I

INTRODUCTION

Among the Roman Gods was a wise and powerful one called
Janus. His statue had two faces, one looking backward into
the city and the past and the other looking out of the city
toward the future. The gates of his temple were closed only
in times of universal peace --- and in all of the history of
the Republic and the Empire, this happened only rarely.

Not unlike Janus, Retailing, and in particular, the

Supermarket Industry, must have two faces, one examining the

 

past and one looking toward the future, while still continu-
ing to exist during the present. And like the temple of
Janus, the gates to the temple of Retailing and the Super-
market Industry will rarely, if ever, be closed.

The Supermarket Industry, since its inception, has been
in a constant state of conflict and turmoil. In the begin-
ning it had to overcome the prejudiced feelings of the public.
It has been constantly engaged in the battle of reducing
prices, while maintaining profits, due to the intense compe-
tition resulting from the growth and efficiency of competitors
within the industry. It is presently involved in the problem
of diminishing profits.

2.

It was the supermarket, as a new type of retailer, that
entered a "matured" market in the 'thirties as a low-status,
low-margin, high-turnover, low-price operator. Department
stores, by the same token, entered retailing as competitors
to the small retailer. Gradually, as is evident in the
Supermarket field, and the Department Store field, they
evolved into establishments with more elaborate facilities,
higher investments, and higher operating costs.

In looking to the future, it is evident that the Super-
markets and Department Stores are at that stage of maturity
where new low-status, low-margin, high-velocity, low-price
operators are entering the retail field under the titles of
Discount Centers, Discount Houses, Discount Operations,
Discounters, etc.

These new types of retailers are often aggressive,
cost-conscious operators with no interest in high overhead
frills, which include services, elaborate plants, etc.
Basically, the avoidance of these was the criterion for the
foundation of the Supermarket. P. D. Converse has suggested
individual retailers' reasons for the progress toward
"maturity" mentioned previously, and the fertile areas for
cultivation by "Discounters" as a result of this maturity,
as being a relaxation of the vigilance and control over
costs as age and wealth were acquired and either the founders,

or their successors may be unwilling or unable to adjust to

 

3e

changing conditions.1 He suggests other reasons, but for
purposes of this paper, the author felt these two were the
most significant.

Thus, in looking at the past, the Supermarket is created,
and reviewing it to the present, the Supermarket, at an ad-
vanced state of "maturity," is conceived with its numerous
advantages and shortcomings. In terms of the future, the
horizon presents alternatives of (l) a continuation of the
present form of operations, (2) a continuation of a more
progressive growth climaxing in an even more "matured"
operation, and (3) the entry of the Discount Operation.

It is with this third alternative, Discount Operations,
that this work is concerned. A face "toward the past" is
necessary to substantiate the conclusions arrived at by
facing "toward the future." The constant state of turmoil
and conflict :is accepted as part of belonging to the congre-
gation "worshiping" in the "temple" of retailing. A criterion
for belonging toend remaining a part of the congregation of
retailers is the acceptance of the "Challenge to Change."
Discount Operations are a "Challenge to Change."

During the first half of 1960, twenty-three food chains
accounted for thirty-five per cent of the total grocery
business. By 1965, fifteen food chains may control forty

 

1Converse P. D., "Mediocrity In Retailing " Journal
of Mazkgting, 601 23, (April, 1959), pp. h19-h2 .

h.

per cent of the total food business.2 These fifteen food
chains will be the end result of increased merger and absorp-
tion practices by the strong members in the industry. As
concentration increases in the industry, chains will be
forced to turn to other fields to secure a competitive advan-
tage and to secure their share of the total food business.
Discount operations are one answer to the problem of how to
secure a profitable and competitive advantage while embarking
into merchandise lines which are foreign to their native
operations. The Discount center offers the chain an oppor-
tunity to profitably gain a share of the total food business
while reaping the benefits of mass marketing of lines of
merchandise previously foreign to the Super Market Industry. J

N ON

To adequately define discount operations one must
include the retailer and the consumer. Retailing refers to
the sale of goods (other than real estate) and to a lesser
degree services to individual ultimate consumers for personal
or family consumption.3 From a consumer's point of view,
discount buying consists of making purchases at prices

considered more advantageous than those obtainable from

 

2Weiss E. B., "Planning Merchandise Strategy For 1961-
1965," (Doer, Dane, Beinbach, Inc., 1960), p. 2.

3Hollander, Stanley c., "Discount Retailing," Unpublished
Dissertation, Graduate School of the University of Pennsylvania,

199+, p. V.

5.

"accepted forms of retail distribution." Thus, Discount
Operations are defined, for purposes of this work, as retail
outlets selling goods to individual ultimate consumers for
personal or family consumption at prices considered more
advantageous than‘those obtainable from "accepted forms of
retail distribution."u

It is intended that the scope of this paper be limited
to the area of Discount Operations in relation to the Super-
market Industry. However, it is necessary, in covering a
topic such as this, to refer to Discount Operations in fields
other than Foods.

 

“In time, Discount Operations may be considered as
"accepted forms of retail distribution," but under the
present connotations of "accepted form of retail distri-
bution," they are not included.

 

(- ‘_.n ‘4 _A._L_. ._

CHAPTER II
MORE DISCOUNT HOUSES EVERYWHERE

So-called discount houses had their beginning more than
a decade ago. The early ones usually had low rent locations
and recognized the importance of traffic as a basic tenet of
operating on a low margin. The locations were usually in
big cities.

Originally, a card of admission was generally a require-
ment to enjoy the bargains on the appliances that were their
principal lines. The card system was designed to limit

 

patronage to customers as opposed to summon-servers dedicat-
ed to enforcing fair trade laws. It was the realization by
many department stores and appliance dealers of the devas-
tating effects the discounters would have on retailing that
caused the legislation and attempts to enforce the fair
trade laws.

Many retailers, recognizing the impact of the Super-
markets on the Food Industry, foresaw the decline of a
comfortable 35 - 50 per cent margin on non-food lines.

Just as the Supermarket was going to bring disaster to the
Food Industry in the 'thirties, resulting in much anti-chain
legislation and actual picketing in some instances, the

-6-

7.

discount center was going to bring disaster to the department
stores and appliance dealers.

If "disaster" can be defined as decreased distribution
costs, and lower profit margins, resulting in a higher stand-
ard of living for the consumer, and more disposable income,
than the Supermarkets caused a "disaster." So too, the
discount firms are, as Franklin w. Gilchrist put it, "a few
supermarket type retailers in the field of consumer durables."1

As recently as 195%, Discount Houses were still the
subject of very severe criticism. Dr. John W. Dargavel,
Executive Secretary of the National Association of Retail
Druggists, and Chairman, Bureau of Education on Fair Trade,
had this to say: "The discount house is deliberately bring-
ing lawlessness to the market place . . . As things stand
today, it costs the discount house less to pay the penalties
involved in breaking fair trade laws than it would cost them
to do honest advertising. They do virtually no advertising
because they know once they advertise a price, the discount
house down the street will undersell them. For the discount

house to advertise is to invite destruction."2 Thus, feel-

ings such as these prevailed generally resulting in some

 

1"The Discount House And Channels or Distribution,"
Eggntiegg In Marketing Thought, (Bureau of Business Research,
Indiana university, A.N.A., December 27-28, l95h), p. #8.

2"More Discount Houses Everywhere - Is This A Threat
To Advertising?" P inters I , Vol. 2H7, No. 5, (April 30,

195k), pp. 31-33.

 

8.

media refusing to place Discount House advertisements. Dr.
Dargavel further states that "unless the discount house is
effectively curbed, there will inevitably be anarchy in the
market place. The American public must ask itself whether
it wishes to sacrifice the legitimate retailers who make
outstanding contributions to our economic and community life
and who are the backbone of our mass distribution system."3

Gradually, through time, and as a result of the over-
whelming acceptance of the discount houses, such bigotry
succumbed.

With increased ineffectiveness of the price fixing reg-
ulations, the discount houses became respectable merchants,
out in the open, larger, and more aggressive in their promo-
tions.

The discount house is another manifestation of the

I The ph11030phy upon which discounting

competitive drive.
is based is price competition, which is the essence of our
economic system. Its emergence at this time is simply evi-
dence of the vitality of our competitive system.5 It is a
direct retaliation for attempted retail price regulation.

Also, by insulating competitors, competition may be killed.

 

3&2” pp. 31-33.
“Alexander, Ralph s. and Hill, Richard M., "What To Do

About The Discount House," Harvard Bu iness Review, Vol. 33,
No. 1, (January-February, 19555, p. 5%.

5:111” P0 56°

 

9.

The far reaching effects of the discount houses have
thus far influenced the department stores and drug stores
most noticeably. Many are new opening selfeservice stores
with which they hope to meet the discounter's challenge. In
a study conducted in Portland, Salem and Eugene, Oregon, the
observations revealed that department stores are making
increased use of self-selection methods, while discount
houses are offering more personal selling help.6

It is to the credit of discounters such as Masters,

E. J. Khrvette, Two Guys from Harrison, and the many others
that they were able, in the face of overwhelming obstacles,
to operate and continue to Operate and achieve their present
reputable nitch in the field of retailing.

KOrvette rose from two million dollars in sales to
one hundred and fourteen million in 1959.7

In following the growth of the discounter, it was ini-
tially "illegitimate," followed by the thinking that it
was desirable that it operate, but only in the event of
regulated prices, and finally to the point where other

retailers are questioning how to meet this price competition,

minus regulated pricing.

 

6Dodge, Robert B., "How Discount House Selling Has
Influenced Department Stores " Journal Of etailin ,
Vol. mvx, NO. 2, (Summer, i96'TO ,""p"."'9""'7. '£‘—""g

7Loehwing David A. "The Hard Sell," argon-,3,
Vol. XL, No. 2 , (July 16, 1960), p. 15.

10.

Discount retailing has emerged in response to price
structures which, however Justifiable in the past, no longer
reflect the necessary costs of retailing many items. Conse-
quently, private enterprise has sought to bring retail prices
in line with costs.8 As Dr. Hollander put it, "the attempt
to maintain prices above the equilibrium point has had to
face the onslaught of the drive toward equilibrium."9

Never in the history of retailing have so many large
retailers featured price events to the extent that prevails
today. What is more, there is little reason to hope for a
reversal of this trend -- discount retailing continues to
expand and it will continue to make an impact on most tradi-
tional retailers.

E. B. Weiss has suggested in his monthly summary of
"Tested Retail Selling Ideas" that in meeting price compe-
tition a retailer remember that he Can't be the lowest on
everything, that discounters sell lines at maintained prices,
that discounters take full markup on a large number of lines
where the brands are not well known, or non-existent, or

where the buyer is not able to Judge values competently.10

 

8"rho Discount House And Channels or Distribution,"
mean no 58-59~
9Hollander, op, cit., p. 300.

10Weiss 3. B., "For Your Information," Chicago Tribune,
(February, I961), p. h.

11.

Appliance stores are attempting to ignore the Discount
Center and concentrate on store appeal, services, salesman-
ship, promotional gimmicks, etc., while the department stores
have resorted to increased self-service, re-evaluation of
merchandising techniques, location evaluation, stimulation
of feelings against the discount centers through advertising,
and utilization of private brand, low-price merchandise for
propaganda purposes.

In summary, the conventional retailer, when faced with
competition by a retailer has four specific alternatives
available, with their numerous ramifications:

l. Abandon the field to the discounter

2. Stress private brands

3. Reduce services

h. Adopt cost-cutting techniques

The end result of the entire movement has been to bring
a lower price structure to general merchandise in the same
manner as the advent of the supermarkets forced a lower price
structure on food distribution. In twenty-three years food
distribution has changed more than any other form of retail-
ing and it has come about on the low profit of 1.36 cents
per sales dollar on the average for the last twenty-four

years.11

 

11"Progress In Food Distribution," statement by thn A.
Logan, Past President NAFC to The Consumer Study Sub-Committee
of the Committee on Agricuiture, House of Representatives,

(May 8, 1957) .

12.

Department stores, drug stores, hardware stores, etc.,
are all facing this change now for the first time and, not
unlike the supermarket industry, new and dynamic innovations
are invading the market to fight for their share of the total
retail expenditures by consumers.

This brings about the fourth and final state of the
growth of the discounter, and that is, entry into, and
competition by, new discounters.

In this new field, entrants are faced with the challenge
of operating in the decade of the mass retailer, the man.who
can move goods onto his shelves and off again at a rapid rate
and who has the courage and imagination to utilize all the
skills of science and technology available to him}2

The fertile areas for the discounter lie in the future,
as discounters still have taken over less than one per cent
of the total United States retail volume.13

The discounters have taken another step toward capturing
a larger share of the consumer's dollar by incorporating
foods into their operation. It is with the recognition of
this magnet for traffic that the discounter came to the

attention of the supermarket operators in the form of com-

petition.

 

12Loehwing, 92, git., p. 17.
13

Ibid 0 ’ pp 0 19-21 0

13.

As the discounter recognized the advantages in selling
non-food merchandise below the traditional 35 - 50 per cent
margin usually taken by the conventional department stores,
appliance dealers, etc., so too, the food discounter has
recognized the "high" margins now being taken on the food
lines, and consequently, has started to merchandise foods
in much the same way as the non-foods, with low-cost, low-
margin, high turnover. Some discounters have taken it upon
themselves to operate their own food departments, while
others have added the food department by leasing.

The natural consequence of food departments in discount
centers is that some veteran supermarket operators are
branching into the discount field themselves. It seems that
supermarket operators are adapting to merchandising non-foods
in their own area of low-margin, high-turnover operations.
It is with this question that many supermarket chains are
now weighing the feasibility of entering discounting.
mm _

As recently as l95h there were bitter feelings toward
the discount house. As the ineffectiveness of resale price
maintenance laws became apparent, the emergence of appliance
discount centers became evident.

The emergence of discount houses began.with a feeling
of its "illegitimacy" on the part of conventional retailers.

Gradually, this evolved into a feeling of acceptance, but

1%.

only if resale price maintenance laws were enforced. As
the ineffectiveness of the laws became apparent, retailers
rose to question how to meet this new competition.

In facing this new competition, drug stores, grocery
stores, department stores, etc., have had to re-evaluate
their present operations in terms of service, location,
markup, etc.

The conventional retailers, including the supermarkets,
are facing a challenge much like that of the emergence of
the supermarket in the 'thirties.

The re-evaluation of operations has led many convention-
al retailers to enter into, and contemplate entering into,
the discounting field. In particular, it would seem that a
natural discount operation would result from the chain super-
market, traditionally accustomed to operating in an area of

low-margin, high turnover.

.CHAPTER III
PRESENT OPERATIONS

Presently, it would seem, there are four major types of
Discount Food Operations in existence.

The first may be termed the Conventional Supermarket
Discount Food Operation. It can be described as a separate
entity, handling conventional merchandise, with turnover
being the principal criterion. In operations of this type,
packer label or private brand merchandise of standard or
less than standard quality is predominantly promoted as
price leaders. In some instances, a grade of beef, less
than choice is promoted, again with emphasis on price. The
entire merchandising scheme is centered on price, with the
emphasis being placed on the theme of "merchandise at a
discount."

Usually, in the case of existing discount supermarket
operations, such as was the experience of the Colonial Food
Store Operation in Dayton, Ohio, when a decision is made to
go into discounting, prices are drOpped from one to three
cents on every item, and an average of 500 to 800 items are
discontinued. Items discontinued are those which previous

records indicate are slow movers and/or are duplicates of

-15-

l6.

existing lines of merchandise.

Often, the competitive situation in a particular market
forces a chain to resort to this practice to maintain a share
of the market. As mentioned above, turnover is the key to
a successful operation of this type. A rule of thumb advo-
cated by one chain states that volume, in this converted
type of supermarket, has to double to retain the profit
percentage earned prior to the conversion.

Non-foods are stocked, but are usually limited to the
conventional non-food items found in a supermarket, and not
the ”big ticket" items such as television sets and refriger-
ators.

Numerous factors must be considered with respect to the
name of the operation. Image in the market, characteristics
of the market, are factors to be considered. In some in-
stances, it has been to the benefit of the operation to
retain the original name, or a portion of the original name
of the chain for purposes of acceptance in the market.

Grand Union is a very useful example of a discount
operation retaining a portion of the original chain name
in their "Grand way Savings Center" operations. The most
recent progressive change, showing the importance of the
name of the operation, has been Grand Union changing the
names of their operations from "Grand Way Savings Centers"

to ”Grand Way Discount Centers.“ At a recent University of

17.

Massachusetts conference on discount houses, Mr. E. Brightman,
Vice President of Merchandising for Grand Union, declared
that the company considers "Discount" as a key word in at-
tracting customers.t

Advantages of this type of operation would include
increased turnover of existing profitable lines, as a result
of increased traffic, more effective utilization of existing
shelf space in that only high volume merchandise is being
stocked, and inherent in this is the cost savings resulting
from less inventory and more efficient utilization of labor.
Also, an operation of this type, depending on the market
area, will be competitive, in that it is meeting and beating
existing prices.

In shifting from a conventional type operation to the
discount operation, the number of prices lowered will vary
from 1700 to 2000. The Supermarket Institute indicated that
discount centers do not tend to cut their margins on staple,
low-priced merchandise, nor do they take less than the full
markup on gadgets and small housewares.2

The second type of Discount Food Operation is closely
related to the preceding type with the major difference

 

1"Grand Union V-P Foresees Swift Decline of Leased
Departments In Discount Stores " Su er Mark t New , Vol. 10,
No. 15, (April 10, 1960), p. 5 .

2"Super Markets of the Sixties,” Super Market Institute,
Ing., Vol. 1, p. 101.

18.

being in the non-foods department. It is primarily a food

distribution operation and is merchandised as such. In the
non-food lines the conventional merchandise is handled and,
in addition, the larger ticket items are stocked.

Traffic is generated by the low-priced food staples,
thus creating a high turnover of low-margin items, resulting
in an acceptable profit. In addition to the profit on the
food items, profits from the high turnover (compared to
normal retail outlets) of non-food items including the large
ticket items, generated by the heavy traffic, are earned.

In some instances food items are used as loss leaders
and may be sold below cost to create heavy traffic resulting
in a low-margin, high-turnover operation.

It is not unusual to have operations of this type han-
dling upwards of 7500 food items and approximately 30,000
general merchandise items.

This particular type of operation is evidently feasible
in view of the fact that the Grand Union Chain had twenty
Grand Way Discount Centers Operating in five states as of
October, 1960.3 Facts and figures are not available, but
by the fact that the chain has continued to expand in that
direction, it may be assumed that they are a profitable

segment of the corporation.

 

3"Grandway Opens 2 New Florida Units," Su er Mark t
m, Vol. 19, No. IA, (October 31, 1960), p. 35.

19.

The third major type of Discount Food Operation could
be described as a department in a discount center. The food
department may be leased from the center or may belong to
the corporation which developed the center. The other de-
partments will usually include a drug operation, snack bar,
and the conventional department store lines, including hard-
ware.

In the New York area, many small chains and independents
are branching into discount operations on a leased depart-
ment basis. ‘Waldbaum, Inc., a thirty-unit local chain, is
operating a 12,000 square foot supermarket in White's Dis-
count Center. Royal Farm, a Brooklyn Food Chain was operating
a leased department in The Billy Blake Discount Center in
Brooklyn and later purchased the entire Operation. The
Zayre Corporation, an open door discount chain, will com-
bine operations with Eagle Foods in opening a unit in Chicago,
Illinois.

The E. J. Kbrvette Operations plan to add three super-
markets to the two already in operation in their Discount
Centers. Korvette's policy in the future will be to include
Supermarkets in all new Discount Centers, except in the
instances where exclusive contracts have been negotiated in
Mshopping centers.

A ramification of this type would be the discount center

with a conventional supermarket operating on a leased basis.

 

20.

National Tea Company of Chicago is currently operating a
conventional supermarket within Topps Discount Center at
Niles, Illinois. Proponents of this type believe that the
supermarket will help to generate traffic, thus creating an
opportunity for turnover of the center's non-food merchan-
dise. Food chains fortunate enough to be operating in such
centers have a very lucrative operation in that normal pro-
motional expenses are adequate, as trade is generated by
the discount center, in addition to the normal traffic
resulting from the supermarket. Promotional items such as
stamps, bonus cards, etc. are usually continued if the chain
customarily uses them.

Another type of food department operating in the center
is the discount food operation. It is this type that con-
tributes immensely to the over-all success of the entire
discount center. Not only is it a competitive leader with
the conventional supermarkets in the area, but it is a
leading factor in the center as a result of the weekly or
semi-weekly demand for staples, generating traffic, and
resulting in high turnover of inventories in all segments
of the center.

Usually, the over-all central theme inherent in the
advertising promotions for this type of discount center
is the "Complete one store discount shopping." Essentially
it is the "one stop shopping" theme promulgated by the

21.

shopping centers with the vital word "discount" added for
purposes of creating an image in the market.

In addition to the "complete one store discount shopping"
theme, discount centers of this type usually advertise "no
admission cards . . . no passwords . . . everyone is wel-
come . . . etc."

The fourth major type of Discount Food Operation is
very similar to the preceding one except that it has a
"membership" stipulation. Commonly referred to as a "closed
door“ operation, this type "allows" customers to shop in
the center only if they are a member of a certain organiza-
tion, such as a labor union, or if they are employed by a
specific organization, such as the government. The Kroger
Company is currently operating a 2%,000 square foot leased
supermarket in the GEM international discount house in the
St. Louis area. GEM is a closed door discount house opera-
tion. In analyzing the various qualifications for membership
in the closed door discount center, it is readily apparent
that few people are unqualified or unable to acquire a card
to enter the center.

This type of operation is in a unique position in that
it not only generates traffic through prices, but also
creates the psychological effect of gizigg the consumer an
gpportunity to belong to an organization plus the fact that

this Opportunity is a "scarce" commodity.

22.

By limiting membership, in a very loose sense of the
phrase, the closed door discount center provides itself
with a steady medium-inCome group that makes excellent
customers. A pinpointed homogeneous market means concentrat-
ed buying in price ranges pretty well by income and akin to
taste. Limited promotion, again pinpointed to its market,
also cuts costs.l+ In addition to having a homogeneous
market, the center has a very effective mailing list.

Closed door merchants claim that the usual open door
discounter uses many loss leaders to promote traffic, while
the closed door discounter professes a day-in, day-out,
low markup across the board.5

In addition to the closed door discount centers cus-
tomers being chosen by membership in an organization, there
is also the very feasible entry into a closed door operation
by fees or dues such as The Consumers Mart of America whose
members pay $2.00 annually for membership and the CMA news.
It is estimated that 100,000 members pay this fee. From
the two operations in the Chicago Area, CMA expects to
gross $120 million by the end of 1962. Membership in a

discount operation by means of fees or dues involves each

customer paying on a yearly basis, or once in a lifetime

 

I""(L'losed Door Store Comes Back," Business Week, No. 162A,
(October 15, 1960), p. 60.

5;bid., p. 60.

23.

a nominal fee, usually one to three dollars and receiving
in return an opportunity to shop in a particular discount
center. Again, this sense of belonging or obtaining a
"scarce" or "limited" commodity is prevalent.

Basically, the fees or dues are a direct addition to
working capital, at no cost to the Discount Center for use
of the money.

Another advantage of the closed door discount center
is the reduced credit losses, bad checks, and shoplifting,
as a result of the members being selected on the basis of
their employers, organizations, etc. It is hOped that this
would eliminate the specific type of individual responsible
for bad checks, etc.

W

Specifically, there are four major types of discount
food operations existing today.

1. Conventional Supermarket Discount Operation. Price
would be the predominant characteristic of this type of
Operation, handling only high turnover merchandise, some of
sub-standard quality, and a limited line of non-foods,
excluding the "big ticket" items; e.g. television sets,
stoves, etc.

2. The second type is similar to the first type in
that it is primarily a food operation, but increased empha-
sis has been placed on non-foods, including the big ticket

 

2%.

items. Traffic is created by the food with increased turn-
over of non-foods (compared to normal non-foods turnover)
through the traffic generated by the food prices.

3. The third type of discount food operation is a
department in a discount center. A ramification of this
would be the conventional supermarket Operating in a dis-
count center, with no discount prices. The central theme
of either type of Operation is complete one-store discount
shopping.

h. The fourth type is the closed door discount center.
The primary advantages in this type of operation are two;
limited entry, causing demand for the opportunity to patron-
ize such an operation, and a homogeneous market. A rami-
fication of this type of operation would be the charging
of a membership fee, thus providing the discount center

with working capital at no cost.

CHAPTER IV
THE MASS MMRKET

"The Supermarket operators are indeed leaders in dis-
tribution and will continue to keep ahead of the changing
time,"1 so stated Dr. E. A. Brand, former Director of the
Curriculum in Food Distribution, Michigan State University.
The governing criteria by which a supermarket operator
(included in this term are top managements) continues to
"keep ahead of the changing times" is the acceptance of
industry innovations by the consumers. One step beyond
the acceptance of the innovations by customers is the con-
tinuation of them by the innovator. The continued offering
by the innovator is ultimately dependent upon profits in
the final analysis.

A simple definition of the word profit means to gain,
as from a business transaction or a service. For countless
numbers of years, men have been trying different plans to
make money. And for the same countless numbers of years,
only one answer was found to be applicable. It is simply
that there is no profit in anything other than through a

fair exchange of commodities or services.

 

1Brand, E. A. "Supermarkets and the Changing Times,"
Adaptive Behavior In Marketing, (AMA, 1956), p. 5.

-25-

26.

It is this last phase, "through a fair exchange of
commodities or services," that should govern the relation-
ship of the discount center to the consumer.

Customer preferences have not initiated significant
changes in supermarket merchandising. The history of the
industry has been that the operators provide the innovations
which the consumers endorse and approve. The consumers
didn't ask for the supermarkets in the first place, but
they were enthusiastic when the industry's pioneers made
supermarkets available.2

It is now the concern of the discounters whether the
new concept of complete one stop discount shOpping under
one roof will win the endorsement and approval of the
consumer, and also, the question before the innovistic
discounter is whether the endorsement and acceptance by
the consumer will provide the necessary profit to warrant
the continuation of this innovation.

In an analysis of the consumers' endorsement and
acceptance of the discount center with its one stop, one
roof discount shopping theme, it is necessary to segregate
their numerous advantages and then relate the different
types of consumers, with their various backgrounds, finances,

and desires to the operations of the discount center.

 

2"Present Form of Super Seen Enduring," Supez Market
Negg, Vol. 9, No. 50, (December 12, 1960), p. 32.

27.

As was mentioned earlier, the discount center has
basically the characteristics of the supermarket at its
inception, including low-margin, high turnover, few services,
relatively insignificant fixtures, low-rent location, few
promotional gimmicks, and almost complete self-service.

As time progressed, the industry matured and as com-
petition increased, the advantages inherent in the initial
operation of the supermarket became extinct. To secure a
better location than the existing supermarket, for purposes
of obtaining a competitive advantage, the competitor had to
seek a higher rent location. To attract more customers to
a specific store, the competitor had to introduce competitive
gimmicks. And so it continued to the present advanced stage
of development. In each case, the consumer paid for the
extra conveniences that were enjoyed. Higher rent meant
more convenience and the margins on foods increased; pro-
motional gimmicks such as stamps meant premiums as a result
of shopping at a specific supermarket; but the stamps, like
advertising, convenience location, services, etc., are a
cost of doing business and are a cost to the ultimate
consumer.

It is at this present stage that the public has stopped
to review, and in many cases revise, their spending habits.
As was mentioned above, the consumers do not initiate the

innovations, but upon presentation they endorse and approve

28.

than in terms of patronage, resulting in "doing business"
at a profit or reject them in terms of continued patroni-
zation of established operations, resulting in not doing
business at a profit and discontinuation of operations.

In an era Of rising disposable personal income, an
increase in costs of doing business resulted in an increase
of cost of merchandise to the consumer. These increases
were not noticed to the extent that the consumers refused
to shOp in a particular outlet.

It was the discounter that initiated a re-evaluation
of spending habits of the buying consumers.

In addition to this re-evaluation of spending, and in
conjunction with it, there has emerged the saphisticated
consumer. During the fifteen years following World War II,
the American consumer received history's fastest and most
revolutionary education in making and spending money. To—
day the very high living standards are accepted as a matter
of course; there is a tendency to forget that the vast
majority of citizens have only reached them in the past
decade and a half or so.

Millions of families whose incomes amounted to $3,000
or 8k,000 in l9k5 are easily making double that amount
today and each income group has experienced successive sub-

3

stantial increases.

 

Theatres Dr. Tibor, "The Changing Consumer of the Sixties,"
Spegialtz §a1e§man, Vol. 50, No. 3, (March, 1961), p. 18.

29.

With this unique and happy state of affairs, new homes
were built and/or bought and furnishings were secured in
terms of countless necessities, conveniences, and luxuries.
In addition to the necessities, conveniences, and luxuries,
the buying consumer felt it necessary to purchase goods to
show the world how well they were doing in terms of material
purchasing power. It was an era of "Status-Seekers," and the
overpowering desire to belong to a higher class. It was the
purchasing power that provided the consumer with the proof
of "belonging."

‘While the consumer was buying, he was buying in areas
unfamiliar to him. It was the era of the inexperienced
buyer who was at the motivational mercy of the retailer,
in terms of services, promotional gimmicks, elaborate fa-
cilities -- all added costs of doing business.

Motivational research studies show that this period of
indiscriminate buying is, on the whole, drawing to its end.
In the 1960's, buying has become a more balanced and mature
_process from the emotional point of view. And on the ra-
tional level, buyers have become increasingly more know-
ledgeable, more discriminating, and more experienced.

Greater emotional stability and greater experience in
buying mean that more and more this decade will be charac-

terized by selective buying. In the future years, buying

 

leid., p. 19.

30.

for buying sake or to show off will be a motivation of
diminishing force.5

In the role of an experienced buyer the new consumer,
from a balanced emotional point of view, regards products
in terms of how they confirm, enrich and express his ac-
cepted identity in his own eyes.6 The new social and
economic position has been accepted and is no longer in
danger of being questioned. Now, the products available
are a means of satisfying completely this new position.

However, included in this new type of emotionally
stable consumer is a strain of the previous type of ra-
tional individual. This constitutes the experienced buyer,
matured from the emotional spend-for-spending sake, show-
thedworld type of individual, but still regulated by the
rationality of the pro-prosperity era.

As a result of this rationality, combined with the
desire to purchase products for purposes of satisfactorily
completing this new position, the present consumer wants
the "genuine" article. He wants products that enrich his
personal and family life. The consumer is economy-conscious
and quality-conscious. The purchaser is willing to pay a
higher price, but only if convinced that it is of genuine
quality, otherwise he will want a bargain. This would

 

5Ipid., p. 19.
6Ibid.

3]..

imply a pre-sold demand for national brand items and a price
bargain acceptance on private brand items.7

By the same token there is a growing rebellion against
frivolous and artificial obsolescence. The consumer will be
less ready to buy products only because the color scheme or
design has changed.8 (The automobile industry is currently
facing this emerging situation.)

As a result of being experienced, the consumer expects
the retailer to recognize that he is more knowledgeable,
more discriminating, and less emotional.

It is reCOgnized that there are minor exceptions to
this stereotyped consumer, but this will include the major-
ity of consumers.

In addition to the results obtained from motivational
research studies, Stephen Masters, President of Masters, Inc.,
one of the truly great pioneers in the field of discounting,
or as he calls it "low margin retailing," at a recent meet-
ing of the National Retail Merchants Association referred to
the shoppers in discount houses as being "among the shrewdest
of all shoppers." He further stated that "the discount
customer tends to be somewhat young, keenly interested in

buying at rock bottom prices, and very well educated in the

 

7This will be discussed more extensively in a later
chapter.

8Kioeves, op, cit., p. 19.

32.

realm of retail value."9

Distribution is now serving a sophisticated consumer
to the degree that sophistication is a compound of native
intelligence, education, observation, and experience re-
sulting from the new position of relative prosperity and
social status experienced by the consumer.

It is into this changed market composed of "sephisti-
cated" consumers that the discount house has presented itself,
and like the supermarket, the consumer did not ask for it,
but the fact that it was initiated by an innovator and
endorsed and accepted by the consumer makes it a serious
competitive factor in the market today.

The discounter, realizing that the present prospering
consumers were not service oriented shoppers, satisfied their
wants in terms of very limited service, one stop shopping
cash sales.

The rapid rise of the suburbs with the do-it-yourself
trend made the limited service discounter a natural substi-
tute for the high service, elaborate facility type depart-
ment store. The discounter has provided for the consumer

the option of utilizing different services and paying for

 

9Masters, Stephen, "What Does the Consumer Really Want
in the Way of Service," Speech presented at the Fifth Store
Management Group Workshop at the Harvard Business School,
(Boston, Massachusetts, June 17, 1959).

33-

them. If an item is delivered there is a delivery charge to
each customer using it, but not to the customers not requiring
delivery. In instances of warranties on branded merchandise,
they are promised and supplied by the manufacturer and fully
honored by the discounter. Thus, the consumer has the al-
ternative of exchanging services for price savings. In
creating this alternative, the likelihood that any consumer
will be able to find a combination of price and services

that meets his preferences has been increased.10

The supermarket has educated the consumer over the past
years on the feasibility of self-service and self-selection.
In the supermarket, the consumer pays for extra services
desired, delivery, stamps, etc. The consumer has been edu-
cated to expect a share of savings in his purchases as a
result of foregoing services and elaborate facilities.

It has been the supermarkets that created a distribu-
tion system made up of consumers conditioned to the idea of
taking care of their own wants once they are allowed access
to the goods in which they are interested.

In addition to this new consumer's prosperity and

0"Competitive Impact of Discount House Operations on
Small Business," Hearing before a Subcommittee of the Select
Committee on Small Business United States Senate, Eighty-
Fifth Congress, Second Session June 23, 2+ and 25, 1958,
(United States Government Printing Office, 1958), p. 1+Ol

31+-

s0phisticated spending, the increasingly large amount of
leisure time available to the male member of the family for
purposes of purchasing and performing various services during
the purchasing process has been an important factor in the
acceptance of discount centers by the consumers.

It is also interesting to note that a minority of
individuals, accustomed to a higher status of living than
current earnings allow, will use the discount house as a
means of continuing this conspicuous consumption through
more economical purchasing of branded merchandise.

And finally, present consumers are generally suscepti-
ble to new ideas. Never before in history have so many new
products been offered to the consuming public. Almost daily,
various phases of life are affected by innovations, result-
ing in a consumer conditioned to change, not resistant.

The discount center Offers a specific change in the
consumer's Shopping habits. It is available to the masses,
similar to mass education, mass production in factories,
and many other related activities available to, initiated
for, and accepted by the "mass" consumer.

Granted, discount centers do not appeal to every consu-
mer, just as the supermarket does not appeal to every consu-
mer. There are many shoppers who do not like clogged aisles,
noise, confusion, etc. Many shoppers desire service from

the salesperson, etc. Consequently, discount centers, like

35.

all other innovistic forms of retailing cannot and do not
expect to secure the entire market. Traditionally, these
individual customers will continue to shop with the tradi-
tional retailer. But it is to this new mass market that
the discount center was specifically created and it was
the masses in the market that endorsed it by their accept-
ance in terms Of patronage.

ms:

The advent of the discount center, like that of the
supermarket,was not asked for by the consumer but upon
being provided with a discounter they endorsed and accepted
the discounter, as they endorsed and accepted the super-
market in the 'thirties.

As costs of goods increased, with an appreciable rise
in disposable income, the consumer continued to purchase
from the conventional retailer. The discount center forced
a re-evaluation of spending habits by the buying consumer.

The purchasing consumer has, in re-evaluating his
spending habits, emerged as a sophisticated shopper in terms
of education in the realm of retail buying and emotional
stability. Inherent in this sophistication is a desire for
quality and growing rebellion against frivolous and artifi—
cial obsolescence.

It was the new mass market that the discount center was

designed for and it was the mass market that endorsed it in

terms of their patronage.

CHAPTER V

MASS MARKET MERCHANDISE

NATIONAL BRAND MERCHANDISE

In the preceding chapter the new consumer was described
and it was noted, as in any evolution, certain characteristics
from the past are apparent in the present consumer. Although
retailing is catering to, and tending to cater to, this new
consumer, one salient characteristic is readily identified;
every consumer, regardless of income, wants value for his
money. This new type of consumer wants value concentrated
in the merchandise.

A popular misconception (and there are many) is that
the discount center advertises national brand merchandise
in much the same way as the supermarket advertises loss
leaders. The belief is that by advertising national brand
merchandise the discounter will generate volume on many
standard priced items through the traffic created by the
advertisements. Basically, this is sound reasoning, but
only if the operation was not of the discount type. Inher-
ent in the definition of a discount operation is the idea
that the consumer is able to secure 3;; goods at prices

below the normal conventional retailer's prices.

- 36 -

37-

Stephen Masters describes a "true discounter" as one
"Offering a discount on every item in his store."1

Thus, in advertising national branded merchandise, the
discount center is offering to the consumer a commodity which
is competitively priced at substantial savings. The values
offered by the discounter in an advertisement are limited by
space, but they are indicative Of the values available in
the discount center.

Advertising is used to build sales and unit volume to
a higher and higher point where it will substantially lower
the cost of operation, thus enabling the discounter to offer
even lower prices to the consumer.

A description of the new consumer included the charac-
teristic of being "well educated in the realm of retail
buying." Mobility is a part of the new consumer and has
contributed immensely to the education of the consumer in
the "realm of retail buying." Comparative price shopping
is common in this era of mass distribution. The availabil-
ity of transportation, accessibility to shopping centers
through ultra-modern expressways, and the amount of leisure
time available for shopping all contributed to the educated
consumer the discount centers are now serving.

National brands are a strong traffic generator for the

 

lfiasterS. 9.2.419. p. 7.

38.

discount centers. In light of the potential volume to be
distributed through discount centers, many manufacturers
have ceased to attempt to enforce resale price maintenance
laws. In the beginning, discounters were a relatively minor
part of the total sales Of the manufacturer. It was neces-
sary in order to preserve existing consumer relations to
pay lip service to resale price maintenance.

With the advent of unenforced resale price maintenance
laws the manufacturer, in most instances, has lifted the
restrictions upon who buys his merchandise.

Thus, another false impression of the present discount
centers has been eliminated. It was believed, and perhaps
in the beginning it was true, that discount centers handled
Odd lots, irregulars, and discontinued national branded
merchandise. This is true to a limited degree, in terms
of deal purchases where the savings are passed on to the
consumer in addition to the prices normally Offered by the
discount center, but this is not the normal merchandising
techniques employed by a discounter. National brand mer-
chandise of first line quality is available to discount
centers from manufacturers. National brand manufacturers
have realized the feasibility of supplying discounters with
their merchandise in terms of increased sales and decreased
distribution costs. The national brand items in the dis-

count center are competitive with many private brand items

39.

and, in some instances, undersells the private brands of
normal retail distributors.

National brand manufacturers by supplying discount
centers make available to the consumers impulse items. The
traffic in a discount center increases the percentage of
impulse items purchased.

In a recent survey conducted by the A. C. Nielsen
Company a trend was established that consumers desire to
shop in increasingly larger stores. In 1958, 69.9 per cent
Of the purchasers of a thirty commodity group indicated
their desire to shop in larger stores. In 1959, 7l.h per
cent cast their ballot in that same direction. In 1960,

I 72.8 per cent followed the trend.2

Discount Centers are a step toward the "larger stores."
It would be a valid assumption that national brand manufac-
turers are catering to the consumer through discount centers.

The mass marketing concept is rapidly advancing in the
form of larger and larger retailers. The discount center
is perhaps the one new mass market retailer with unit stores
averaging from 100,000 to 180,000 square feet and above. As
they are accepted more widely, they will naturally evolve
into a chain of one stop shopping under one roof discount

centers. By 1965, E. B. Weiss believes that national dis-

 

2
p. 9.

"The Consumer Votes," (A. C. Nielsen Company, 1960),

l+0.

tribution by a manufacturer will be effected by going through
fifty chains or, even at the extreme, twenty-five chains.3

Merchandising national brand merchandise in a discount
center places many burdens upon the manufacturer.

The primary burden is one of pre-selling. It is neces-
sary in the case of existing brands and particularly in the
case of new products to continually pre-sell them to the
consumer.

In an analysis over a two-year period, covering forty-
five product groups in grocery stores, thirty-three of these
product groups had no really successful introductions during

the period and this group's sales increased only 9.7 per

 

cent. On the other hand, a group of twelve, in which manu-
facturers successfully introduced, advertised, and merchan-
dised new brands, showed a sales gain of 17.9 per cent.”
The second burden, and equally important, placed upon
the manufacturer merchandising national brand merchandise
in a discount center is packaging. A leading factor in the
successful introduction of brands in recent years has been

Packaging convenience. Adequate packaging is necessary to

satisfy both the consumer's desires and the discount centers'

g

3Weiss, 92. cit., p. 3.

““26th Annual Nielsen.Review of Retail Grocery Store

Trends," (A. C. Nielson Company, 1960), p. 17.

k1.

operations. Designing cases for "tray—stocking" is one of
the criteria for successful discount food center operation.
Other innovations in operations will appear and it will be
the responsibility of the manufacturers to adapt to meet
the changing needs. A very good case in point is the recent
change in the size of the Kleenex tissue boxes. This pro-
duct is readily structured for distribution in a discount
center, offering sufficient inventory to satisfy demand and
yet utilizing existing shelf or display space most effec-
tively as a result of the size of the individual box being
reduced to approximately one-half, but still containing the
standard #00 count. I
To the consumer, the manufacturer has the responsibility I
of creating a package that will clearly identify the merchan-
dise, in terms of quality and benefits inherent in the product.
To the discount center, the manufacturer has the respon-.
sibility of providing an attractive package, conducive to
impulse sales. Also, the package must be such that it does
not add to distribution costs.
There are many factors to be considered depending on
the manufacturer's products. It is not the purpose of this
work to educate and point out to the national brand manufac-
turers what should be their packaging policies, but rather
it is desirable that the manufacturer be cognizant Of the

necessity for adecuate (in terms of the consumer, the manu-

#2.
facturer, and the discount center) packaging of their pro-
ducts for mass distribution through the discount center.
CONTROLLED LABEL MERCHANDISE

It would seem in many instances that national brand
merchandise is-inherent in many definitions of a "Discount
Center."5 It is a natural assumption that a discount center,
with its relatively low advertising expenditures, low labor
cost as a result of self-service, and its less than optimum
location would require national brand merchandise to oper-
ate. National brand merchandise is required to operate
successfully in terms of generating traffic, but national
brand merchandise can and should be supplemented with "con-
trolled label merchandise."

Controlled label merchandise would include any merchan-
dise packaged for, or produced by, a retailer for distribu-
tion through their outlets exclusively. Primary requirements
for any merchandise, and more so controlled label merchan-
dise, demand that quality, quantity, and price coincide with
the value judgments of the purchasing consumer.

Controlled label merchandise has contributed much to
the successful supermarket story. Controlled label merchan-

dise was a necessary tool to be used in building an industry

 

5Doctor Paul E. Smith Professor of Marketing at Michigan
State University suggests that a discount center, a) implies
that there is a legitimate markup (set price) from which a
discount is given b) sells national brand , c) has limited
stock in depth and breadth, d5 has less than optimum location,
and e) has volume.

H3.

in the face of rising costs, which were causing increased
costs to the consumer.

As the leading chains in the food industry grew larger
and as they continue to grow even larger in terms of national
distribution, controlled label merchandise will become an
even more influential factor in the market.

Sears, Roebuck and Company is an existing example of a
company meeting the requirements of quantity, quality, and
price coinciding with the values of the purchasing consumer.
Their theme includes the idea of "the best buy for the money,"
implying that the product may not be the best, but that it
is themamzzimmsmasx.

Through this policy, Sears has established a controlled
label merchandise reputation comparable to many national
brand manufacturers. The distinction separating the two
is negligible.

In a recent survey by Burgoyne Index, Inc., it was noted
that private label6 grocery products were endorsed by three

out of five shoppers.7 In the same survey, it was learned

 

6The author would like to note that the merchandise
referred to in the Burgoyne Index Inc. survey as "private
label" merchandise is in essence the "controlled label"
merchandise referred to above in this paper. Private label
merchandise would include merchandise, packed only once or
twice during a season, available to any retailer for resale,
limited supply due to the minor role the packer plays in the
manufacturing industry and usually "footballed" as a loss leader.

7"Discount Operations Held Posing Danger to Sugars,"
Super Market Nggs, Vol. 10, No. 1, (January 2, 1961 , p..k3.

1.1+.

that seven out of ten consumers felt that private brands were
a real value and, also, it was noted that only sixteen per
cent of those consumers interviewed buy no private label
merchandise.8

Again, returning to the effects of the supermarket
industry on retailing, it was the supermarket that condi-
tioned the consumers to accepting and endorsing controlled
label merchandise.

In mass distribution, it is becoming even more important
that the chains establish a corporate image in their numerous
outlets. It is a reported fact that today, twenty per cent
of the families in the United States move to a different
location every year.9 TO substantially capitalize on the
profitability of controlled label merchandise, it is imper-
ative that a corporate image be associated with the merchan-
dise and, also, that in instances of mergers the corporate
image be established in those outlets.

As discount centers grow and become chains on a national
basis, controlled label merchandise will be almost as impor-
tant, in all lines of stock, as the national brands. Con-
trolled label merchandise will aid the discount center as

it has helped the supermarket industry to meet, effectively,

the problem of rising costs.

 

Ibld.

9Lecture by Doctor Paul E. Smith, Professor of Marketing,
Michigan State University, East Lansing, Michigan.

 

k5.

PRIVATE LABEL MERCHANDISE

Private label merchandise is a result of the free enter-
prise system in the United States. Many packers and manu-
facturers, not large enough to effectively compete on a
national basis, can compete in local areas for their share
of the market. The inability to compete nationally may be
the result of limited facilities, limited raw materials, etc.
Regardless of the reasons why, they nevertheless compete
locally and because of substantially lower costs of doing
business, be it reduced quality, low advertising expenses,
less administrative expense, etc., they are able, usually,
to offer the merchandise at a substantial savings to the
retailer.

The retailer, in promoting private label merchandise,
recognizes that price is definitely the primary promotional
ingredient in the product. Consequently, private label mer-
chandise serves as a loss leader for the retailer. Sometimes,
private label merchandise is sub-standard in quality and other
times it is comparable to the national brand merchandise,
but, regardless, price is the customer drawing card. It is
through merchandise such as this that discount centers are
able to strengthen their price image in the market.

Thus, each type of merchandise, national brand, con-
trolled label, and private label, playints part in the

successful story of the discount center.

1:6.

As existing chains continue to expand through mergers
and building, the remaining independents and small chains
will disappear either into the larger chains or into vol-
untaries or COOperatives. This transition will add to the
growth of controlled label merchandise and advance it to
the point where it can effectively compete with national
brand merchandise.

The demand for increased quantities of controlled label
merchandise will lead to the purchase of small manufacturing
and packing companies by chains for purposes of producing
controlled label merchandise. The small plants not purchased
by the chains will be engaged in producing, on a contract
basis, controlled label merchandise or national brand mer-
chandise.

In all instances, private label merchandise10 will
cease to be a competitive factor in the market. The real
competition.will take place between the national brand mer-
chandise and the controlled label merchandise. The degree
of competition will be contingent upon the amount of inte-
gration Of manufacturing by the chains with its numerous
problems of product research, product development, procure-
ment of raw materials, and the various other requirements

inherent in manufacturing.

 

0
See Footnote,§ for the characteristics of private
label merchandise.

“7.

Depending upon the degree of integration of manufacturing
in retail chains a more competitive factor in the market is
rapidly emerging; internal competition. The issue is not
should a manufacturer compete with himself. Rather, the
basic query must be, how, under existing market conditions
and in line with future trends, can a manufacturer compete
with himself more profitably?"11

Internal competition, as a result of mergers and expan-
sion, has produced such competitive products as the Evinrude
and Johnson boat motors which are produced by different fi%

plants, but are owned by the same parent organization. Num-

erous examples are available in the soap and detergent pro-

 

ducts, as well as paper products, and, in some instances, fl;
health and beauty aids.

By producing competing products, a manufacturer has
control over the degree of competition one product is
subject to in any market.

In relating the important battle of the brands to the
discount center, it is seen that as competition becomes more
rigorous, advertising and pre-selling will be a natural
reaction, thus dismissing the burden of substantial adver-
tising on the part of the discount center. Controlled label
merchandise will continue to supplement national brand

merchandise and continue to be a profitable item for the

 

11Weiss, "planning Merchandising Strategy for 1961-1965,"
M0: 13' 1°

#8.

discount center. As the discount center evolves into a
national chain, controlled label merchandise will satisfy
a demand created by the consumer.

Countervailing powers, the neutralization of one posi-
tion of power by another, will tend to regulate the competi-
tive effectiveness of internal competition within the large
manufacturers. As their prices tend to rise, retail chains
who are large enough to produce their own requirements will
integrate manufacturing into their operations, thus insuring
merchandise from the large manufacturers on a competitive
basis. Also, this thesis would include the probability of
one large manufacturer, as profits rise in a market, to
enter that competitive market, causing profits to diminish
and prices to the consumer to decrease as a result of
increased competition.

In any discussion of brands, it is necessary to remain
cognizant of the importing of foreign manufactured products,
and their increasing importance upon the market. Their ac-
ceptance by the consumer will depend largely upon the country
exporting the product and the world situation. Price is the
main attraction of such merchandise, but even that will not
generate sales in the event of ill will toward the country
where the product was manufactured. Items of this type
offer excellent promotional material for discount centers,

but they must be purchased with prudence, in terms of

#9.

inventory turnover. Long term contracts for merchandise
must be avoided in order to achieve maximum turnover of
the merchandise at a favorable consumer acceptance period.
SUMMARX

It has been noted that national brand merchandise, as
a result of unenforced resale price maintenance laws, is
available to the discount center in regular merchandise,
not irregulars, odd lots, or discontinued lines.

Consumers have indicated a desire to shop in larger
stores and discount centers, through offering national
brand merchandise, are catering to this desire.

In selling national brand merchandise through a dis-
count center, the burden of pre-selling and adequate pack-
aging is almost totally placed upon the manufacturer.

National brand merchandise is necessary for the success-
ful operation of a discount center, but it is also necessary
that it be supplemented with controlled label merchandise,
which would include any merchandise package for, or produced
by, a retailer for distribution through his outlets exclu-
sively.

As chains of retail outlets grow larger, controlled
label merchandise will become an even more influential
factor in the market. In the future, competition will emerge
between national brand merchandise and controlled label mer-

chandise on a regional or national basis, as a result of the

50.

size of the chains of retail outlets, including discount
centers.

Private label merchandise contributes to the strength-
ening of the discount center's price image in that it is
available, usually, at a substantial savings to the consumer.

As a result of mergers and growth, private label manu-
facturers will eventually disappear, either into the larger
chains or into voluntaries or cooperatives.

Competition between the brands is, and is tending
toward, a competitive struggle of the controlled label
merchandise versus the national brand merchandise; included
in the national brand merchandise is the internal competi-
tion between competitive lines owned by the same parent
company, e.g. the soap companies, paper manufacturers, and
the automobile manufacturers.

The result of this competition will be an adequately
pre-sold line of merchandise available to the consumer
through a discount center with little or no advertising
necessary.

Countervailing powers will tend to regulate the effec-
tiveness of internal competition.

Imported merchandise will be profitable promotional
merchandise, depending upon the international situation at

that specific time.

CHAPTER VI
THE EMERGENCE OF MASS MARKETING

"We will see by 1965 a retail organization that will
include under one corporate control a group of department
stores, a food chain, a drug store, a variety chain, and
a miscellany of other types of outlets, including even gas
stations,"1 so stated E. B. Weiss, in looking forward to
the period between 1961 and 1965.

'In carrying Mr. Weiss's foresight one step further,
the conventional retailer is facing and will face an even
stronger factor in the market, the one stop shopping dis-
count center, an evolution of the retail organization spoken
of in the preceding paragraph.

It is the need for and the acceptance of which moti-
vated the emergence of the discount center, a mass marketing
Operation.

It was a combination of merchandising techniques from
which the discount center evolved. In the past, drug stores
have merchandised department store items, food chains have
merchandised hardware lines, and many other examples are

evident in retailing. Various retailers have taken on

 

lWeiss, "Planning Merchandising Strategy for 1961-1965,"
22.1.21!” 130 2-

-51-

52.

traditional lines associated formerly with the specialty
retailers. It is difficult, as a result of this mix-match
merchandising, to distinguish one operation from another.

Food chains recently have recognized the advantages
in being associated with, or being a part of, a discount
center.

Sidney R. Rabb of Stop & Shop believes that "this
discount store-supermarket combination is a natural evolu-
tion in retailing . . . its future is likely to be similar
to the supermarkets."2 Stop and Shop even more recently,
April, 1961, completed negotiations for the acquiring of
Youth Center-Bradlee, an eight-unit discount chain in the
Massachusetts area.3

Thomas C. Butler of Grand Union, in regard to the
concept of one stop shopping under one roof, stated that
"Consumers . . . have evidenced a growing preference for
one stop shopping. The traditional supermarket proved
this. we at Grand Union have proved to our satisfaction

1,

that the pattern does not step with food." Grand Union's

 

2"A Trend: Food-Discounter Under One Roof," Chain

Store A e Grocery Executives Edition, Vol. 37, No. 5,
T——_LApril, 1661), p. 37.

3"Executive Notebook " Su er Market Merchandi in ,
Vol. 26, No. 1+, (April, 1961+, p. 7“. '———'§"‘5

n"A Trend: Food-Discounter Under One Roof," op, cit.,
p. 37.-

53.

convictions are evidenced by the growth of the "Grand Way
Discount Centers" in five states, with a total number of
twenty units.

The importance of general merchandise in an operation,
as recognized by the innovistic leaders in the food industry
quoted above, is readily apparent from several studies con-
ducted by Loewy, Snaith, Inc. The figures are from the U.S.
Government Department of Commerce and Department of Labor.
These figures vividly demonstrate the sensitivity of the
movement of merchandise to the availability of disposable

personal income.

. rrr- '1. " ”-q

As disposable personal income goes up 1 per cent the

 

F;

amount of money spent on food goes up only eight-tenths of
one per cent. On the other hand, the amount of money spent
by consumers for durable toys goes up 1.5 per cent. The
amount of money spent for drugs and sundries goes up l.h per
cent. For non-durable toys and small sportswear it goes

up 1.3 per cent. In converting these figures to dollars,

if a customer has $80 extra to spend for food, she will
have $130 to spend for non-durable toys. These are relative

figures and not absolute, but they are indicative.5

 

5"How The Loewy Approach Contributes To Profitable
Progress In General Merchandise " by Neal Hathaway Vice
President of Raymond Loewy Wiliiam Snaith, Inc., resented
at Super Market Institute onference 0n General Merchandise,

(January 13-1#, 1961), PP. “-5.

51+.

As disposable income rises 1 per cent, expenditures
for soft goods and apparel goes up only six-tenths of one
per cent.6 Next to food, apparel is the biggest traffic
producer in a discount operation,7 and like food, in terms
of added expenditures in an era of rising disposable personal
income, it places very low percentage wise.

It is important to note, however, that in food and
apparel lines, the discount center has the leading two lines
necessary for, and capable of, generating traffic. In addi-
tion to profits normally earned as a result of high turnover
of inventory, the discount center, as a result of continuous
studies of items and lines with high sensitivity to disposable
personal income, could merchandise such lines and items for
additional profit.

The first step by supermarkets in branching into opera-
tions other than conventional supermarket lines has been
toward the acquisition of existing drug chains.

In combining a drug store operation under one roof with
the supermarket, numerous benefits are derived: 1) It
broadens the number of drug items which can be carried,

2) It provides the ultimate in one stop shopping, 3) It

Offers customers waiting for a prescription an opportunity

 

61bid., p. 5

7"Discounters' Future? Even Brighter?" Su er Market
News, Vol. 10, No. 15, (April 10, 1961), p. 50.

55.

to shop for foods and non-foods, and h) It builds a quality
image of the total store based largely on the pharmacy
concept.8

The advantages of operating a discount center including
a supermarket, drug store operation, limited department
store lines, etc., can be multiplied many times over in
terms of the above benefits.
SUMMARY

As corporatiom grow larger and merge with operations
foreign to their basic interests, there will exist a group
of department stores, a food chain, a drug chain, a variety
chain, and a miscellany of other types of outlets, under one
corporate control. From this existence will emerge a mass
marketing one stop, under one roof, discount shopping center.

Presently, drug stores, department stores, and super-
markets, are merchandising similar lines. This is a begin-
ning of the evolution toward the discount center. The
acquisition of drug chains by supermarkets is another form
of entry into the gradual evolution toward the discount center.

The sensitivity of general merchandise expenditures to
disposable personal income is a key to added profits through
the promotion of the right merchandise.

 

8"Drug Operation A Natural Food Retailing Adjunct,
Some In LA Convinced," Su er Market News, Vol. 10, No. 17,
(April 2h, 1961), pp. 1, 53.

CHAPTER VII
CONCLUSION

Not every man fits every hour and so too, not every
form Of distribution fits every period of time. History
shows that Napoleon had his revolutions, Grant had his
civil war, and so it is in retailing. Every form of dis-
tribution sooner or later is faced with the challenge of
a newer form. First the cash store threatened the service
stores; then the supermarket threatened the smaller stores,
etc. "Now," says Ray Harb,1 in recognizing the advent of
the discount center, "all accepted forms of food distribu-
tion are being challenged by a newer form."2

Malcolm P. McNair warned the supermarket industry of
the increasing importance of being alert to changes when
he said, "it is a mistake to expect one single pattern of
retail distribution to become standardized."3

Entry into the discount field by the super market indus-

 

1Ray Harb is the Executive Vice President of the
Cooperative Food Distributors of America.

2"Executives Notebook " Su er Market Merchandisin ,
Vol. 26, No. 2, (February 1, I9§15, p. 7.

3"Cutting Distribution Cost Held Vital," "Quotable
Quotes," Su er Market News, Vol. 10, No. 6, (February 6,
1961), p.‘3§T""""" '

- 56 -

 

57.

try and, in particular, the chain super markets is accept-
ing the "Challenge To Change." Discount centers are the
"new form" now challenging the "present forms of distribu-
tion." Discounting is the "bloodless revolution" now occur-
ring in retail distribution.

As in any revolution, discounting sprang into existence
as an insurgent and illegitimate form of retailing. Gradu-
ally, it was accepted and endorsed by a minority; later it
was recognized by conventional retailers as a competitor
for the "crown," the consumers' patronage. And finally,
as in a successful revolution, it has attained a substantial
stronghold in the market as evidenced by the relatively few
discount food operations now in existence and their success-
ful operation. And in general, success of the complete
discount center movement is evident.

Throughout this entire work, reference has been made
to the supermarket as being the operation that preceded the
advent of the discount center. The discount center is, in
essence, a rebirth of the supermarket on a larger scale.

The supermarket has paved the way for history to repeat
itself in the form of the discount center.

It is accepted and endorsed by a sophisticated consumer,
well educated in the realm of retail purchasing, and regulated
by rationality, rather than emotion. Buyers have become

increasingly knowledgeable, more discriminating, and more

58.

experienced.

Not only have steps been taken in the favorable direc-
tion of the discount center by retailers and consumers, but
manufacturers are also being oriented to discount centers in
terms of the importance of adequate packaging and pre-selling
of national brand merchandise. Controlled label merchandise
is also necessary for the profitable operation of a discount
center.

With corporations such as General Foods diversifying
into household items such as scouring pads, starch, while
traditionally being a food manufacturer, and Procter and
Gamble, with their entry into food manufacturing with
peanut butter, away from the traditional soap manufacturing
processes, the trend toward concentration within an industry
is evident. It will only be a matter of time before large
corporations will seek diversification into lines even more
unrelated than the examples cited above and these corpora-
tions will turn to the supermarket in its most progressive
stage, the discount center, for_distribution of these lines.
In turning to the supermarket chains, the Kroger Company
recently acquired a drug chain operation. Stop & Shep has
acquired a chain of discount centers. These are the begin-
nings for a corporate chain seeking a profitable growth.
However, it is important to reiterate that the discount

center, like all preceding innovistic forms of retail dis-

 

59.

tribution cannot and will not dominate the entire retail
market.

1,,

The concern of industry leaders for the industry's
apparent Malthusian growth in terms of the number of stores
existing certainly adds incentive to considering the possi-
bility and feasibility of entering into different fields of
retailing.

Discount centers offer the corporate food chains an
opportunity to fill a need for a new type of retail distri-
bution outlet which is evidenced by the few existing types
of discount centers now successfully operating.

Discount centers offer the chain an avenue of expansion
into successful mass marketing operations similar to the
supermarket. The basic tenets, so familiar to the super-
imarket industry, of low margin, high turnover, is readily
applicable to the discount center. The basic function of
the supermarket, the mass distribution of food at the lowest
'possible price, is incorporated in the discount center's

basic function of SELLING MORE FOR LESS AT A PROFIT. Discount
centers are a CHALLENGE TO CHANGE.

 

h.
See Appendix B

BIBLIOGRAPHY

BOOKS
Zimmerman, M. M., The Su er Market. New York: McGraw-
Hill Book Company, Inc., 1955.

PERIODICALS

Alexander Ralph S. and Hill, Richard M. "What To Do
About The Discount House," Harvard Business Review,
Vol. 33, No. 1, (January-February, 9 .

 

Converse P. D. "Mediocrity In.Retailing," Journal Of
Marketing, Vol. 23, (April, 1959).

Day, C. "More Discount Houses Everywhere - Is This A
Threat To Advertising?," Printez's Ink, Vol. 2H7,
(April 30, 195%).

Dodgefi R. E. "Discount Selling By The 'Legitimate'

etailers," gournal Of Retailing, Vol. 33, (Winter
1957-58).

Dodge R. B. "How Discount House Selling Has Influenced
Department Stores " Journal Of Retailing, Vol. 36,
No. 2, (Summer 1960).

Hollander, Stanley C. "The Discount House," Joggnal Of
Markgting, Vol. 18, (July 1953).

Koeves, Tibor. "The Changing Consumer Of The Sixties "
fipggialtz Salesman, Vol. 50, No. 3, (March, 19615.

Loehwing, David A. "The Hard Sell," Barrons, Vol. XL,
No. 29, (July 18, 1960).

Pessemier Edgar A. "Applying Supermarket Techniques To
Non-Food Retailing " Journal or Retailing, V01. 36,
No. 2, (Summer 19 O)

Richards, J. A. "Hill The Big Discount House Invade Your

Magket," Electrical Merchandising, Vol. 91, (March,
9 9 . ‘

- 60 -

61.

Smith Bernard W. and Radolf Herman. "Self Selection
Challenges The Merchandising Division " Journal Of
Retailing, Vol. 36, No. 2, (Summer 19 O).

Anon. "Closed Door Store Comes Back," Business Week,
No. 162%, (October 15, 1960).

. "A Trend - Food Discounter Under One Roof " Chain

Store A e Grocery Executives Edition, Vol. 37, No. h,
TT'ngri , 661) .

. "Executives Netebook," Su r Market Merchandisin ,
Vol. 26, No. 2, (February, 1351).

. "Tomorrow's Super Market Today," American Businesg,
Vol. 29, (November, 1959).

_____3 "Private Label Health And Beauty Aids Fail In Supers,"
dv tisi A e, Vol. 30, (November 2, 1959).

. "Discount House, New ShOpping Center Problem," Chain
Stgze Agg, Vol. 36, (May, 1960).

 

. "New Store, New Methods," Progressive Grocer, Vol.
39, (January, 1960).

. "Food Retailing In The 60's," Pro ressive Grocer,
Vol. 38, (December, 1959).

. "Discount Houses Menace Advertising," Printer's
Ink, Vol. 2H7, (May 21, 195%).

. "Korvette Grows Up," Tide, Vol. 32, (October, 1958).
. "Executive Notebook," 8 er Market Merchandisin ,
Vol. 26, No. R, (April, 1931).

EEESPAEER§

"Grand Union Vice President Foresees Swift Decline Of Leased

Departments In Discount Stores " Super Market News,
Vol. 10, No. 15, (April 10, 19é0).

 

"Grand Way Opens Two New Florida Units " Super Market News,
Vol. 9, No. HM, (October 31, 1960).

weiss E. B., "For Your Information," Chicago Tribune,
(February, 1961).

"Present Form Of Super Seen Ending," Su e Market News,
Vol. 9, No. 50, (December 12, 1960).

62.

"Discount Operations Held Posing Danger To Supers " Spper
Markgt News, Vol. 10, No. 1, (January 2, 196 ).

"Discounter's Future? Even Brighter! " Super Market News,
Vol. 10, No. 15, (April 10, 1961 .

"Drug Operation A Natural Food Retailing Adjunct, Some In
L.A. Convinced " Super Market News, Vol. 10, No. 17,
(April 2%, 1961).

"Cutting Distribution Costs Held Vital," "Quotable Quotes "
§uper Market News, Vol. 10, No. 6, (February 6, 1961).

Handler, Julian H. "The Editor's Corner," Su er Market
Nggp, Vol. 10, No. 13, (March 27, 1961).

MI§§ELLANEOUS

Weiss E. B. "Planning Merchandising Strategy For 1961-1965,"
Doyle, Dane, Bernbach, Inc., Copyright, 1960.

"Super Markets Of The Sixties," Super Market Institute, Inc.,
Vol. 1.

Th2 2%scounp House And Channelg Of Distribution, Frontiers &
n Marketing Thoug t, eau 0f Bus ness Research,

Indiana University, A.M.A., December 27-28, 195%.

 

Logan John A. "Progress In Food Distribution," The Consumer
Study Subcommittee of the Committee On Agriculture,
House of Representatives, May 8, 1957.

Brandfi E. A. "Supermarkets And The Changing Times," Adaptive

ehavi In Marketin , The American Marketing Associa-
tion, 1956.

Masters, Stephen. "What Does The Consumer Really Want In
The Way Of Service," Fifth Store Management Group Work-
shop, Harvard Business School, Boston, Massachusetts,
June 17, 1959.

Competitive Impact Of Discount House Operations 0n Small
Business, earing Before a Subcommittee of the Se ect
Committee On Small Business, United States Senate
Eighty-fifth Congress, Second Session June 23-2H and
25, 1958, United States Government Printing Office,

Washington: 1958.
Th; Consumer Voteg, A. C. Nielsen Company, Copyright, 1960.

630

26th Annual Nielsen Review Of Retail Grocery Store Trends,
A. C. ielsen Company, Copyr ght, 19 0.

Hathaway Neal. "How The Loewy Approach Contributes To
Profitable Progress In General Merchandise," Super

Market Institute Conference On General Merchandise,
January l3-lh, 1961.

Hollander, Stanley C. "Discount Retailing " Unpublished
Dissertation, Graduate School of the niversity of
Pennsylvania, COpyright, 195%.

APPENDI CES

APPENDIX

 

STORE MANAGEMENT WORKSHOP -
National Retail Merchants Association

"WHAT DOES THE CUSTOMER REALLY WANT
IN THE WAY OF SER CE

Stephen Masters, President
Masters, Inc., New York, N. Y.

Presented at the Fifth Store Management Group
WOrkshop at the Harvard Business School,
Boston, Mass., June 17, 1959.*

I am honored and, I must confess a bit amused at being invited
to participate in this activity today. The reason for this is

that I can recall a period Just a few years ago when many mem-

bers of your organization would never allow themselves even to

be in the same room with a discounter.

I also find it quite interesting to observe that the positions
of the discount house and the department store seem to be re-
versed. Instead of the discount house being on the defensive
as an illegitimate upstart, a fly-by-night and unorthodox re-
tailer it is the department store that now seems to be on the
defens ve.

Many of the orthodox habits and practices of the department
store are now being challenged. In fact, as the department
store adopts more and more of the discount house methods, it.
may soon be the discount house that is the orthodox method of
retail distribution.

The discount house and other forms of what we call low—margin
retailing have made great strides in distributing mass quanti-
ties of consumer goods. We now enjoy high prestige among the
large suppliers. ‘We also enjoy a vast public acceptance. And,
surprisingly, the low-margin retailer even enjoys a growing

 

'"This is a speech presented by Mr. Stephen Masters
President of Masters Inc., a New York chain of Discount
Houses. This presentation gives a potential discounter an
insight into the character of a successful Operator and very
vividly enumerates the reasons why Masters is a successful
Operator.

It is through the untiring efforts of Stephen Masters and
individuals like him that discounting has risen to its present
degree of acceptanceé and its unprecedented mission of SELLING

MORE FOR LESS AT A P OFIT.

65.

prestige in the conservative world Of finance and investment.

With reference to that point for a moment let me note as an
example that Just three low-margin Operations, all located in
the Greater New York-New Jersey area have demonstrated the
inherent power Of this form of retailing in the following manner.

In 1955, Masters, Kbrvette and Two Guys From.Harrison were
doing an annual volume Of 67 million dollars. Just three
years later, in 1958, these three lowbmargin operations had
grown to the point where they were doing 200 million dollars
annually. NO wonder the Wall Street community is looking with
a great deal of interest at our low-margin types of retailing.

Department stores are making a determined effort to meet this
challenge. Some are succeeding to a great degree. But you
still face great, great problems. Most of your small increase
in annual dollar sales is coming entirely from new branch
stores, with relatively little increase in unit sales. Your ”
expense ratios continue tO go sky high, although the more
progressive units are learning how to combat this to a small
degree.

The department store is still on the defensive, however, with

its customers-and now its suppliers. Thousands upon thousands
of customers are drifting away to the stores of low-margin
operators who sell both soft and hard goods at much lower prices.

 

The suppliers have poured millions Of dollars into new products,
research, millions-indeed billions-Of dollars into advertising
and promotion, only to find the traffic pattern moving to a

new form of retailing.

There are still some people, manufacturers, wholesalers re-
tailers, who think the secret of Masters' success is pr ce-
cutting. Such people have had the past 22 years to study and
analyze the Masters' Operation. If they had done so, they
would have quickly corrected this false impression. Until
recently, unfortunately for them, few took the trouble to
investigate our Operation.

Our methods have never been a secret. If Masters' operating
methods were a secret, I wouldn't be here today. I have been
invited to tell you s ecificall how we Operate. And I shall
do exactly that. As a matter 0% fact, I will hold back only
one thing, our exact mark-up formula. That is my only
secret.

66.

Misconceptions About Discount Houses

As I travel around the country I occasionally hear statements
from unknowing retailers that discount houses are high pre -

s e, that they offer no se vices, that they don't guarantee
anything, refuse to take Sack merchandise, and so on.

These are the charges they make to explain away our low-
margin of Operation. But what are the real facts?

I don't claim to speak for all discounters. In fact, I have
always strongly refused to speak for any low-margin retailer
except Masters. I believe that Masters' Operation is unique
in the United States.

However I will say, in general, that the majority of the
discount houses today are low pressure, not high pressure.
They offer reasonable services. The larger ones advertise
extensively. They Offer the same guarantees as anyone else,
perhaps more. They take back merchandise. And the majority
of discount houses are located in high-traffic, high rent
areas, close to major transportation facilities.

The secret of the successful discount house is efficient
operation, with management able to make quick and intelligent
decisions, plus hard work by everyone all up and down the
line. We make decisions in minutes, not months.

In the Old days a department store buyer was a man who could
make quick decisions. Those were the days of profit and high
unit volume for department stores. Today, the department
store buyer too Often acts merely as a glorified 'Office boy'
for his merchandising manager and buying committee.

Fa t about Masters

Masters spends under 7 per cent on salaries, while the total
department store spends 18% on them. But the salaries paid
by Masters are higper than those of the average department
store. This is no paradox or illusion. Masters' salaries
are high, but we have cut out the unnecessary personnel -

92% of our employees are selling on the floor, while in the
average department store less than 50% of the total employees
are salespeople.

We have eliminated costly displays and display departments,
window dressers decorators, fashion coordinators unneces-
sary merchandising men, superfluous vice presidents duplicate
buyers, catalogue and advertising space salesmen and the like.

‘J‘F‘!

67.

Our rental cost per square foot Of selling space is about
one-third that of the average department store. This is not
because we operate in lower rent areas, but because we elimi-
nate costly display space and keep our non-selling space to
a minimum.

Our demands for store structures are not as rigid or elaborate
as those of department stores. I don't mean to imply we have
bad or shoddy stores; it is just that we are more flexible in
some ways. All of our stores are modern and up-to-date. In-
cidentally, I would like to point out that we will never Open
a store that is on more than one level, because only by having
a one—floor Operation can we operate the low-cost system we
have pioneered. .

While our advertising costs are about equal in percentage to
those of the department store, our delivery costs are zero
compared to their 15 per cent. Many department stores, do
not deliver merchandise free below a minimum purchase price
such as under $3. Now, when a woman buys something for, let
us say, $3.19, and takes it home under her arm she is paying
an average cost for the goods as if it were delivered to her
home. This average delivery cost must be added to p11 mer-
chandise, whether it is delivered or not, and is borne by all.

Masters has no such policy. Customers who carry their own
packages are not taxed with a hidden delivery charge. Those
who want delivery pay for it. Those who carry out their
packages save the delivery cost.

We at Masters do not employ salesclerks in the sense that you
normally think of this term. The merchandise we sell is al-
ready pre-sold to the consumer. Over $10 billion dollars
worth Of advertising last year has thoroughly educated the
customer to product value and brand recognition.

We do employ what I prefer to call 'educated order takers.‘
These are people who will quickly write up a customer's order.
They are very well trained in the merchandise they sell...
usually far better trained than a department store sales
person. They can offer information intelligent suggestions
and assistance in the prOper use and care Of the merchandise.

‘We forbid high-pressure methods and any kind of switch-selling
tactics. Our merchandise is not piled up in confusion to
impress the customer with quantities; it is displayed for
easy selection, in orderly product classifications indicating
sizes, colors, uses, voltage, horsepower and Other technical

details, as well as price.

68.

Incidentally, you may be interested to know that Mappppp'
invento turnover is eight times a year, while the new
Harvard Report shows that the typical department store has--
3.85 stockturns a year based on average monthly inventories.

Studies show that $85 a square foot return on selling space
is a very good figure for department stores. At Masters'
h8th Street store near Rockefeller Center, in the heart of
the highest rent district, we have a return of about $1,000
a square foot.

eratin ense Compargg

The Operating expenses of the average department store have
reached an all-time high Of some 3% per cent. Compare this
with Masters' costs, which are slightly more than 12 per cent
and going even lower as our newer units get into full operation.

We agree with Hess Brothers, the department store who say -
and I quote Max Hess: 'The only reason $10 is a fair price
is because we haven't yet found a way to sell the article

for $9 or $8.‘

When a customer goes into an average department store, the
price she is asked to pay for any product has built into it
not only the usual high overhead costs, added to the whole-
sale cost Of the merchandise - but the price also has built
into it a free delivery to Mrs. Smith, a free pickup Of
returned goods from Mrs. Jones, a fancy gift wrap for Mrs.
Brown, a layaway for Mrs. White, an extended credit to Mrs.
Green, and the salaries of lots of superfluous people.

As Sam Flanel of the N.R.M.A. told a group of department
store executives at a meeting last year in St. Louis:

'With so much chain, variety, food drug and
discount store movement into department store
merchandise lines, there are limits on what we
can do to raise our mark-ans even if our custo-
mers would let us do so.‘

'I think,‘ Mr. Flanel concluded, 'we've reached
the upper limits on mark-ons.’

Thap gag the understatgment of the year, and we certainly
agree wi him.

 

69.

Dgpartmgnt Stores Changipg

Three years ago it was unthinkable that customers should
serve themselves in a department store. Now, many depart-
ment stores have self-selection and some have self-service.
Macy's says it has increased sales from 7 per cent to 23
per cent in some departments by self-selection and self-
service.

Some old-line department stores in Manhattan have begun to
advertise loss leaders without regular store services. In
other words minus delivery service and credit. All these
are now 'extras' you have to pay for if any loss-leaders
are still available when you get to the store.

I noted that at last year's meeting of the N)R.M.A., sugges-
tions were made for stores to introduce the following unor-
thodox practices:

1. Self-selection and self—service fixtures in more
departments. This has been the practice at Masters
for 22 years.

2. Charging customers for deliveries, C.O.D., returns,
pickups, and gift-wrapping. Masters has always
charged for delivery of anything the customers
could not carry. Masters never charged for war-
ranted pickups or C.O.D. and will continue to
render these services free.

3. Reducing handling costs by selling more merchan-
dise in the factory-sealed cartons. This has been
a practice at Masters for 22 years.

h. Curtail sales to employees at a discount. Masters
still Offers employees its merchandise at COST as
an incentive.

5. Flexible pricing according to the profitability of
each individual item, a concept called 'Merchandise
Management Accounting.‘ Masters does not use such
a policy or concept. We use a set formula of mark-
up which applies to‘pll types Of merchandise. When
we have a good value we turn that value over to the
consumer, which we think is the right thing to do.

6. Accounting in terms of profit dollars instead of
percentages. We were probably the pioneers in
recognizing this basic FACT OF LIFE.

”fix—.3; = . _ -=- .. " _..-- ,_

70.

7. Less wasteful use Of cooperative advertising money.
Cooperative advertising money, as any schoolboy can
figure, comes out of your pocket or mine. In the -

~ use Of money, any money, we are never wasteful.

8. Cutting costs of Operation all along the line. I
think department stores are beginning to learn this
lesson from discount houses.

These eight points are all components of the gross markup,
which can be controlled and must be controlled. We do it
and so can any other intelligent merchant.

Sgrvice Given by Masteps

Now with regard to service: I want to emphasize the fact
that Masters Offers services equal to, and often better than,
those offered by many department stores. For example:

1. All merchandise is brand new and sold in the
original factory-sealed carton.

2. We allow a refund or exchange at any time up to
thirty days with no questions asked.

3. Masters itself furnishes a one-year guarantee in
addition to the manufacturer's warranty.

h. we maintain on our own premises a large, dependable
repair service epartment--we elieve we are the
only store in the country rendering such a service.

The reason why we do it is strictly a matter of
dollars and cents.

Our studies showed that the tortuous procedure of
taking back a product, giving a receipt, sending
the product to the manufacturer with proper papers
and forms, waiting, picking it up, notifying the
customers--cost us more in manhours, money, admin-
istration and frustration-especially customer
frustration-than that system was worth. We run
our repair department not as public benefactors
but to save money.

5. ‘We g9 make home deliveries, charging the customer
who demands this service just what it costs us.
Our service organization also installs and services
major appliances in the customer's home. On major
appliances, installation and service is built into
the cost of the item whether Masters buys it or
Macy's buys it. SO here we all operate alike.

6.

7.

9;

71.

We forbid switch selling on the part Of any of our
sales help. We don't use bait advertising or loss
leaders. We don't nail any appliance down to the
floor. We don't advertise an item when we have

only a half dozen in stock. If we advertise it we
have it in quantity AND WE ADVERTISE THE QUANTITY,

so no one is fooled. Onlz a fool fools his own
customers.

We once advertised an 8-cup percolator for $12.88.
The shipment didn't arrive. We delivered a 10-cup
percolator which COST US $15, and sold 3800 of them
in a three-day sale.

Once we advertised a h-piece picnic set for 99 cents
(# cups, knives and spoons) in a flier. Now a flier
or circular lasts five or six weeks and we should
have know that. We sold out in two hours our stock
of 1700 sets which we had received as a bonus from

a manufacturer. We sold 2 00 additional picnic sets
at 99 cents which cost pp 3 a set. This was cheaper
than fooling a customer.

In essence: we make every item in our store, every
shopping day, reflect a worthwhile saving of money
to the customer. What store offers more?

On advertising this past year the Masters chain
spent about one and a half million dollars, to
build our sales and unit volume to an even higher
point where it will substantially lower the cost
of Operation and enable us to Offer even lower
prices to our customers. This is the basis of the
advertising profession's argument when they sell
pp advertising.

And we are sold. It works.

We have a well-established time payment plan worked
out With local banks who take our customer's paper
at a very good rate. In this way our operating
costs don't go up because the only people who pay
for this service are the people who want it.

At this point may I say that we are also working on a charge
account system for our customers. It will be done in a new
way, much more economical than that Of the department stores,
a way in which only the participating customers will pay for
the service.

720

The Future Of Qiscount Retailing

'We started off in business twenty-two years ago by very
frankly catering to the low-income group Of customers. But
this didn't last too long. During the Second War when we
maintained our discount policy even on hard-to-get merchan-
dise, our customers were upgraded into higher-income brackets.

Today, our customers come from the very highest income levels,
as well as the middle and lower ones. Our customers have
included world-famous people in industry, society and enter-
tainment; we have even served a family in the White House.

Someone recently pointed out that shOppers in discount houses
are among the shrewdest of all shoppers. The discount house
customer tends to be somewhat young, keenly interested in
buying at rock-bottom price, and very well educated in the
realm of retail value.

A store does not become a 'discounter' just by putting up a
sign in its window saying it is one. -Some stores will meet
the prices offered by a legitimate discount house on a few
items. A true discounter offers a discount on every item in
his store. If you were to buy all your needs for one year
from Masters, you would pay less money than if you spread
your purchases among many other stores.

Masters is a discount department store and the secret of its
success is apparent in my definition of a discount de artment
store: it is a streamlined, Tow-cost, fast-turnover, high-
volume, low-margin operation in pre-sold, nationally-adver-
tised, top-quality, guaranteed brands. May I repeat: because
of our formula Of mark-up from cost, every item is a value

to the customer. Because of this policy we are probably the

only true 100 per cent discount house in America with a one-
price policy in all our stores.

Let me predict that you can expect discount retailing in the
near future to take an even greater bite out of the total
retail volume of consumer goods sold because:

1. We are ever improving our techniques of operating
at low margins.

2. We are taking on additional categories Of consumer
goods such as furniture, more soft goods, and even
drugs.

3. ‘We will go increasingly into new types of distri-
bution, such as shopping centers, and highway outlets.

73-

%. And more manufacturers will change their policies
and pricing schedules to fit into our high velocity
Operation.

'Fair Trade' Means Price-Fixing

A final word gentlemen: As an American who believes in the
American system of free enterprise, I would be a hypocrite
if I addressed a group Of retailers today and did not avail
myself of the Opportunity to comment on the new 'fair trade'
law Congress is about to push through.

I must express my feeling Of shock and disgust at the bald-
faced attempt by certain Congressmen to rig retail prices so
the people of the United States will have to pay at least a
billion dollars more a year for merchandise and food.

The phony phrase 'Fair Trade' is the most deceitful word in
the English language and the retail drug association execu-
tives who have spread the entire country with their phony
propaganda on so-called 'Fair Trade' have no intention,
pbviously, of giving up their high-salaried jobs in their
so-called trade association. Drug and pharmaceutical manu-
facturers furnish their goods to druggists under private
labels today While giving lip service tO price-fixing.

Let me give up some graphic examples of what I am talking
about. Take two bottles of buffered aspirin. They are Of
the exact same quantity, the formula is clearly indicated
on the label according to law. Both formulas are exactly
the same. One is fair traded and sold for $1.23 per 100
pills. One is sold at Masters for 19 cents per 100.

Take a one-pound jar of white petroleum jelly that is fair
traded at 89 cents; a one-pound jar Of Masters U.S.P. white
petroleum jelly, exactly the same, sells for #8 cents.

Price-fixing is a dirty cussword to the 'Fair Trade' crowd;
they prefer the term 'voluntary fair trade.' That phrase
is also a deception. Price-fixing is never voluntary--
always coercive--no matter what name you give it.

I am appalled that the House Commerce Committee approved out
of committee the bill introduced by their chairman, Congress-
man Harris for 'Federal Fair Trade.' This, in my view, is
the most flagrant abuse Of consumer trust in congressional
history. Most Of the State Supreme: Courts in our land have
already labelled the former 'fair trade' laws unconstitutional,
unfair, and unenforceable.

7%.

You have already found at your places copies Of the full page
ad I inserted in the Sunday New York Times and‘Washington
newspapers. If you are interested I will gladly send you
additional copies.

Coppetition Bripgs Lower Prices

Why don't you department store executives show the courage to
come out, as I have, in a vigorous counterattack against this
conspiracy to destroy free, competitive retailing? Let's
forget we are competitors. DO you know what is happening to
us AS CITIZENS when each succeeding Congressional session
forces us to give up more of our rights?

 

The Department Of Justice has come out flatly every time
against this type Of monopoly legislation.

Two Chairmen of the Federal Trade Commission have denounced
the Federal 'Fair Trade' Bills introduced in the House and
Senate.

Edward Hourey, former FTC chairman, told the American
Management Association in February of this year:

'The short definition Of monopoly power is the power
to determine the market price and exclude competitors.‘

The present FTC chairman John Gwynne, told the House Commerce
Committee in March of this year:

'The fixing Of retail prices is inconsistent with the
American system of free competitive enterprise and is
contrary to public policy expressed by Congress in the
antitrust laws since 1890.'

Competition in business is the spark plug of the.American
system Of free enterprise. You know that better than any
one else. ‘

Fair competition is the enemy of monOpOly whereever it seeks
to breed. It is the enemy of low wages and low standards of
1Ving 0

Competition brings lower prices. Lower prices sell more
goods. Volume means profits.

If people can buy more things for less money their standards
Of living go up, and everyone benefits - even the tax
collector.

75.

You and I, by our efficient Operations and creative showman-
ship help people to live better. We help manufacturers to
make more and better products and to spend more money for
research and development plants and equipment, to spend more
money for advertising and promotion so we can sell more goods.

Everyone benefits, and that's the way it should be.

I do hope I have contributed to a better understanding of
the discount house and its relationship to the retailing
revolution that is going on in the mass distribution Of
American consumer goods. The fruits Of that revolution
must be passed on to the American consumer in the form of
ower prices, competitively arrived at in the Open market."

APPENDIX

76.

"The burden Of a new store expansion program on the
company executives is usually considered last. I think it
deserves more consideration. . . A hastily developed pro-
gram can be ruinous." - Milton L. Selby then president Of
Safeway Stores, at the National Association Of Chain Stores
convention, Nov. 2, 1955.

"SO we ask ourselves: Is this a maturing industry?
Certainly the rise in store expense is one sign Of maturity.
There is also some evidence of a decline in the rates of
return on investments." - Prof. Malcolm P. McNair, Lincoln
Filene professor of retailing, Harvard Graduate School of
Business Administration at the Super Market Institute mid-
year meeting, Dec. 5, l 56.

"We must recognize the possibility that unrestrained or
misdirected expansion can prove economically unsound. In
the rush to Open new outlets, there is always the danger
that many communities will become over-stored." - Ralph W.
Burger, president of A & P, public statement, Jan. 1%, 1957.

"The typical new supermarket Opened in 1956 was in direct
competition with two other supermarkets. The typical new
supermarket Opened in 1957 faces competition from three other
supermarkets." - Curt Kornblau, research director of SMI,
reporting on survey of new supermarkets, Dec. 9, 1957.

"There are several important areas today which deserve
our keenest consideration. One is the deleterious effect
upon the high volume principle of the supermarket that is
implicit in some of the irrational site-selection competi-
tion we have seen in recent years." - Myer B. Marcus, execu-
tive vice-president, Food Fair Stores, SMI convention, May
26, 1958.

"As more markets spring into existence the competitive
race gets much hotter . . . Couldn't it be that we are sowing
the seeds of our own destruction by building in excessive coats
and raising the break-even point to a level that becomes
unrealistic and impractical." - T. A. Von der Ahe, president,
Von's Grocery Co., at NAFC annual meeting, Oct. 7, 1958.

"As might be expected, it always seems that 'the other
fellow' - my competitor - is responsible for the over-stored
condition in a specific area which is creating so much Of
today's pressure for sales and also is cutting into profits." -
John.A. LOgan, then president of NAFC, at NAFC annual meeting,
Nov. 30, 1960.

77.

"Over-storing can become the national disease of the
supermarket industry. All Of us must seek to check this
disease . . . If there are those who insist on putting up
stores where they are not needed, their acts will bring
them to grief." - Sidney R. Rabb, Chairman of the Board,
Stop & Shop, SMI mid-year conference, Jan. 30, 1961.

"LOS ANGELES - Supermarket trade circles suggest that
southern California's economic problems will hasten the
demise or acquisition of marginal independents and chains
in the area this year." - Les Gilbert, in Supermarket New ,
Feb. 20, 1961 .

 

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