Cheap (6 page)

To meet the needs of this growing consumer class, discounting was quietly on the rise. By this time many manufacturers had stopped even trying to set minimum retail prices, since the fair-trade laws were difficult to enforce and critics accused them of being discriminatory and anti-American, and worse. A decade earlier, in 1937, Harvard Business School Professor Malcolm P. McNair had railed against the laws in the pages of a Duke University Law School journal: “The sentiment which furthered the Robinson-Patman Act and its various blood relatives has in it more that is reminiscent of the beginnings of the Nazi movement in Germany, where the same zeal was displayed to protect the small business owner from large corporations. Ultimately, perhaps both may lead to a totalitarian state.” McNair did not explain how enforcing manufacturers’ minimum prices would lead America down the totalitarian path, but by the early 1950s the public had lost its stomach for price minimums.

New technologies—television in particular—radically altered America’s relationship with the material world. In 1948, only 350,000 homes had television sets. Five years later, in 1953, television ownership had exploded reaching 25 million homes. Suddenly, half of all American households had a hulking brown cube in their living rooms through which merchants cycled a steady stream of promotional messages. A wave of lively and sometimes aggressive advertising rolled over the country and spurred record levels of consumption. Advertising expenditures soared, prompting progressive economist John Kenneth Galbraith to decry the creation of “desires . . . to bring into being wants that previously did not exist.” Television advertising was particularly vital for the low-service discount chains that, with no experienced salesforce to push product, relied on the customer to come to their stores pre-loaded with wants.

The postwar boom of the late 1940s and 1950s found the working and middle classes actively seeking better homes, better furniture, more and better medical care, fancier cars, and more exotic travel. As war shortages faded into memory, the challenges of industry remained not in the production of goods but in the selling of them. There was more than enough stuff to go around; the challenge was unloading it at a profit. As the 1950s bled into the 1960s, further increased efficiencies cleared the way for still more products to be made, sparking still more price competition. Computers, although laughably primitive by today’s standards, were in the early 1960s nothing short of miracles. The room-sized card-fed IBM behemoth stored more information and processed more data than could small armies of humans. Described as a “wondrous combination of the traveling salesman, mathematical genius, and the Sears, Roebuck catalogue,” the computer vastly streamlined distribution, giving retailers still more power. Thanks to the new technology, store owners no longer had to wait five days or more for their merchandise; they could demand next-day delivery and get it. And because of this remarkable “just-in-time” distribution capability, suppliers were no longer free to dump piles of goods into a customer’s warehouse with the understanding that the retailer would eventually find the market. It was now up to the manufacturer, not the retailer, to manage inventory and to pay the price if supply got out of sync with demand. The trick was to hold inventories to a minimum without getting caught short. If a manufacturer couldn’t provide the right item at the right price, the retailer simply went elsewhere. Manufacturers felt great pressure to keep their own inventories well stocked—at significant cost to themselves—while at the same time offering retailers the lowest possible wholesale price.

Food stores offer a particularly vivid example of this trend. Before the “supermarket revolution” of the 1930s, roughly 110,000 retail food sellers accounted for 70 percent of the business. Thirty years later a mere 30,000 retailers accounted for the same volume. And the large, centralized supermarkets wielded enormous power. As a General Foods executive told a reporter at the time, “If one [chain store] makes a decision not to carry our brand, this could be a sizeable chunk of our business.” The obvious corollary is that General Foods tried very, very hard to keep the chain stores happy by keeping wholesale prices as low as possible.

While this may seem a subtle change, it was not. In the 1930s and 1940s, American manufacturers seemed invincible—muscular bastions of technological sophistication and efficiency, in sharp contrast to the puny, low-tech, and somehow feminized world of retail. The manufacturers called the tune, and the retailers danced to it. Suppliers signed exclusive contracts with individual store managers with the understanding that theirs would be the only store in a given region to carry a particular brand. If the store didn’t perform or reduced the size of its order, it lost the contract. But in the 1950s, federal laws severely restricted the scope of these exclusive deals, and department stores began poaching competitors’ best-selling merchandise. As the goods became more generic—as one coffeepot or sewing machine or bicycle was considered just as good or nearly as good as another—the manufacturers lost their edge. At the same time, locally owned hardware stores, clothing stores, and electronics dealers were giving way to the large, centrally controlled chains. The gradual consolidation in the retail sector led to stores being gobbled up by larger stores like so many minnows in the sea.

By the late 1950s legal barriers to price-cutting were gone. Retailers of every stripe—department stores, specialty shops, supermarkets—reconsidered their business models, rethought their distribution systems, and worked hard to offer at least a semblance of the discount experience. They lowered their prices and lengthened store hours. With the exodus to the suburbs and the improved highway system, shopping became decentralized. Discounters took advantage, drawing customers from within a five-mile radius of urban centers and a twenty-five-mile radius in rural areas. Soon every corner of the country had its own discount operation: Spartan, Zayres, Mammoth Mart, Bradlees, Shoppers World, Two Guys, W. T. Grant, The Giant Store, among scores of others. These chains catered to the growing legion of suburbanites by cultivating a “family fair” environment with acres of free parking, piped-in music, and aisles wide enough for the ubiquitous shopping cart. They cut overhead costs by maintaining little or no stored inventory. Everything in stock was laid out on the store floor within sight and easy reach of customers. Self-service further reduced costs by eliminating the need for salesclerks, and it sped up the shopping process. A newly informal shopping environment attracted a growing number of male shoppers—especially blue-collar workers who felt out of place in the stodgy downtown department stores. Evening and Sunday hours were added to encourage working stiffs to stroll the aisles with their homemaker wives. Men were highly desired customers, for it was thought that they, not women, were the most impatient and impulsive shoppers, prone to making purchases based on visual and visceral appeal. To capitalize on this, discounters prominently displayed tempting selections of auto supplies, shaving accessories, and other manly goods at the end of shopping aisles, poised for easy launch into shopping carts and baskets.

Far from being sated with this growing feast of goods and services, as John Kenneth Galbraith predicted they would be, Americans’ desire for what money could buy grew faster than their incomes. Third-party universal credit cards, introduced in 1949, would in ten years’ time enable the conversion of frugal America to a nation in debt. Despite growing prosperity, the new middle class found it increasingly difficult to keep up, and, as do many of us today, started to “trade down” to “trade up.” Middle-class consumers who wanted a showy car or a boat or a trip to Paris saved for these luxuries by cutting corners where they could on commodities such as children’s clothes, toiletries, hardware, and even food. As more and more respectable people sought low price, discount shopping lost its stigma. It would gradually become the norm. In the words of one anonymous retail guru of the time, “The discount house is producing the greatest deflation of stuffed shirts ever to hit American business.” As the Eisenhower administration drew to a close, three thousand discount chains littered the country with annual sales of an astonishing $5 billion. Discounters became the leading retailers for children’s clothes and toys; the second largest sellers of sporting goods, auto accessories, garden products, and housewares; and third in health and beauty aids, women’s clothing, shoes, furniture, and jewelry. Stuffed shirts or no, discounting had changed the face of retail indelibly and forever. There would be no turning back.

THE FOUNDING FATHERS

Cheap Merchandise means cheap men, and cheap men mean a cheap country, and that is not the kind of Government our fathers founded, and it is not the kind their sons mean to maintain.

PRESIDENT WILLIAM MCKINLEY

 

 

 

 

 

In 1962, Harvard’s Malcolm P. McNair drew up a list of the six greatest merchants in American history. Frank W. Woolworth made the cut, as did John Wanamaker, J. C. Penney, General Robert E. Wood of Sears, Roebuck, and Michael Cullen, the first “supermarketeer.” Perhaps least known of these notables was Eugene Ferkauf, founder and controlling stockholder of E. J. Korvette, then the nation’s largest discount store. With his hardscrabble upbringing and all-American good looks, Ferkauf is sometimes likened to Sam Walton. In truth, the men had very few things in common. A quick look at their personal histories offers clues that they probably thought quite differently on pressing issues of the day. For starters, the name
Ferkauf
is an Ellis Island contortion of
ferkoyf,
which means “sell” in Yiddish.
Walton
means “walled town” in Old English. Putting personal history aside, the two did share one defining character trait: Each was unimaginably cheap.

Sam Walton drove the obligatory junk car and wore off-the-rack suits from his stores, price tag dangling. Wal-Mart executive offices were furnished with mismatched furniture samples from vendors, some of it lawn furniture. The company still charges suppliers for incoming phone calls, and its notorious reimbursement policy allows for tips no higher than 10 percent.

Ferkauf ’s brand of parsimony was no less severe, but it tended toward the personal. He maintained no office, paid no secretary, and reportedly took important business clients to lunch at a hot dog stand. (It’s unclear who paid for the franks.) From all available evidence he never dictated a letter or made a speech. He shunned credit cards. He spent weekends with his family and workdays making surveillance runs through his stores, tidying up piles of merchandise and interrogating customers. In a 1962 cover story,
Time
magazine described the forty-one-year-old CEO as “probably the most unorthodox tycoon in the land.”

Unorthodox, maybe, but at the same time familiar. Ferkauf’s biography reads like a caricature of a self-made man. He was born in Brooklyn, the cherished son of Rumanian immigrants. An indifferent and dreamy student, college was not for him. After high school he hopped the subway every morning to midtown Manhattan, where he managed one of his father’s two small luggage shops. He enlisted in the army during World War II, served four years as a sergeant in the Signal Corps, and returned home to a hero’s welcome and the family business. He sold belts and bags at the expected 40 percent markup, netting about $80 a day. This brought a decent living, but it was not enough for Gene, who had grown in both confidence and ambition in the military. Slash that markup in half, he reasoned, and leather goods will fly out the door. His father, Harry Ferkauf, was not so sure. Harry was a cautious, careful man who recalled the Great Depression with dread. Low prices, he warned his son, would anger other merchants. Civility and comradeship, not profit, came first. Gene ignored his father, cut prices, and stood back as the customers poured in. Soon he was selling $500 worth of merchandise a day. Harry pleaded with him to up his prices. He was antagonizing the competition, and, in any case, why sell more than you need to make a decent living? In 1948, Gene could stand the kvetching no longer. He plowed $4,000 into his own business selling discounted leather goods out of a second-story loft on East 46th Street. He named the store E. J. Korvette.

E. J. KORVETTE
is sometimes mistaken as a contraction of “eight Jewish Korean War veterans.” This blunder is understandable, given that Ferkauf hired his army pals to run the place, but these were veterans of a different era. Korvette opened its doors before the Korean War began. The
E.
stands for Eugene and the
J.
for Ferkauf’s friend and partner Joe Zwil lenberg.
Korvette
is an allusion to the famed Canadian World War II sub-chaser, the Corvette. (Ferkauf changed the
C.
to a
K.
to avoid legal hassles with the navy.)

Korvette started in leather because Ferkauf knew leather. But he also knew that leather wasn’t sexy, at least when it took the shape of wallets and luggage. Customers needed wallets and luggage, of course, but this was not the stuff of which dreams were made. Postwar America was bursting with pent-up eagerness and enthusiasm for the new, especially technology. People loved the shiny stuff—especially large appliances: washing machines, vacuum cleaners, and refrigerators. Everyone wanted the biggest and the best, and in hot new colors like avocado green. The media had cast these mechanical marvels as freedom machines, transformers of the dreary into the fabulous. Washing machines banished the drudgery of “washing day”; freezers made the dream of TV dinners come true. To cite but one remarkable example, General Electric ran an advertisement entitled “Things My Bill Has a Right to After It’s Over,” referring to the postwar world as seen through the eyes of the wife of a young soldier. The blushing bride says her Bill has a right to all the coffee he wants from her spanking new G.E. Coffee Maker, all the ice he wants from her G.E. “zoned” refrigerator, and “no more K.P.,” thanks to the new G.E. electric sink that “will let us forget that kitchen drudgery forever.” Suddenly, actions once taken by hand—mixing a cake batter, opening a tin can—were jobs for a machine. “Electronic servants” loosened apron strings and gave women more leisure to—what else?—shop for more low-price goods. Set free from their domestic doldrums, women were drenched in newfound leisure, or at least that’s how the story was told. Advertisements advised them to spend all that free time wisely, as in this
Ladies’ Home Journal
advisory: “Time to watch the papers for announcements of special sales. Time to be constantly alert for special bargains. Time to shop around and secure the utmost for their money.”