m n ^ m s ^
This dissertation has been microfilmed exactly as received 67-2481 LOWRY, James Rolf, 1930- AN EVALUATION OF THE CURRENT STATUS AND FUTURE OUTLOOK OF LEASED DEPARTMENTS AS AN IMPORTANT ASPECT OF DISCOUNT MERCHANDISING. The Ohio State University, Ph.D., 1966 Economics, commerce-business
University Microfilms, Inc., Ann Arbor, Michigan C Copyright by
James Rolf Lowry
1967 AN EVALUATION OF THE CURRENT STATUS AND
FUTURE OUTLOOK OF LEASED DEPARTMENTS AS
AN IMPORTANT ASPECT OF DISCOUNT MERCHANDISING
DISSERTATION
Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University
By
James Rolf Lowry, B.S. in Comm., B.S. in Bus. Ed., M.B.A.
*******
The Ohio State University
1966
Approved by:
Adviser Department of Business Organization ACKNOWLEDGMENTS
Several years ago this writer was seeking an area of research that would be a suitable topic for a dissertation. An investigation into the utilization of leased departments by discount store merchants was initially suggested by this writer's adviser, Dr. William R.
Davidson. A preliminary study of the field showed that this was an area where a contribution to marketing knowledge could be made.
The assistance given by Dr. Davidson in the form of guidance, patience, cooperation, and grant provider is deeply and sincerely appreciated. His firm support made this comprehensive study possible.
Dr. James C. Yocum, Director, Bureau of Business Research, carefully and thoughtfully directed and scrutinized the research design and methodology of this investigation. His constructive supervision was highly valued. Mr. Omar S. Goode of the Bureau of Business Research
spent many hours of his personal and professional time assisting this writer in the tabulation and analysis of the research data. He pro
vided an invaluable contribution to this project. Further acknowledg
ment is made to Dr. Alton Doody for his effective evaluations of out
lines and his suggestions for direction of approach.
My wife, Margaret, who efficiently managed a growing family
during the period of this study, was a catalyst in the research mix.
Her stoic understanding and encouragement allowed this project to
progress and to be concluded.
Those leased department operators who responded to the appeal
ii by Dr. Davidson for grants of funds to support this work must be parti cularly thanked. Without their gracious participation this endeavor would not have been possible.
The efforts of all the leased department operators in discount stores who participated in the survey are appreciated. The worth of information and research was recognized by these capable businessmen who took their valuable time to complete the survey questionnaire.
Appreciation is also expressed for the interest shown and materials furnished by Richard Groberg, editor, Discount Store News,
William Duvel, Vice President, Dun & Bradstreet, and the research staff of Fairchild Publications. An expression of gratitude goes to many others who remain unnamed for their cooperation in this endeavor. VITA
October 16, 1930 Born - Fort Wayne, Indiana
1952 ...... B.S. in Comm., The Ohio State University, Columbus, Ohio
1953 ...... B.S. in Bus. Ed., The Ohio State University, Columbus, Ohio
1954 ...... M.B.A,, The Ohio State University, Columbus, Ohio
1954-195 5 ...... Westinghouse Electric Graduate Student Training Program, Pittsburgh, Pennsylvania
1955-195 8 ...... Procurement Officer, United States Air Force, Eielson, Air Force Base, Alaska
1958-1960...... Assistant to Sales Planning Mgr., Westinghouse Electric Corp., Mansfield, Ohio
1960-1962. .... Assistant, Business Organization Department, The Ohio State University, Columbus, Ohio
1962-1966...... Instructor, Business Administration, Bowling Green State University, Bowling Green, Ohio
1966 ...... Assistant Professor, Marketing, Ball State University, Muncie, Indiana
FIELDS OF STUDY
Major Field: Marketing
Studies in Marketing. Professors William R. Davidson, Theodore N. Beckman, Robert B. Miner, and Robert Bartels
Studies in Finance. Professors Elvin Donaldson, John Pfahl, Leo Stone, and George Goodell
Studies in Insurance. Professors David Bickelhaupt and James Hammond
Studies in Economics. Professors Clifford James and Robert Patton
iv CONTENTS
Chapter Page
I. INTRODUCTION ...... 1
Statement of the problem ...... 1
Objectives of the study...... 3
Definitions and scope...... 7
Secondary research ...... 9
Primary research ...... 10
II. DEVELOPMENT AND USE OF LEASED DEPARTMENTS...... 21
Earliest origins ...... 21
Origin in the United States...... 24
Present use in department stores ...... 30
Leased department characteristics...... 35
Organizations operationally similar to
leased departments ...... 37
Establishment of lessee - lessor rapport ...... 44
III. HISTORICAL DEVELOPMENT OF DISCOUNT STORES...... 47
Closed door discount store ...... 49
Promotional discount store ...... 53
Soft goods supermarket ...... 55
Integration of discount store types...... 58
Present utilization of leased departments
by the discount store...... 60
v Chapter Page
IV. FINANCIAL CONDITION OF LEASED DEPARTMENTS IN
DISCOUNT STORES...... 65
Failures of discounters...... 65
Financial ratios ...... 66
V. PROFILE OF THE TYPICAL LEASED DEPARTMENT IN
DISCOUNT STORES...... 73
Location...... 73
Number of leased departments ...... 82
Measurements of the leased departments ...... 86
VI. PERSONNEL PRACTICES OF LEASED DEPARTMENTS
IN DISCOUNT S T O R E S ...... 104
Number of employees...... 104
Training programs...... 112
Unionization ...... 115
Payroll expense...... 122
Dollar sales per employee...... 125
VII. SERVICE CHARGES PAID TO THE DISCOUNT STORE BY THE
LEASED DEPARTMENT OPERATORS...... 133
R e n t ...... 133
Advertising...... 137
Combined rent and advertising...... 137
Credit service ...... 141
Warehouse service...... 141
Checkout service ...... 144
vi Chapter Page
VIII. OPERATING PRACTICES OF LEASED DEPARTMENTS IN
DISCOUNT STORES...... 145
Sources of purchases ...... 145
Methods of supplying merchandise to departments. . . . 151
Methods of Inventory control ...... 155
Rate of Inventory t u r n o v e r...... 159
IX. DEVELOPMENT AND GROWTH OF THE LEASED DEPARTMENT
IN DISCOUNT STORES ...... 163
Business of origin ...... 163
Operation of other businesses...... 170
Expansion plans...... 173
Growth from 1958 to 1965 ...... 184
X. ATTITUDES OF THE LEASED DEPARTMENT OPERATORS
IN DISCOUNT STORES TOWARDS LEASING ...... 189
Factors to investigate ...... 189
Advantages of operating leased departments ...... 196
Disadvantages of operating leased departments...... 202
XI. SUMMARY AND CONCLUSIONS...... 210
Historical development ...... 210
Financial condition of leased departments...... 212
Major conclusions from the survey...... 212
Significance of the study...... 224
Recommendations for further research ...... 225
vii Page
APPENDIX
A. Supplemental Tables...... 230
B. Questionnaire and Letters sent to Operators of
Leased Departments in Discount Stores...... 241
C. Values of Chi-Square for Differences in Response
Between Lessees Completing Mail Questionnaire
and Lessees Personally Interviewed ...... 246
D. Selected Comments from Leased Department Operators
in Discount Stores Regarding the Role of the
Lessee in Discount Stores...... 252
BIBLIOGRAPHY...... 260
viii LIST OF TABLES
Table Page
2.1 Lessees In Department Stores ...... 34
3.1 Number of Merchandise Lines Leased by Selected Soft Goods Supermarkets, 1958...... 59
3.2 Per Cent of Departments in Discount Stores that are Leased Departments, Comparison Among the Years 1965, 1964, and 1963, by Merchandise Line...... 62
3.3 Per Cent of Departments Owned by the Discount Stores and Leased by the Discount Stores, Comparison Between 1964 and 1962, by Merchandise L i n e ...... 64
4.1 Financial Ratios ...... 67
4.2 Financial Ratios ...... 70
5.1 Headquarters Location...... 74
5.2 Geographic Operation ...... 77
5.3 Geographic Operation ...... 79
5.4 Preferred Location ...... 81
5.5 Departments Operated ...... 83
5.6 Departments Operated ...... 84
5.7 Typical Department Size...... 88
5.8 Optimum Department Size...... 89
5.9 Typical Department Sales...... 91
5.10 Optimum Department Sales...... 92
5.11 Typical Sales Per Square Foot...... 94
5.12 Optimum Sales Per Square Foot...... 95
5.13 Typical Transaction S i z e ...... 97
5.14 Optimum Transaction S i z e ...... 99
5.15 Typical Items Stocked...... 101
ix Table Page
5.16 Optimum Items Stocked...... 102
6.1 Number of Employees...... 105
6.2 Full-Time Employees...... 108
6.3 Total Employees...... 109
6.4 Part-Time and Nonselling Jobs...... Ill
6.5 Training Programs...... 114
6.6 Training Programs...... 116
6.7 Union Contracts...... 117
6.8 Union Contracts...... 120
6.9 Union Contracts...... 121
6.10 Payroll Expense...... 123
6.11 Payroll Expense...... 124
6.12 Sales per (Full-Time and Part-Time) Employee ...... 126
6.13 Sales per Employee...... 128
6.14 Sales per Full-Time Employee ...... 130
6.15 Sales per Full-Time Employee ...... 132
7.1 Rental Charge...... 134
7.2 Advertising Charge ...... 138
7.3 Rental and Advertising Charge...... 139
7.4 Credit Service Charge...... 142
7.5 Warehouse Space Charge...... 143
7.6 Checkout Service Charge...... 144
8.1 Sources of Supply...... 147
8.2 Methods of Supply...... 132
x Table Page
8.3 Methods of Supply...... 154
8.4 Inventory Control ...... 156
8.5 Rate of Tu r n o v e r ...... 160
9.1 Previous Operations...... 164
9.2 Previous Operations...... 167
9.3 Year of O r i g i n ...... 169
9.4 Other Businesses Operated...... 171
9.5 Other Businesses Operated...... 172
9.6 Sales by Other Businesses...... 174
9.7 Expansion...... 175
9.8 Expansion...... 179
9.9 Future U s e ...... 181
9.10 Sales Growth ...... 185
10.1 Factors to Investigate...... • 191
10.2 Factors to Investigate...... 194
10.3 Advantages of Leased Departments ...... 197
10.4 Advantages of Leased Departments ...... 200
10.5 Disadvantages of Leased Departments...... 204
10.6 Disadvantages of Leased Departments...... 207
Appendix
A.l Typical Sales Per Square Foot...... 231
A.2 Rental and Advertising Charge...... 232
A.3 Rental and Advertising Charge...... 233
A.4 Sources of Supply...... 234
xi Table Page
A.5 Inventory Control...... 235
A.6 Future U s e ...... 236
A.7 Sales Gr o w t h ...... 237
A.8 Sales Gr o w t h ...... 238
A.9 Sales Gr o w t h ...... 239
A. 10 Sales Gr o w t h ...... 240
xll CHAPTER I
INTRODUCTION
The vigorous growth of discount merchandising in the United
States since the mid-1950's has given rise to separate retailing en tities that sell to their clientele at a price which is discounted from the normal list price. These discount stores, often called either discount houses, self-service department stores, or mass merchandisers, have presented practitioners and academicians with new vistas for study and problem solving. The modus operandi of discount stores has many aspects distinctive from traditional retailing. This study focuses on only one characteristic of a typical discount store— the utilization of leased departments.
Statement Of The Problem
The utilization of leased departments is not exclusive to dis count stores. In the United States there has been a limited use of leased departments by some conventional retailers, namely, department stores and food stores. Some discount stores are truly like the ancient bazaars of Persia because all of their departments are leased.*- The store name reflects only a shell occupied by a conglomeration of lessees. For all merchandise lines in discount stores it has been
^Frank Meissner, "Closed Door Discount Stores," Journal of Retailing, Vol. 28, No. 30 (Fall, 1962), p. 22.
1 estimated a median 27 per cent of the departments are leased. This varies from a low of 10 per cent for traffic appliances to a high of 2 75 per cent for millinery.
There has been a brisk growth in the discount store segment of the retail industry. In 1960 discount store sales were estimated to 3 be $2.9 billion. Five years later in 1965 the sales of discount 4 stores escalated to $13.2 billion. The sales volume of the leased departments increased as the sales of the discount stores increased.
Dun & Bradstreet, Incorporated reported in 1964 that sales of $2.1 billion were achieved by over 460 leased department operators it listed
Although selling at low retail prices is not a new phenomenon, certainly the modern discount store with its usage of leased depart ments is. Until the present there has been no definitive exploration made into the policies, practices, and attitudes of the leased depart ment operators in discount stores. Much of the discussion in trade papers and other retailing publications about the lessee in discount stores is based on conjecture rather than fact. An examination of the literature in the leased department field indicates there have been no comprehensive studies of leased departments in any type of retail opera
2"The True Look of the Discount Industry-1965," The Discount Merchandiser (June, 1966) » P- 48.
3"The True Look of the Discount Industry: 1961:'" The Discount Merchandiser (July, 1962) , P- 30.
4"The True Look of the Discount Industry-1965," op. cit. , p. ;
^"improved Profits and Debt Positions Highlight 1964 Ratio Study of Leased Department Operators," Discounters Digest (New York: Dun & Bradstreet, Incorporated, September 28, 1965), p. 1. tion from the standpoint of the lessee. Several excellent studies of
leased departments in department stores have been completed, but the
information was based upon surveys of lessors. Thus, for this primary
research it was thought that the research design and the methodology
should be directed to the leased department organizations in discount
stores.
Suppliers, discount store operators, other retailers, and the various interested publics need extensive and accurate information upon which to base their business decisions regarding the lessee in discount
stores. It is believed that the information in this study will provide
a foundation for making better-informed decisions. Overall, the con
clusions of this research should provide new perspectives into the rapid
growth and development of leased departments in discount stores, the present status of leased departments, and the attitudes held by the
lessees.
Objectives Of The Study
The overall objective of this study is an evaluation of the
current status and future outlook of the leased department in discount
^Stanley F. Teele, Department Leasing in Department Stores (Boston: Bureau of Business Research, Harvard University, October, 1933). Leased Departments, Rates, Policies, and Expenses in Department and Specialty Stores (New York: Controllers^ Congress, National Retail Dry Goods Association, 1952). Leased Departments, Rates, Policies and Expenses in Department and Specialty Stores (New York: Controllers' Congress, National Retail Merchants Association, 1958). Leased Departments, Rates, Policies and Expenses in Department and Specialty Stores (New York: Controllers' Congress, National Retail Merchants Association, 1965). stores. In order to accomplish this central purpose, it is necessary to verify a series of propositions formulated to establish a systematic and analytical framework of inquiry. An objective evaluation of the information compiled in an effort to test the hypotheses is more im portant than whether the propositions are correct or incorrect. The following 21 hypotheses were formulated:
Location
1. The region of operations for leased department organizations is
mainly in a single metropolitan area.
2. Leased department organizations prefer to locate their leased
departments in either independent or local discount store chains.
Number of leased departments
3. The small businessman operating from one to four leased departments
has an opportunity to develop and to grow as a leased department
operator in a discount store.
Measurements of the leased departments
4. The size of the typical leased department in any one merchandise
line is less than the optimum size desired by the leased depart
ment operators.
5. The dollar sales of the typical leased department in any one mer
chandise line are less than the optimum dollar sales desired by
the leased department operators.
6. The median dollar transaction size of the typical department in
any one merchandise line is less than the median dollar trans
action size for the optimum department desired by the leased
department operators. 7. The number of items stocked in a typical leased department in any
one merchandise line is more than the number of items stocked in
the optimum leased department desired by the leased department
operators.
Training programs
8. An informal introductory training program for new employees is the
only training the leased department employees receive from most
leased department organizations.
Leased departments with union contracts
9. The majority of all leased department employees belong to a
labor union.
Payroll expense
10. The payroll as a per cent of sales for leased department organiza
tions is similar for all organizations regardless of the mer
chandise line handled.
Service charges paid
11. A rental fee and a charge for advertising are the only signifi
cant expenses assessed against the leased department operator by
the discount store.
12. The rental commission and the advertising charge paid by leased
department operators differ according to merchandise lines.
Sources of purchases
13. The proportion of purchases made directly from manufacturers by
lessee firms is dependent upon the merchandise line handled by
the lessee operation. 14. For any given merchandise line, the larger the number of depart
ments operated by the leased department firm, the greater is the
proportion of purchases made directly from manufacturers.
Methods of Inventory Control
15. For different type merchandise departments, the sophistication
of the inventory controls varies.
16. For any given merchandise line, the greater the number of depart
ments operated by the leased department organization, the more
sophisticated the inventory controls become.
Business of origin
17. The majority of the firms operating leased departments have their
origin as operators of conventional stores.
Operation of other businesses
18. The majority of the firms operating leased departments are engaged
in other businesses which represent the greatest per cent of their
total company sales volume.
Factors to investigate
19. The factor that leased department organizations believe most im
portant to investigate before determining in which discount store
to operate is the caliber of management of the discount store.
Advantages of operating leased departments
20. The dominant advantage of operating leased departments in discount
stores versus owning and operating stores of one's own is the
greater amount of customer traffic generated.
Disadvantages of operating leased departments
21. The greatest disadvantage of operating leased departments in 7
discount stores versus owning and operating stores of one's own is
the difficulty of coordinating merchandising policies such as pric
ing and promotion.
Definitions and Scope
Since this research has been delimited to leased departments in discount stores, it is necessary to have a working definition of leased departments and discount stores. For purposes of this study a discount store is defined as
A departmentized retail establishment of at least 10,000 square feet that sells a reasonable mix of hard and soft goods, prices merchandise at a relatively low markup above costs, ad vertises extensively, minimizes free customer service, maximizes use of self-service, utilizes relatively inexpensive facilities, provides ample parking, and can be distinguished from other retailers by its emphasis upon "discount prices."
Conversations with discount store merchants and leased depart- 7 ment operators aided in the formulation of this definition.
A leased department refers to a unit which is not wholly owned
by the discount store in which it is located. Such a department is
sometimes called a licensed department since the legal aspects of a
licensing agreement rather than a leasing agreement may reserve to the
Q store a greater amount of control.
Considerable thought and attention in developing the definition were given to the criteria set forth for a discount store in the follow ing authoritative Marketing textbooks: Theodore N. Beckman and William R. Davidson, Marketing (New York: The Ronald Press Company, 1962), pp. 246-247; and Charles F. Phillips and Delbert J. Duncan, Marketing Prin ciples and Methods (Homewood, Illinois: Richard D. Irwin, Incorporated, 1964), pp. 240-241. ^Leased Departments, Rates, Policies and Expenses in Department and Specialty Stores, 1958, op. cit., p. 38. Professor Stanley F. Teele of Harvard cited four major charac teristics of the leased department which tend to differentiate it from other types of arrangements:
1) The lessee is an independent businessman or firm. 2) The lessee has control of all merchandising activities. 3) The lessee deals with the public under the firm name of the lessor. 4) The lessee has a personal representative in the store.
The first characteristic should not be implied as a restriction as to the type of organization which may be a lessee. The lessee could be a chain organization as long as it is corporately independent of the lessor.
For purposes of this study Professor Teele's four point desig nation of a leased department is accepted. In the survey of leased department organizations conducted by this writer, a few lessees in dicated they had leased departments without personal representatives being continuously present in the store. Since these lessees denoted their units as leased departments, an exception was made to the defini tion and they were classified as leased departments in the research.
Grocery supermarket leased operations in discount stores and operations of personal service departments such as dry cleaning and snack bars are excluded from the scope of the study. The grocery operations present merchandising policies and physical display problems unique from soft goods and hard goods merchandising. Discounters gen erally attempt to separate the store into food and nonfood sections.
g Teele, op. cit., p. 1. Since the personal service departments have different operating policies and practices than merchandise departments, they are excluded from the research, too.
The contractual provisions of the leasing arrangement are not studied in this dissertation. It was felt that the details of the lease would only be minutia and not add significantly to the general objective this research proposes to accomplish. The functional opera tions of a department such as buying and advertising have not been intensively researched, nor has any one type of merchandise department been singled out for a thorough analysis of its operations. Intensive functional and merchandise line studies were not appropriate to the research objective.
Secondary Research
The secondary research was centered around publications and organizations which serve the discount field. A valuable publication for this study was Modern Retailer, a monthly periodical for discount and self-service department stores. Annually, usually in the summer, this paper devotes one copy to a leased department listing. Each issue contains news articles, editorials, and descriptive comments on lessees' operations.
Another productive source of information was The Discount Mer chandiser. Each spring, this monthly magazine carries a statistical report on discounters entitled, "The True Look of the Discount Indus try." Interviews with discount store proprietors and a revelation of 10 their endeavors is a common reporting technique in this periodical.
Discount Store News is a third important publication in the field.
In a summer edition, the "Discount Census," is printed which details facts and figures on the industry. This journal proved a useful secondary data source.
Fairchild Publications cited this writer with several articles on leased departments. Mr. William Duvel, Vice-President, Dun &
Bradstreet, Incorporated aided in uncovering source material, and he made copies of Dun & Bradstreet's Discounters Digest available. Sam
Flanel, General Manager, Controller's Congress, National Retail Mer chants Association, provided this writer with information which his organization had gathered on leased departments.
The Journal of Marketing, Journal of Retailing, Harvard Business
Review, Fortune, Barron's, Financial World, Stores, Department Store
Economist, and many other publications contributed to building depth for this writer in discount merchandising. College textbook^ research monographs, association studies, doctoral and master's theses, annual reports, and corporate research accounts were other sources studied.
Primary Research
The primary research has been directed to the operators of leased departments in discount stores. Discount store lessees were deemed to be the best source of information regarding their own prac tices, policies, and attitudes.
In order to achieve the objectives of the study the primary 11 research was necessary. The validation or invalidation of the 21 hypo theses could not have been accomplished without the empirical research.
Methods of collecting data
The research was made an Ohio State University Bureau of Business
Research project and questionnaires were sent by and returned to the
Bureau. The mail questionnaire provided the primary source of infor mation although some nonrespondents to the mail inquiry did reply to personal interviews and long distance telephone calls.
The first mailing returned 132 usable queries. Another 75 were processed after the first follow-up, and the second follow-up yielded
68 responses. During August and September, 1965, 50 usable personal interviews were conducted by the author with leased department opera tors in the tri-state region of Ohio, Indiana, and Michigan. In
October, 1965, six women's wear lessees returned their questionnaires after receiving a telephone plea to reply. Thus, the total responses came to 331.
The personal interviews lasted from fifteen minutes to an hour.
The usual time was about twenty to thirty minutes. The topics of the mail questionnaires were used in the conduct of the personal inquiries.
Some difficulties in interpreting certain questions and some irregu larity in the answers to these questions were detected during the inter views. These deviations from the normal responses and their meaning are cited when applicable in the following chapters.
Development of schedule
Before the questionnaire was developed, a familiarization with 12 the policies and practices as well as the problems of leased departments
in discount stores was necessary. Numerous articles in business, financial, and other publications on discount stores and leased depart ments were read for perspective. Leased department operators and discount store merchants were not only contacted in the formulation of the hypotheses, but their aid was also sought in properly struc turing the proposed questionnaire.
After a pilot-form questionnaire was developed, twelve leased department operators were interviewed either by telephone or in person to perceive their critical reactions to the proposed inquiry. The constructive evaluations received from these lessees were incorporated into the final draft of the questionnaire. The final questionnaire and the letters of transmittal are exhibited in Appendix B.
Sources of respondents
After eliminating duplicate names and unwanted merchandise
lines, listings in three separate trade directories produced 1,441 names of leased department organizations for this study. The 1964
Directory of Discount Centers, the 1964 edition of Directory of
Discount Houses and Self-Service Department Stores, and the annual
leased department listing of Modern Retailer were the references for
the questionnaire mailing.1® For the personal interviews the Dun &
1®1964 Directory of Discount Centers (New York: Business Guides, Incorporated, 1964); Directory of Discount Houses and Self-Service Department Stores (Chicago: National Research Bureau, Incorporated, 1964); and '^Annual Leased Department Listing," Modern Retailer (May, 1965), pp. 64-66, 68-74, 76-80, 82-87. 13
Bradstreet, Incorporated Market Guide of Discounters and Mass Merchan disers supplemented the other three publications.^^
Amount of response
In order to more readily comprehend the ensuing paragraphs, the following tabulation of the preliminary leased department organization universe, the revised universe, and of the responses to the mail ques tionnaires, personal interviews, and the long distance telephone calls has been included:
Sub Capable Usable Totals Totals of Responses Responding Mail Questionnaire
Total Mailed 1,441 (Preliminary Universe)
Returned by P.O. as Undeliverable 102
Uncompleted question naires returned by nonlessees 109
Total unqualified as lessees 211 211
Total capable of responding 1,230 1,230
Usable responses 275 275
Nonusable responses 15
Total response 290 290
Total no response 940
*^Market Guide of Discounters and Mass Merchandisers (New York: Appraisal Service, Dun & Bradstreet, Incorporated, March, 1965). 14
Sub Capable Usable Totals Totals of Responses Responding Personal interviews with no response group
Total interviewed 108
Qualified as lessee and usable responses 50 50
Qualified as lessee but no response 14
Total qualified as lessee 64 64
Total unqualified as lessee 44 44
Total capable of responding 1,186
Telephone calls to women1s wear lessees
Total telephone calls
Qualified as lessee and usable response 6
Qualified as lessee and nonusable response
Qualified as lessee and response
Qualified as lessee but no response
Total qualified as lessee 15 15
Total unqualified as lessee
Total capable of responding (revised universe) 1,180
Total usable responses 331 15
Of the total 1,441 questionnaires sent, 102 were returned by the
Post Office as being undeliverable. Another 109 businesses returned the questionnaire, but they had not completed it. Most of these 109 indicated they were out of the leased department business, or they had never operated as a lessee. Deducting the 211 nonapplicable firms from 1,441 left 1,230 lessees capable of responding. There were 290 lessees who responded to the inquiry, but an edit of the questionnaires produced only 275 usable ones. There was no reply of any kind from
940 organizations.
The personal interviews with lessees were conducted in the metropolitan areas of Cleveland, Akron, Canton, Columbus, Dayton,
Cincinnati, and Toledo, Ohio; Indianapolis and Anderson, Indiana;
Flint and Detroit, Michigan. From the 940 nonrespondents 108 were contacted personally in the previously identified cities. Of the
108 addressees, 64 concerns were presently lessees in discount stores,
but 44 had either never been in this business or else they had dis
continued their lessee activities. From the 64 organizations eligible
to respond, 50 replied orally to the questionnaire. Deducting the 44
nonlessee firms from the 1,230 addresses produces 1,186 possible
respondents.
A comparison of the number of women's wear lessees listed in
the directories to the number that replied to the survey indicated a
need for a greater number of responses in this merchandise line. Con
sequently, in early October, 1965, 21 women's wear leased department
operators were selected from the nonrespondents and called by telephone. 16
The conversation stressed the impact of their responses upon the total
survey. In order to minimize the cost of the calls only organizations
east of the Rocky Mountains were contacted. Of the 21 firms called, 15 were active lessees while 6 were not engaged in leased department
operations. The final tally from the telephone calls resulted in 8
questionnaires of which 6 were usable. Reducing the previous total
of 1,186 by 6 left 1,180 presumptive leased department organizations—
the universe— who were potential respondents.
The mailings, personal interviews, and the telephone contacts
indicated the addresses provided by the directories were not wholly
accurate. As the discounting industry develops and matures, it remains
in a state of flux with a flow of firms in and out of business. Un
doubtedly, of the 849 nonrespondents (1180-331 respondents) numerous
ones were not bonafide leased department operators. On the other hand,
it is very probable that the addresses of other small lessees were not
recorded in the directories. The personal interviews showed 41 per cent
of the listed organizations not to be in the leased department field.
Contact by telephone revealed nearly 29 per cent of the firms listed
as lessees were not engaged in leased department operations. Relating
the 331 usable replies to a field of 1,180 possible respondents yields
a return of 28 per cent. If 41 per cent of the 1,180 remaining ad
dresses were incorrect, then the responses to the total universe would
have been 48 per cent, or after applying a corrective factor of 29
per cent to the 1,180 firms, a 40 per cent response would have resulted. 17 12 In any case, the survey produced substantial returns.
Tabulation
As each returned questionnaire was received in the Bureau of
Business Research, the firm's response was recorded on a card for placement in a card file identifying the status of all addressees.
Then, the questionnaire was edited in order to determine its usabi lity within the framework of the survey. The information taken from all applicable questionnaires was coded for a later transfer to punched cards.
At this point a decision was made on how to set up the classi fication of merchandise lines. The most logical grouping of merchandise departments was assembled together in an effort to produce merchandise categories adequate for analysis. Because of their unique product characteristics, some lines were not susceptible to combination.
The resulting major merchandise lines and their component departments follow:
Major merchandise line Component departments
Women's and children's Women's, children's, millinery and handbags, and hosiery
Men's Men's and boys'
Domestics and linens Domestics, yard goods, and yarn
Shoes Men's, women's, and children's shoes
^ A n article on research, citing a survey response by business men, stated: "30% of those polled is a high rate of return." The Editors, "Businessmen Re Advertising: 'Yes, but . . Harvard Business Review (May-June 1962), p. 21. 18
Major merchandise line Component departments
Health and beauty aids Health and beauty aids, drugs, and stationery
Pharmacy Pharmacy
Records Phonograph records
Sporting goods and toys Sporting goods and toys
Bakery Bakery
Hard lines Hardware, housewares, traffic appliances, wallpaper and paints, plumbing supplies, electrical supplies, and garden center
Auto accessories Auto parts and accessories
Furniture and floor covering Furniture and floor covering
Appliances Major appliances, sewing machines and vacuums, and stereo components
Jewelry Jewelry and optical
Camera Camera and photographic supplies
Pet supplies Pets and pet supplies
Miscellaneous Home improvements, liquor, and gasoline.
Once the information from the respondents had been punched on
cards the various entries were tabulated and frequency distributions were made on the basis of merchandise lines. The completed question
naires were physically grouped by merchandise lines so the tabulation
results could be quickly referenced to the questionnaire in an effort
to locate any seemingly spurious entries made on the punched cards.
Such entries were then corrected. 19
Analysis
Sophisticated statistical procedures were not deemed necessary or appropriate for the analysis and interpretation of the research data.
Frequency distributions and the median, mean, mode, and range were ex
tensively used. The median was the most frequently utilized measure
in the interpretation of the tables.
The survey information is presented in the tables by merchan dise lines. In addition, suitable basic data are analyzed by either rate of inventory turnover or number of leased departments operated, or by both of these categories for selected merchandise lines. The tables of major interest are presented within the chapters while the tables of lesser importance are placed in Appendix A.
For analyzing certain data by either rate of inventory turnover or number of leased departments operated or both the merchandise lines selected represented a diversity of consumer goods. It was felt that these categories would be representative of all merchandise lines. The lines were also ones in which there were a large number of respondents.
However, the reader is cautioned that the comparisons are only signifi cant when the cells in the tables contain numerous responses. Where only a small number of respondents appear in each cell, the conclusions must be limited. In the case of few responses differences in the data are greatly influenced by a small number of firms and variations of a random character do not appear. The lines chosen were: health and beauty aids, women's and children's, shoes, furniture and floor cover
ing, hard lines, and jewelry. 20
The magnitude of the study can be comprehended by a disclosure of some aggregate figures compiled from the 331 respondents. The 331 respondents operated over 3,413 leased departments in discount stores.
Total employment for the leased department operations was greater than
16,800 persons. Taking the median sales for the typical department and multiplying the figure by the total number of departments operated produced a sales volume of $767,925,000. This was 0.27 per cent of an estimated 1965 retail sales of $283.9 billion.Since discount store sales totaled an estimated $13.2 billion, the responding lessees represented 5.8 per cent of this volume.
Test for nonresponse bias
The personal interviews and the telephone calls were made to lessees who did not reply to the mail questionnaire. This was the test for the existence of possible nonresponse bias. A group of nonrespon dents was selected on a random basis who could be compared with the mail respondents to the survey. In order to see if the difference between the responses of the two classifications was statistically significant, or only what would be expected from random sampling error, the chi-square test was utilized. This procedure revealed no signifi cant difference between the replies from the respondents and the non respondents. A detailed presentation of the chi-square test for this
survey is found in Appendix C.
13Source of 1965 estimated retail sales was: "1965-Another Banner Year in Sales for Discounters," Discounters Digest (New York: Dun & Bradstreet, Incorporated, April 26, 1966), p. 1. CHAPTER II
DEVELOPMENT AND USE OF LEASED DEPARTMENTS
In attempting to ascertain the origin of the leased department
it becomes apparent that the lessee type of operation has had a ubi
quitous existence. The following paragraphs will chronicle a few of
the endeavors that were predecessors to the leased department in dis
count stores.
Earliest Origins
Rape1os
During the Periclean Age in Greece, roughly the third quarter
of the fifth century B.C., Athenian imports were sold by the kapelos
who was a retailer with stalls in the market-place or near a temple.
The State rented the stalls to the kapelos. Since the government
furnished the sites, it evidently felt a compassion to protect the
consumer against any wrongdoings. In any case the state established
an agency to guard the public from fraud in its negotiations with the
kapelos.
A narrative of the kapelos concludes:
Their tongues were rude and fluent, their honesty was more than suspect, and the state subjected them to rigorous regulation. A board of market wardens regulated buying and selling, maintained a certain degree of order in the market, and strove to prevent the sale of poor-quality goods. A board of inspectors of weights and measures undertook to see that purchasers got as much as they paid for. Each commodity was sold in a separate part of the market and at an hour
21 22
determined by the Wardens. Interspersed with the shoppers were loafers whose object was entertainment, gossip, and discussion.1
Bazaars
The bazaars of the Persian Empire from 550 to 323 B.C. were similar in concept to modern leased departments. The royal bazaars crowned with vaults and domes contained long lanes of shops selling a wide variety of goods. The concept of a bazaar in the United States today is where different individuals bring their own goods to a common market for sale.
One account of the bazaar states:
In this area "are sold the richest stuffs and goods that are found in all the realm and it is so full of shops for all kinds of merchandise that there is nothing in the world so rare that it may not be found there." This bazaar remains a magnet for visitors to Isfahan: separate sections are given over to coppersmiths, to the jewelers, and to the rug dealers, while numerous, crowded shops display the characteristic hand- blocked cotton prints of Isfahan, colorful local pottery, hand-loomed silks and wools, and mounds of nuts, raisins, and sticky sweets.2
Markets
About 1100 A.D. in England those who brought their produce to be sold in the markets of the boroughs and towns made various payments to the king or to the local lord for the privilege to enter the walls, to stand in a fixed spot or on a particular street where buyers would know where to find them, to rent stalls; and for fines should they
. E . Van Sickle, A Political and Cultural History of the Ancient World (New York: Houghton Mifflin Company, 1947), pp. 391- 392. 2 Donald N. Wilber, Persian Gardens and Garden Pavilions (Rutland, Vermont: Charles E. Tuttle Company, 1962), pp. 85-86. 23 break the rules of the market. All of the preceding levies added to a considerable sum which enhanced the value of the market right. As mar kets became important to the country towns, as well as to the boroughs and cities, they increased in number. This growth was in spite of the tolls imposed by the owners, lords of manors, abbots, bishops, and 3 royal officers in an attempt to boom their private coffers.
Market law and market rules were established which governed the English merchants. Below are some excerpts from these rules:
For bread, wine, and ale the prices had to be fixed once a week by the mayor bailiff, according to a regular scale, so that in this respect there was no opportunity for hag gling; but there might be room for fraud in the quality and in the weight. In the 'Usages of Winchester' . . . rules are laid down as to the sale of fish and poultry. They shall not be bought wholesale before nine in the morning; a board on which fish is shown for sale pays rent a farthing a day; every cart-load of fish on the board pays a half-penny; tolls are paid besides for cart-loads, horse-loads, and man loads of fish brought in by nonburgesses— salmon, lampreys, and herrings sold in Lent, for each kind a special toll. Butchers pay for their stalls, and merchants of unslaughtered goats, sheep, and swine are registered. Bakers in the town are well looked after. They must keep the assize with good bread of full weight; those from outside who sell their bread in the High Street pay more rent than those who stand in the other streets, and every baker must put his seal upon his loaves
Fairs
Fairs, too, were prevalent in England in the eleventh and twelfth centuries. Actually, fairs date from time immemorial, and the term was evidently derived from the Latin feria which meant a pagan festival.
O H. W. C. Davis, Editor, Medieval England (London: Oxford University Press, 1924), pp. 312-313.
^Ibid., p. 314. 24
Fairs in medieval days were often held at the feast of some saint.
A fair was a periodical gathering of buyers and sellers, in a place and at a time ordained by charter or statute or by ancient custom. They were usually held once a year, or every six months, or at most every quarter. Most of the famous fairs of medieval times were grants to abbots, bishops, or other ecclesiastical dignitaries from the king. Generally the fair was held in a wide field or meadow near a town. Just before the opening the owner of the fair took possession of the meadow. Wooden booths were erected for rent, or ground set aside for those who wished to put up their own tents or to sell their wares in the open. When the fair was opened no merchant could buy or sell in the district except at the fair. 'No manner of man or womanj ' said a town council, 'shall keep open shop in the town on that day, or shall show their goods in the street, but shall resort unto the fair there as it is wont to be kept.' Thus, within the limits of the prescribed time and place, there was a monopoly of trade; and the owner made his profit from the tools and other revenues.®
The Kapelos, bazaars, markets, and fairs all contained rudi ments of the present day leased department operation.
Origin In The United States
Farmers' markets
Although the complete ancestral lineage of leased departments
is difficult to trace, their immediate forebearers in twentieth century
America are easier to distinguish. The two most important lessee
arrangements precluding the discount store were those in the depart
ment stores and the farmers' markets. Supermarkets, drug stores,
variety stores, departmentized specialty stores, and many other kinds
of operations in the sporting and amusement fields have utilized
®Edward Maslin Hulme, The Middle Ages (New York: Henry Holt and Company, 1929), pp. 609-610. 25 leased departments, too. The department store lessee can be charac terized as the type found in conventional stores who offers complement ary and specialized talents to a well financed and capable merchant.
Leased departments in department stores contributed only 5.75 per cent of all sales among the stores doing one million dollars or more an- nually in 1963.
On the other hand, the lessee in a farmers' market envisages a leased department operation who assumes a major portion of the lessor's financing and merchandising functions. In this latter case the store owner is merely a landlord who performs perfunctory house keeping tasks for a bevy of tenants.
The farmers' markets that evolved in the late 1940's were an outgrowth of the central retail markets for farm products which had dominated rural America prior to the Civil War. Before 1941 these markets were located for the most part in the farming regions of the
South and the Midwest selling mainly farm produce. But the depression,
World War II, and the ensuing demand for inexpensive merchandise by the masses gave rise to new markets. In addition to handling agricultural products many of these new markets merchandised some or all of the following lines: appliances, furniture, rugs, jewelry, shoes, and clothing.7 By 1955 it was estimated there were 1,000 farmers' markets
6Leased Departments, Rates, Policies, and Expenses in Department and Specialty Stores.(New York: Controllers' Congress, National Retail Merchants Association, 1965), p. 7.
7Robert K. Otterbourg, "The Farmers' Markets," Journal of Retailing (Winter, 1954), p. 169. 26 Q in the United States with sales of over a billion dollars.
In the mid-1960's the discount house overshadows the farmers' market. Trade publications indicate that in recent years numerous farmers' markets have either become full fledged discount stores or else they have closed their doors forever. In retrospect a brief review of the operations of the farmers' market yields some inter esting insights that are applicable in the 1960's to leased depart ment operations in discount stores.
The owners of farmers' markets adopted rakish personalities for their establishments. They used pitchmen, auctioneers, flood lights, and brass bands to attract customers. In many cases their methods were quite successful. At the Quakertown Farmers' Market and '
Auction, Quakertown, Pennsylvania, 25,000 people would come during an eighteen hour period on Friday and Saturday.
The markets were often housed in huge hanger or quonset-like structures sometimes containing 100,000 square foot or more of floor space. Some markets consisted of an arrangement of low interconnected wooden buildings. Each market was composed of 50 to 150 booths and counters which were rented to merchants on either a nightly or a monthly basis. Outside the market would be a parking area for several thousand cars. The market owner supplied the utilities, paid the local taxes, supervised the operation, and did some institutional type advertising
8Morris L. Sweet, "Will Today's Farmers* Markets Become Tomor row's Super Markets?," Printers' Ink (October 12, 1956), p. 28.
9Ibid. 27
in the newspapers. The amount allocated for advertising either came
from a portion of the rental payment, or else the lessee was charged
an additional sum.10
Generally, the stall operator paid rent of seven to ten dollars
a night, or if leasing on a monthly basis, one hundred dollars a month.
Many tenants were charged a percentage of their sales along with a min
imum dollar guarantee. Sometimes the dealers traveled a fifty mile
circuit to a number of markets each week. They were able to do this
because the various markets in a region stayed open different days and
nights.11
The itinerant merchant of the farmers' markets was the focus of much criticism. It was stated that he foisted inferior goods on cus
tomers, and duped others through falsification of brands, and deceptive
packaging and promotion. The market owners, who were local citizens
and subject to local pressures, generally attempted to keep control of
12 their lessees and maintain some semblance of standards.
The market usually operated on a cash and carry basis. An
exchange policy for goods was honored. If the individual concession
aire refused to make exchanges on defective merchandise, the market
operator would cancel the lessee's agreement. Since overhead expense
would only run 10 to 15 per cent, less than one-half the expenses
10"Farmers' Markets Offer Retailers and Discounters New Competition," Tide (September 11, 1954), p.24.
11Ibid.
1^0tterbourg, op. cit., p. 172. 28 experienced in department stores, prices were cut and consumer savings were large. On the other hand the customer's choice of merchandise was
somewhat limited. Distress items, rejects, records, unbranded goods,
and a few name brand goods constituted the merchandise assortments 13 strewn misshapenly on counters.
In one New York state community a survey was taken of the
lessees active in the local farmers' market. It was revealed that the majority of the leased departments were run by independent merchants in
the nearby city. These dealers stated that their market outlets gave
them a greater ability to buy while still not overstocking their free
standing units, and they could utilize their leased facilities to get 14 rid of slow moving surplus inventory.
After visiting a farmers' market in New Jersey, one observer wrote about the clientele and their buying habits:
The average buyer at Frankie's is in the lower income group, drives to the market on Saturday with his wife and children, parks in the vast lot and approaches the selling area with a mixed desire for merchandise and entertainment.
His first stop is usually the food stalls which stock low cost, medium quality groceries and produce. Here the family spends most of its budget. After the basics are bought, the family usually stops to listen to a chorus of pitchmen demonstrating patent medicines. Then they eat ice cream, pizza, hot dogs, cotton candy, and soft drinks.
The next step is the general merchandise area where
13Otterbourg, op. cit. , p. 171.
l4Ibid., p. 171. 29
business takes on the complexion of a middle east bazaar, 90% shopping, 10% buying.*5
At the Quakertown market it was found that trading habits varied with the season. Some customers came from a radius of fifty miles, but the majority of them journeyed to the store from within a twenty 16 mile area.
Early use in department stores
Leased department arrangements were found in the earliest depart ment stores in this country. Macy's in March, 1874, installed separate china and glassware, and silver departments with the expectation of rivaling the assortment of any specialized store in New York. These two areas were stocked by L. Straus & Sons, wholesale dealers in china 17 and glass. The agreement with Straus was similar to a lessee-lessor relationship.
Straus not only replenished the inventory in the departments but the firm also retained ownership of the merchandise. Macy's was relieved from the consequences of any stock losses. The goods were charged to Macy's at the net cost of the wholesale firm. The floor space and fixtures were supplied by the department store. The Straus merchandise was received, marked, inventoried, advertised, sold, packed, and delivered by the store. Periodically, the two firms divided equally
*5"Farmers' Markets Offer Retailers and Discounters New Competition," op. cit., p. 24.
16 Sweet, op. cit., p. 31.
^Ralph M. Hower, History of Macy1 s of New York 1858-1919 (Cambridge, Massachusetts: Harvard University Press, 1943), p. 104. 30 the gross margin received from the sales of the leased departments.
Macy's share went for the space provided, use of store facilities, and the selling services. Straus's portion paid for expertise in buying, purchasing facilities and supervision, and an inventory investment.^
A few years after the Macy venture the Strauses developed other similar arrangements with John Wanamaker in Philadelphia,
R. H. White in Boston, Woodward & Lothrop in Washington, D. C.,
Wachsler and Abraham (later Abraham & Straus) in Brooklyn, and
J. H. Walker in Chicago. Straus's only major disagreement with a lessor came after a fifteen year stint with Wanamaker's. The store attempted to revise the agreement to its own monetary advantage, so the Strauses counteracted by carrying the case all the way to the 19 Pennsylvania Supreme Court.
Present Use in Department Stores
A more recent source on the status of leased departments in department stores is the Controllers' Congress of the National Retail
Merchants Association which periodically has published surveys on the 20 rates, policies, and expenses of lessees. Stores, the magazine of
■^Hower, op. c i t . , p. 220.
19Ibid., p. 221.
20 Leased Departments, Rates, Policies, and Expenses in Depart ment and Specialty Stores (New York: Controllers' Congress, National Retail Dry Goods Association, 1946); Leased Departments, Rates, Policies, and Expenses in Department and Specialty Stores (New York: the National Retail Merchants Association, has provided additional 21 factual data on lessees in department stores.
Two separate surveys covering the operations of leased depart ments in department stores were taken in 1959 and in 1961 by the Stores 22 publication. The two studies were essentially in agreement that in both years about 20 per cent of the stores had begun leasing depart ments which had been formerly store operated. Another nearly 20 per cent of the stores resumed operating some departments which had been previously leased. The statistic most at variance between the two surveys related to the use of a leased department as a method of add ing new departments to the store. In 1959 and 1961 the figures were
42 and 28 per cent, respectively. This discrepancy could have occurred because the two questionnaires were not necessarily answered by the same department store respondents. Different stores had different experiences. Another explanation revolves around the increase in department store sales as a per cent of total retail sales between
1954 and 1958. Department store sales as a per cent of total retail sales were 6.2 per cent in 1954, but increased to 6.7 per cent by 1958.
Controllers' Congress, National Retail Dry Goods Association, 1952); Leased Departments, Rates, Policies, and Expenses in Department and Specialty Stores (New York: Controllers' Congress, National Retail Merchants Association, 1958); and Leased Departments, Rates, Policies, and Expenses in Department and Specialty Stores (New York: Con trollers ' Congress, National Retail Merchants Association, 1965).
^"Top Management Looks at Leased Departments," Stores (January, 1959), pp. 23-26; and "Leased Departments," Stores (October, 1961), pp. 8-12, 46-52. 32
During this four year period, department stores participated in many innovating features. These included revitalizing their main stores, building branches, adding telephone and mail order services, and ex tending their inventory of merchandise into lines which they had not previously handled. The lessees aided in this latter move. Possibly by 1961 the greatest growth period for new merchandise departments in department stores had passed. The 1961 survey indicated, too, that the department store executives did not expect any spectacular develop ments to occur in the sphere of leasing by 1965. Perhaps, this response indicated that the lessee had already played his strongest role in developing new merchandise lines in department stores.
In the 1958 Controllers' Congress report the department store executives indicated the advantages of leased departments. The pre dominant advantage listed by 93 per cent of the merchants was the specialized skills possessed by the lessee. The wider range of mer chandise and services that can be offered by the store was an advantage named by 36 per cent of the respondents. The benefit of having capital freed for other uses was named by 25 per cent of the store operators.
Cost of close contact is prohibitive to store, net profit is better, and administrative load is lightened, were advantages identified by 23 13, 11, and 10 per cent of the stores, respectively.
Only 66 per cent of the department stores participating in the
1958 research named any disadvantages to leasing. The most often iden tified disadvantage by those reporting was that the leased department
23"Top Management Look at Leased Departments,” op. cit., p. 24. 33 produces a lower net profit, or a smaller contribution to the store's expense than an owned department. Lower profit or contribution was
identified by 35 per cent of the stores as a drawback. Indicated by
23 per cent of the respondents was the possibility of poor control
of the department's merchandise and services. Other less frequently mentioned disadvantages were: lack of a storewide viewpoint in the
leased departments, difficulties in the timing and coordination of promotions, lower standards, poor management, the loss of direct customer contact and the possible danger to good will, and the need
for more attention from management than would be given an owned department.* 24
The following information is a summary of the pertinent service
charge data taken from the 1965 Controllers’ Congress study. Most
rentals paid by the leased departments to the stores were based on a
per cent of net sales. The usual rental was between 12 and 18 per
cent. A specialized dollar rental was very rare; but numerous instances
of a yearly minimum guaranteed dollar amount were reported. The most
common advertising charge was 3 per cent, but the figures ranged from 25 2 per cent to 6.5 per cent.
Table 2.1 shows the ten most frequently leased departments in
department stores. The 1959 Stores study reveals that nearly 50 per
^"Top Management Look at Leased Departments," op. cit., p. 25.
OC Leased Departments, Rates, Policies, and Expenses in Depart ment and Specialty Stores, 1965, op. cit., 12-13. 34
TABLE 2.1-Lessees In Department Stores: The Per Cent of Departments Which are Leased in the Ten Most Commonly Leased Merchandise Lines In Department Stores for 1957 and 1963
Per Cent to Total Reporting Merchandise Line Department Stores
1957 1963
Beauty Salon 55.2 75.4 Photographic Studio 44.3 48.4 Better & lower priced Millinery 37.9 43.4 Women's & Children's Shoes (Main) 31.5 37.7 Better Millinery 23.2 33.6 Jewelry and watch repair 36.9 28.7 Shoe repair 39.9 27.0 Women's, Children's, Men's Shoes N/A 25.4 Books 20.7 23.8 Sewing Machines 34.0 20.5
Source: Leased Departments, Rates, Policies and Expenses in Department and Specialty Stores (New York: Controllers' Congress, National Retail Merchants Association, 1965), p. 2. 35 cent of the surveyed department stores leased 10 per cent or more of 26 their departments.
Leased Department Characteristics
As the previous discussion has indicated, the leased depart- I ment is not a new retailing concept nor one that has fallen into disuse. On a functional basis lessee operations should not be limited to merchants who operate separate departments within larger establishments. But, before examining the various types of organiza tions operationally similar to the lessee, it is well to consider the major characteristics which a leased department should possess. In
1933, Stanley E. Teele of the Harvard Business School laid down four major features that a leased department should have. His analysis is nearly as appropos now as it was then. As was indicated in Chapter I, the four features are:
1. The lessee is an independent businessman or firm. 2. The lessee has control of all merchandising activities. 3. The lessee deals with the public under the firm name of the lessor. 27 4. The lessee has a personal representative in the store.
As an independent merchant, the lessee holds title to the goods he sells. All the risks of merchandising are embodied in the lessee.
All profits accrue to the lessee, but he must also bear the opprobrium of loss. The lessor receives his compensation from the lessee in the
26"Top Management Looks at Leased Departments," op. cit., p. 23.
2?stanley F. Teele, Department Leasing in Department Stores (Boston: Bureau of Business Research, Harvard University, October, 1933), p. 1. - - J
36 form of rent. Although the lessee is truly a merchant, perhaps, the term independent is erroneously used. Independent in this instance does not necessarily refer to a retailer who operates a single store; it refers to the specialist who buys and sells goods for his own account within the confines of the lessor organization. The lessee's operational policies are basically independent of the lessor’s dictation. Since there are many chain enterprises engaged as lessees, it is important to establish the proper terminology. Enterprises organized as sole proprietorships, partnerships, and corporations all serve as lessees. Also, manufacturers, wholesalers, and retailers, regardless of their level in the channel of distribution, may operate leased departments.
Control of all merchandising activities rests with the lessee.
As stated by the Committee on Definitions, American Marketing Assoc
iation, merchandising is "the planning involved in marketing the right merchandise, at the right place, at the right time, in the right quan tities, and at the right price.” The lessee control does not imply unlimited freedom in merchandising. The lessee is still circum
scribed by the contract provisions negotiated between himself and
the lessor.
The lessee has no identity of his own. The consumer looks at
the store as a whole, and he assumes that all the departments are
owned and operated by the store. In the customer's vocabulary there
is no such thing as a leased department. If the store has a good
location, effective management, and a bulwark of strong departments— 37 leased or owned, the lessor succeeds and the lessee succeeds. If not, they both fall. The fortunes of the anonymous lessee depend upon the character of the named lessor. Of course, an interdependency does exist, since a lessor operation with many lessees is beholden to the image created by its conglomeration of lessees. Some lessees have developed their own private brands. However, this in no way detracts from the basic characteristic of lessee anonymity since the customer establishes brand identification with the entirety of a particular store and not to a segmented part of the store.
Today, with the advent of self-service merchandising the impor tance of a personal representative in the store may not be as important as it was in 1933. Although the supervision of sales personnel by this representative may be no longer of prime concern, he still asserts control over the activities of the leased department. For the purpose of defining a leased department the inclusion of lessee personnel in the lessor's establishment tends to preclude such organizations as the vending machine operator and the rack jobber from calling themselves leased departments.
Organizations Operationally Similar to Leased Departments
Rather than defining a leased department operation strictly along the lines suggested by Teele, one may utilize three major charac teristics of a leased department for a further examination and study of lessees and operations similar to lessees. Factors to be considered include merchandise control, title to goods, and rental payments. 38
Merchandising control is the most important activity assumed by the lessee although, as previously noted, the lessee-lessor con tract may somewhat abridge the lessee's overall control. Besides having control of the merchandise, the lessee takes title to the mer chandise. He is a merchant and as a merchant he assumes all the in herent risks of ownership. The inventory ownership feature will be placed in a subordinate position since it does not appear as important as control. A final characteristic of the leased department is the payment of rent to a landlord. Rent is determined in one of three ways: fixed fee, per cent of lessee sales, or a combination of mini mum guaranteed amount and per cent of sales whichever is the largest.
In the ensuing discussion rent will take the form of either an explicit cost or an implicit amount contained in the cost of goods sold.
If a continuum were drawn to show the types of merchandising arrangements functionally like the leased department, initially those operations most similar to the lessee would be shown. At the far end of the continuum would be those forms least similar and in between would be various gradients of similarity. The vending machine operator would be the first on the continuum adjacent to the leased department.
Vending machine operator
The vending machine owner solicits locations for the placement of his units. Once he obtains positions for the machines he keeps them supplied with fresh merchandise. The vendor purchases and controls the items to be sold through the vending machine. A rental fee is paid to the owner of the area where a machine is stationed. The rental 39
amount is commonly based on a percentage of sales or on the basis of an established sum per unit sold. 28
Rack jobber
The rack jobber can qualify as being functionally similar to the concessionaire. The rack jobber commonly places his own display racks inside a store, and then he supplies the store with the goods to keep the racks filled. The merchandise is sold on a credit or consign ment basis, and the jobber takes back all unsold goods. Although an explicit fee is not paid by the jobber to the merchant in the form of rent, the merchant may consider his cost of goods sold from the jobber
as being an acknowledgment of an implicit rental payment.
If the jobber were to pay rent to the merchant for the space encompassed by the racks, the jobber would charge the retailer a higher
price for his merchandise. This action would allow the jobber to re
coup his rental costs. The retailer would have bartered a lower cost
of goods sold for a higher cost of goods sold plus a rental payment.
Thus, it may be reasonably stated that the retailer may view his net
cost of goods sold as containing an implicit rental payment from the
jobber.
Rack jobbers are particularly important in servicing grocery
supermarkets with nonfood items. In the discount store field there
is one rack jobber who is the dominant supplier of pet supplies, and
there are many phonograph record rack jobbers servicing this trade.
2®Theodore N. Beckman and William R. Davidson, Marketing (New York: The Ronald Press Company, 1962), p. 265. 40
Consignor
Consignment selling has some aspects of a lessee operation, too. When consignment selling is used, shipments are made to retailers while the title to the goods remains with the seller until the mer chandise is sold. The retailer reimburses his supplier only for what is sold allowing the consignee to carry a large inventory without
OQ incurring a commensurate financial obligation. Since the stock on hand is not actually owned by the retail merchant, a situation ana logous to the lessee develops. By retaining ownership of the inventory, the consignor possesses many aspects of control over the goods. The implicit rental payment may be viewed the same as it was in the case of the rack jobber.
Franchiser
If the concept of similarity to a leased operation is broadened to include all arrangements that circumscribe the control of merchan dising while relegating the ownership of merchandise by the supplier
to a much lesser position, then the franchise agreement should be con
sidered. When a franchise is utilized, the franchiser grants the dis
tribution privilege to a restricted number of firms. A franchise may
be given for one product, for a line of products, or for an entire
business enterprise. Where an entire business is franchised and to
a lesser degree a line or a product, franchisers may insist that cer
tain items be purchased only from them. Within legal limitations they
29paul H. Nystrom, Marketing Handbook (New York: The Ronald Press Company, 1948), p. 207. 41 may also effectively dictate the line of goods which will be sold by the retailer. Other merchandising controls used by franchisers include sales goals, uniform store layouts, and standards of maintenance to be 30 followed. Again, the rental payment must be considered implicit.
In fact a negative type of rental payment may exist where the retailer pays a franchise fee for the privilege of obtaining the franchiser’s services.
Voluntary chain operator
The retail voluntary chain either organized by a wholesaler or organized by a retailer cooperative group may be considered func tionally as an example of franchising a total business. The fran chisees gain the superior planning of the sponsoring organization.
Adherence of the members to rigid physical and merchandising standards is insisted upon. Although the retailer cooperative voluntary chains are organized by the retailers for the purpose of operating their own wholesale establishment, they are included in this study. Function ally, they are similar to the wholesaler sponsored chain. In both cases the wholesale establishment attempts to achieve efficiency and economy of operation through the control over activities that quasi
integration allows.
Equipment lessor
A more remote likeness to the lessee operation is where a piece of specialized equipment is given or leased by a supplier to another
30E. H. Lewis and R. S. Hancock, "The Franchise System of Dis tribution,” Management Research Summary (Washington, D.C.: Small Business Administration, 1963), pp. 1-2. 42
enterprise with the agreement that only the products of the supplier
will be merchandised from this equipment. For example, in the petro
leum field refineries lease gasoline pumps to independent stations and
then require these stations to purchase their gasoline from them for 31 use in the pumps. The gasoline supplier retains control over his
product although the dealer has formal ownership. In some states
dairies can lease nonrefrigerated equipment; and if state rates are
adhered to, refrigerated equipment to their customers. The use of 32 such equipment is specifically confined to the products of the renter.
The retailer's investment is in the product to be sold, but not in the
vehicle that aids its sale. Like the rack jobber it is possible to
resolve a portion of the dealer's cost of goods sold to be the receipt
of an implicit rental fee from the supplier. In instances where the
retailer pays a rental fee for the equipment to a supplier, a reverse
rental payment analogous to the franchise fee develops.
Demonstrator
The hidden demonstrator in a retail store is operationally
aligned to the lessee. The demonstrator is employed by the manufac
turer to exhibit and sell the manufacturer's products in retail outlets
on a temporary basis. The store pays no wages to the demonstrator, and
the retailer reaps all the profits made from the demonstrator's sales.
Of course, the demonstrator is much more likely to be concerned with
the interests of his employer rather than the interests of the store.
^Beckman and Davidson, op. cit., p. 668.
“^"independent Grocery Stores," Small Business Reporter (San Francisco: Bank of America National Trust and Savings Association, 1964), p. 7. 43
Customers may be readily switched from a competing line to the demon strator's line; thus, exerting the manufacturer's temporary dominance over a phase of the retailer's merchandising operation. The manu facturer could conceivably consider the demonstrator's salary as a payment justified and rationalized in lieu of rent which would be paid if he were a lessee and had to purchase space within the store.
Application
An indication that at least some of the above classifications are compared and weighed for alternative use, is shown by a question posed at a national conclave of discount merchants. The inquiry re lated the size of the store to the merchandising control technique. A lessee who operated in both large and small stores asked if it were fair to be a lessee in the large organizations and to rack job or book merchandise on consignment at cost basis in the small stores. 33
In other cases the alternatives to the use of lessees in department stores were fractionated or composite arrangements of the previously mentioned types of organizations. One setup was con cluded by a book specialist who operated leased departments in large stores. In smaller establishments he supplied a balanced stock, aided in advertising and promotion, and trained an employee to pro vide daily reports for reordering purposes. The merchandise inventory and the management of the department remained otherwise in the hands of the store.
Another possibility cited was the consignment arrangement
33Harold S. Larkin and Sidney L. Davis, editors, Seminar Pro ceedings of the first Discount Operators National Show (Boston: Modern Retailer Publishing, August, 1961), p. 16. 44 particularly in departments carrying high priced items. The vendor managed department was listed as an option, too, and greeting cards were used as an example. The major resource determined the stock on hand, laid out the department, and trained the sales people. This type of operation is feasible where there are so many low turnover items to be handled that the buyer cannot follow them all.
A wholesaler operated department was considered as another substitute. Where a large number of items is carried it is suitable for the wholesaler to stock and service the department. A final alter native was in reality a leased department where no monetary rental payment was made. Instead the store is paid in customer goodwill and other intangibles when departments such as a travel bureau are allowed to operate on a rent-free basis. 34
Establishment Of Lessee-Lessor Rapport
The development and use of leased departments in retail stores have been mentioned. The characteristics of leased departments and of the organizations operationally similar to the leased departments have been examined. The purpose of this section is to determine the elements of managerial control which will produce a mutually advanta geous working relationship between lessee and lessor. The character istics of leased department operations make certain managerial policies necessary on the part of the lessor in order to obtain optimum per formance from lessees.
34"Leased Departments," op. cit., p. 50. 45
Integration of objectives
In order to achieve complete understanding between the lessee and the lessor a compatibility of their images, policies, and oper
ating procedures must occur. The leased departments should be granted the same treatment as is accorded the store operated departments. To the customer the operations of all departments must blend into a single
integrated store image.
One authority has stated that the mutuality of interests means that the leased department meet the tests of:
1. Character-as to similarity of objectives. 2. Compatibility-as to similarity of personnel policies, fringe benefits, employee discounts, pay, and so on. 3. Customer interests-as to similarity of operating policies with regard to refunds, complaints and services. 4. Merchandise and promotion policies-with respect to the handling of co-ordinated lines and prices and full, pro rata participation in storewide events.
Management
The lessees role must be an active and participative one in the management of the lessor's establishment. The store should consider
the lessees as members of its executive staff. In the 1958 study of
leased departments in department stores one store operator commented:
"Make them an integral part of the management team; have them attend
policy and planning meetings so they are familiar with day-to-day 36 goings-on in the store."
^Robert D. Entenberg, "Leased Departments Can Be a Sound Investment," Department Store Economist (April, 1962), p. 34.
^6"Top Management Looks at Leased Departments," op. cit. , p. 26. 46
It is not enough for store management to be accessible to the lessees. The leased department operator should be con sulted on all long range merchandising and promotional plans. Too often the lessee is contacted about the day-to-day store activities, but the long range goals of the lessor are never communicated to the lessee.
Contract
A clear, concise contract with all points of probable alterca tions completely defined should be the embodiment of the lessee-lessor agreement. The above statement is a sound legal tenet; but the proper rapport between the store and the leased department can be created only through abiding by the spirit of the contract. Open-mindedness and understanding should supercede the letter of the contract.
One lessor has affirmed:
The cornerstone of a licensor/licensee relationship is the formal agreement between the parties. However, it must be recognized, that while the contract is vitally im portant, it is still only the framework of the working rela tionship. It cannot realistically anticipate all of the problems that might arise.
The really important components that convert the legal document into a smooth, mutually beneficial association are hard work, a sense of fair play, maximum flexibility, and the confidence and trust of one party in the other. '
^Henry Goldsmith, "Store Should Manage Leased Department," Discount Store News (September 21, 1964), p. 19. CHAPTER III
HISTORICAL DEVELOPMENT OF DISCOUNT STORES
The objective of this chapter is to trace the historical development of discount stores and to gain an understanding of the role of the lessee in the early discount stores.
In the 1950's conventional retailers decried the general mer chandise discount organizations founded after World War II were illegitimate offsprings which flourished in a heady atmosphere of loss leaders and low quality. Without digressing on the merits and demerits of illegitimacy it may be observed that Alexander Hamilton allegedly fell into this ancestral designation; but this did not deter him from making an impact upon our history.
The discount store, too, is exerting a moving and powerful influence in society. It would seem unequivocally correct to view the discounter as a permanent institution on the retailing scope rather than one of a transitory nature. In 1965, discount store sales were
$13.2 billion, an increase of 35.5 per cent over 1960, and the sales volume of the average store rose nearly 17.6 per cent to $4,089,000.^
After World War II, the United States had an archaic prewar distribution system to meet the needs of a dynamic postwar economy.
This untenable situation demanded new retailing outlets.
l"The True Look of the Discount Industry-1965," The Discount Merchandiser (June, 1966), pp. 37 and 41.
47 48
Over the years department stores took on a particular image which their customers expected. Only a forceful countermovement to the pattern of department store development would have caused the 2 consumer to notice an innovating department store. Thus, while the department stores languished in their historical image, the factors mentioned below permitted the development of discount stores.
Social, economic and political conditions can be ascribed as causes molding the development of the discount store. Since the end of World War II, the rise of a large middle class in the United States has created a new mass market which is being exploited by mass mer chandisers. The graduated income taxes, extensive inheritance, and large estate taxes have resulted in a more equitable distribution of wealth. Union led negotiations for higher wages, greater number of working wives, moonlighting, and a better educated populace are addi tional factors that have broadened the American mass market.
The state Pair Trade Laws by disrupting normal economic com petition sowed the seeds for the advent and growth of discount stores.
Consumer acceptance of supermarket merchandising permitted the dis counter to use self-service techniques allowing the customer to make unsupervised purchase decisions. Innovators such as Eugene Ferkauf, founder of E. J. Korvette, Incorporated, the nation's largest discount organization, have served as catalysts to mold form and substance from a fomenting retail environment. Professor Malcolm P. McNair of Harvard
2Alton F. Doody, "Historical Patterns of Marketing Innovation," (Chicago: Proceedings of the American Marketing Association Winter Conference, Pittsburgh, 1962), pp. 251-253. 49 has called Ferkauf one of the six greatest merchants in the history 3 of this country.
Other factors such as the desire for one stop shopping, and the inclination of the family to shop together after working hours in a retailing atmosphere that welcomes customers in leisure attire aided the growth of the discount industry.
To speak of a discount store immediately infers there is a single set of criteria which can be utilized to separate this unit from all other types of establishments. A closer examination of the discount venture reveals that the term, discount store, represents at least three uniquely differing kinds of organizations which evolved from the changing socio-economic conditions. In much of the litera ture on the subject, there has been no attempt to distill the essential elements nor to elucidate on the origins of each discount group. The following discussion will attempt to identify the development of the three differing types of discounters and how each type made use of leased departments.
Closed Door Discount Store
Closed door retail stores are known to have been in existence over fifty years ago. In the 1930's during the great depression, they achieved some fame as a means of reducing consumer prices. However,
it was only after World War II that the contemporary closed-door
^Charles E. Silberman, "Discount Houses-A Revolution in Retailing," Fortune (April, 1962), p. 99. 50 discount house came into being.
The rudiments of these postwar stores and their membership requirements can be traced back to the Ship Stores, Air Force Base
Exchanges, and Army Post Exchanges. These Armed Services outlets sold merchandise at less than the established retail price to service men. The buyers were required to show their Armed Forces Identifica tion Card. Customers of the closed door establishments must similarly display a membership card before they are allowed in.
Membership requirements were ordinarily not overly restrictive.
If the establishment was located near a group of Armed Forces instal lations, possibly membership included serviceman and their families, federal, state, and municipal government employees, and employees in industries doing government work. In industrialized areas without the
Serviceman element, the membership requirements may be even more broadly interpreted and include workers and families of union men, or perhaps, all factory workers who can meet the nominal cost of a mem- 4 bership fee.
An observer of the closed-door discount scene has recorded its early beginnings by writing:
The trend started in Los Angeles about ten years ago'. In 1952 a group of government employees decided to try to save money by shopping at wholesale prices directly from distributor catalogues. The venture proved so popular that the group de cided to go into the store business and set up Fedco (Federal Employees Distributing Company). By mid-1961 Fedco has become
^A Survey of Discount Department Stores. Dayton, Ohio: Marketing Research Department, The National Cash Register Company, July, 1960, p. 21. 51
a five-unit Southern California chain with three stores in Los Angeles, and one each in San Diego and San Bernadino.®
The closed door stores were moving eastward while the soft-goods supermarkets, which will be discussed later, were wending their way westward. Fed-Mart was organized in San Diego and it moved into
Arizona and Texas. SAGE started stores in Houston, Dallas, and Austin while GEX, a subsidiary of National Bellas Hess, established units in
Oklahoma City; Atlanta; Norfolk, Virginia; Albany, New York; New York g City; and Philadelphia.
One closed door operation, GEM International, identifies itself as an international organization. It entered into the retailing stream in 1956 with 35,000 members and over $400,000 in sales. By the end of
1962 it claimed nearly 1.5 million membership cards outstanding in 30 stores with a total revenue of $175 million.^ GEM International has stores all the way from Hilo, Hawaii; to Nottingham, England.
The names of the various closed door outfits are an indication of the customer types they serve. The titles also provide a quasi cooperative overture to the entire operation. The designation of the stores are commonly given in initial form. These letters often stand for their proper name. For example, AGE means Affiliated Government
Employees; CAL, Consumer Associates; ECO, Employees Consumer Organiza tion; FAIM, Federal and Industrial Mutual; GEM, Government Employees
5Frank Meissner, "Closed-Door Discount Stores," Journal of Retailing, Vol. 38, No. 3 (Fall, 1962), pp. 19-20.
6Ibid., p. 22.
^"Where the Customer Pays to Shop," Business Week (November 10, 1962), p. 162. 52
Mutual; GEX, Government Employees Exchange; and MGE, Military and
Government Employees Purchasing House.
In contrast to the soft-goods stores which were founded by mer chants who had been formerly in other retail fields, the closed door establishments were frequently originated by men with backgrounds in O either finance, real estate, law, or accounting. Their dependence on leasing signified the limited merchandising ability they initially possessed.
Many of the closed door operators leased nearly every depart ment. Since the land and buildings of the closed-door store were generally procured on a leased basis, the corporation operated mainly as a financial shell which only serviced and coordinated the activities of its lessees.
Since the early 1960's, the ranks of the closed door discount store have been thinning. In 1964 these membership organizations had less than 10 per cent of the total floor space occupied by discounters.
Since the average closed door operation had a 90,000 square foot store compared to 59,000 square feet for the average open door unit, the per cent of establishments represented by the membership stores in the dis- g count industry was considerably less than 10.
8Joseph Lehrman, "Operation of Leased Women's Ready-to-Wear Departments in Discount Department Stores," (unpublished Master's thesis, The City College of the City University of New York, 1962), p. 7.
9"The True Look of the Discount Industry 1964," op. cit., p. 49. 53
Promotional Discount Store
It may appear incongruous to call any discount operation established within the last two decades traditional. But this term
is applicable to the units founded in the New York City area in the
late 1940's and the early 1950's. Today the nature and operation of many of these early discount houses has evolved to the point where they are better known as promotional discount stores. Many of the first discount establishments in New York City were in reality a type of specialty discount center. They carried name brand appliances but little else. In 1954 one observer stated that nearly 90 per cent of all appliances in America's largest city were being sold at less than 10 the list price. Housewares, radio and television sets, jewelry, cameras, hardware, and other easily carried nationally branded hard goods were also handled by these first discounters.
The definition of a discount house prepared by the American
Marketing Association's Committee on Definitions in 1960 best ex presses the entity which this writer is calling the traditional dis count store. The A.M.A. Committee defined the discount house as follows:
DISCOUNT HOUSE - A retailing business unit, featuring consumer durable items, competing on a basis of price appeal and operating on a relatively low mark-up, and with a minimum of customer service.
■*-®"Adventures in Shopping — The Discount Houses," Sales Management (June 15, 1954), p. 42.
•^Ralph S. Alexander and the Committee on Definitions of the American Marketing Association, Marketing Definitions (Chicago: American Marketing Association, 1960), p. 12. 54
A basic difference between the traditional discount house and the promotional store was that an abundance of nondurables or soft goods was added to the durable goods inventory.
Some of the initiators of the promotional discount stores had little prior experience in retailing. Consequently, these individuals proceeded to lease much of their floor space to knowledgeable special ists. Since these promotional discounters could operate with minimum capital outlays, through leasing, it was to their advantage to develop as many different departments for their stores as possible. The end effect was the construction of a massive store with a floor area 12 accommodating multitudinous lessees.
Other promotional stores were established by individuals who were strong merchants in one area particularly hard goods; but they needed the services of leased operators to handle additional offer ings. Many of these hard-good merchants were traditional discounters who found it lucrative to expand their merchandise horizons. Most of the traditional stores have gradually changed into the promotional discount form.
There are several reasons why these units are called promo tional stores. One explanation is that the term describes the promoting entrepenuer who saw the compatability of gaining profit while serving the needs of middle income consumers. In many cases the lessees and store operators offered special leader promotions to draw in the
12A Survey of Discount Department Stores, op. cit., p. 16. 55 crowds. This merchandising technique presented further justification for calling these establishments promotional stores. Of course, the promotional operators contended that their designation implied every day, low promotional prices on all items. Today, the promotional discount store with its sheer size and mass tends to completely over shadow its traditional predecessor.
E. B. Weiss, Vice-President of Doyle, Dane, and Bernbach, comments on this changing emphasis from traditional to promotional units when he writes:
The older discount chains will probably start leasing departments covering some of their newer merchandise classi fications. In this connection it is essential to remember that the original discount chains were primarily hard-goods outlets. Today, they are primarily soft-goods outlets (plus food). The founders knew hard goods. Their knowledge of soft goods has not been equally competent. Consequently, with the keen ability of the newer closed-door and parti cularly the newer mill chains to merchandise soft goods, it is probable that the older discount chains will find it competitively compelling to turn to soft goods leased de partment operators. .1*3
Soft Goods Supermarket
A third discount store type developed in the New England area during the middle 1950*s. Ever since the early 1920ts, the New England 14 region has been declining as a cotton and wool textile center.
•^E. B. Weiss, The Coming Era of Giant Leased-Department Chains (New York: Doyle, Dane, Bernbach, Inc., 1961), p. 17.
14E. B. Alderfer and H. E. Michl, Economics of American Industry (New York: McGraw-Hill Book Company, Inc., 1950), p. 361. 56
As the cotton and woolen mills deployed their resources into the South, they left many large abandoned buildings in their wake. In the 1950's a group of New England soft good merchants arrived on the scene to convert some of these vacant mills into soft goods supermarkets.
Near the city of Providence, Rhode Island, in 1954, the soft goods discount establishment of Martin Chase was founded which is generally acknowledged to be the unit from which others copied. By
1959 over 110 such stores were crusading for the consumers' dollars in the Northeast. Their estimated sales in that year were placed at
$300 million.15
After once establishing a firm regional footing in retail ing, the soft goods supermarket moved into other areas of the country.
As early as 1959 one writer listed fifty-nine cities away from New
1 C England where these stores had propagated. The attraction which these institutions offered was not limited by geographic or ethnic boundaries. The common denominators of low prices and ease and con venience of shopping appeals to many American shoppers.
The original self-service supermarkets were located in the old mill buildings and warehouses; however, the newer units have been situated in modern one story structures, laid out and designed for the continuous flows of traffic which are drawn to them.
■*-®Gerald B. Tallman and Bruce Blumstrom, "Soft Goods Join the Retail Revolution," Harvard Business Review, Vol. 38, No. 5 (September- October, 1960), p. 133.
*®Sam Gottesfeld, "Self-Service Discounters Mushrooming Over Nation," Women's Wear Daily (June 29, 1959), p. 1. The Atlantic Mills Thrift Center is a case in point. In the
fall of 1954, the company established the desirability of operating
a low mark-up self-service soft-goods supermarket. The management
believed this type of operation could exist outside the downtown retail district in a low rental area as long as adequate parking was avail
able. After an investigation, a suitable building was located in New
Bedford, Massachusetts. The structure was renovated, and reopened as
a retailing center in March, 1955. The building had been an old mill known in the community as Fairhaven Mills; consequently, the name
17 adopted for this store was Fairhaven Mills Bargain Center. Since
1957 practically all the other Atlantic Mills Thrift Centers have gone
into new buildings especially constructed for the company.
Since the first locations for this new kind of retail outlet were in abandoned textile mills, many of the early stores included
the word "mill" in their identification; thus, they were called mill 18 t outlet stores. Another factor leading to the use of the "mill out
let" terminology is that the original merchandise handled was generally
mill-end and/or close-out goods. The mill concept is still reflected
in the names of many soft-goods establishments. There are the Atlantic
Mills, Broadway Mill Outlet, Mammoth Mills, Midway Mills, Mill Outlet
Stores, and Sawyer Mills to indicate a few.
17yjrgjnia Dare Stores Corporation, Prospectus. (New York: Virginia Dare Stores Corporation, January 30, 1962} p. 5.
18"Discount Supermarkets-Dynamic New Factor in Retailing," NCR Points (Dayton, Ohio: National Cash Register Company, July, 1959^ p. 1.. . 58
All of the early soft goods supermarkets used leased depart ments to some degree. Some establishments had nearly half of their departments leased while other stores had less than 10 per cent
leased. The shoe and millinery lines were the most leased departments while the cosmetics, domestics, housewares, and hardware departments were frequently leased, too. Since the store operators were knowledge able merchants in the field of soft goods, they generally retained control over these departments preferring to lease the others.1®
Table 3.1 displays a partial list of the departments leased by this type of store in 1958.
Integration of Discount Store Types
In the middle 1960's it has been hard to discern between the three types of discount operations: soft goods supermarkets, closed door discount stores, and promotional discount stores. The tradi tional hard-line discount house has tended to evolve into a huge pro motional discount store, but the sales of appliances, television, and other hard goods generally remain their most important lines. Today,
the soft-goods supermarket is housed in a building resembling the
promotional-type market, and the operating policies of the soft goods
units are nearly identical to those of the promotional outlets. The main distinction between the two is that the soft-goods stores still do not handle as many major appliances and related durables. The
19 Tallman and Blumstrom, op', cit., p. 135. 59
TABLE 3.1-Number of Merchandise Lines Leased by Selected Soft Goods Supermarkets, 1958
Merchandise Company Line Fields King's Zayre Forest Ann Turn- Sandy's Midway Total Hills and Style Compan Hope ies Leasing
Shoes X XX X X X X 7 Millinery XX X X X 5 Cosmetics XX X X 4 Domestics X XX X 4 Hardware X X X X 4 Housewares XX X 3 Candy and/or Pastry X X 2 Infants' Wear X X 2 Toys X X 2 Stationery X 1 Jewelry X 1 Tires X 1 Total Depart ments Leased 1 3 10 5 1 6 5 5 36
Source: Gerald B. Tallman and Bruce Blumstrom, "Soft Goods Join the Retail Revolution," Harvard Business Review, Vol. 38, No. 5 {September-October, 1960), p. 135. 60 chief difference between the membership stores and the other two is the card carrying requirement. The other dissimilarities have begun to pale into insignificance. Undoubtedly this blending process is why many current writers and commentators on the discount frontier con sider all types of discount operations under one generic guise.
Present Utilization of Leased Departments by the Discount Store
Since discounters generally leased their buildings and some times the display fixtures, too, an enterprising individual could start a new store for as little as $250,000. When the organization utilized mainly leased departments, a $30,000 initial capital outlay was adequate to commence operations. Real estate promoters sometimes developed a leased center without regard to the sales potential and without ade quate cash reserves. In 1962 there were at least 125 real estate or lease-holding organizations whose only function was to secure the master lease and perform certain overhead and management services for 20 their department lessees. These stores were among the first to fall when intratrade battle caused some discounters to experience a volume decline in 1962 and 1963.^
Numerous smaller discount store organizations were merged into
^^William A. Duvel, "What the Credit Executive Should Know About the Discount House," Talk at 66th Annual Congress of the National Association of Credit Management, for Manufacturer Division in Phila delphia (New York: Dun & Bradstreet, Incorporated, May, 1962), p. 5.
^"Discounters Strive to Ride Out Storm," Business Week (December 1, 1962), pp. 78, 80, and 85. 61 financially stronger enterprises during the early 1960's. This merger trend has been continuing in the middle 1960's. The resulting larger chain operations have the financial and managerial capabilities to operate their own departments. This greater concentration of discount store power portends a decrease in the future use of leased departments.
The specter of the leased departments being taken over by the discount stores in an effort to strengthen the stores' financial structures has caused a degree of apprehension to the leased depart ment operators. Table 3.2 and Table 3.3 should allay some of the lessees' fears regarding their immediate future. Table 3.2 is a comparison among the years 1965, 1964, and 1963 of the proportion of departments that are leased in the various merchandise lines. Although eighteen lines had the same or less leased departments in 1965 than in
1963, nine merchandise areas experienced an increase in leased units.
Housewares, men’s-boys', infants-children, shoes, auto accessories, records, millinery, tobacco and supermarket composed the nine. The
floor covering line had an 8 point decrease in leased department use;
furniture, 6 points; candy, 6 points; stationery, 5 points; toys,
5 points; and appliances-TV, 4 points. An 8 point increase was ex
perienced in the supermarket area while the shoe line had a 5 point
growth, and the auto accessories line had a 4 point rise. A median
27 per cent of all the departments in discount stores were leased ones.
Table 3.3 presents a contrast between the merchandise lines
leased in 1964 and 1962. Table 3.3 is the culmination of a study of
1,000 operators of both specialty and full line discount stores. In 62
TABLE 3.2-Per Cent of Departments in Discount Stores that are Leased Departments, Comparison Among the Years 1965, 1964, and 1963, by Merchandise Line
Merchandise Line Per Cent of Departments Leased by Stores* 1965 1964 1963
Housewares 22 21 21 Ladies 19 20 18 Toys 18 20 23 Men's-Boys' 23 20 20 Infants-Children 18 18 17 Drugs 39 39 40 Linen-Domesties 25 25 25 Sporting Goods 25 25 25 Hardware 25 25 26 Shoes 65 60 60 Auto Accessories 34 33 30 Jewelry 46 42 46 Garden 17 17 18 Records 27 23 24 Stationery 26 28 31 Appliances-TV 27 30 31 Paint-Wallpaper 31 30 31 Camera 32 34 33 Luggage 23 24 25 Snack Bar 64 63 66 Furniture 30 32 36 Floor Covering 33 34 41 Millinery 72 75 71 Candy 20 20 26 Hosiery 9 8 9 Tobacco 44 36 41 Superraarket 55 58 47
*The 1965 figures are based on all United States discount stores while the comparative 1964 and 1963 base figures are taken from only open-door units. The open-door stores generally have a lower incidence of major departments than membership operations. For most departments the 1965 figures which include closed door stores would be .1 or .2 percentage points higher than 1964 and 1963 even without any increase in frequency.
Source: "l965/'66 Discount Census,” Discount Store News, (August 23, 1965), p. 11; "Discount Census/64," Discount Store News, (August 24, 1965), p. 9; and "Census 1963," Discount Store News, (August 26, 1963), p. 39. 63
fourteen merchandise lines a moderate takeover trend was evident, but
in seven lines the lessees either increased or held their share of department operation. Children's and infants' wear, women’s ready- to-wear, women's accessories, family clothing, men's and boyi* cloth ing, paints, glass and wallpaper, and stationery constituted the seven lines displaying leased department growth. The women's areas, and children’s and infants' wear lines added the most leased depart ments during this two year period. A highly competitive situation and the requirement of specialized merchandising talent could account for the rise in use of lessees in these particular merchandise lines. 64
TABLE 3.3-Per Cent of Departments Owned by the Discount Stores and Leased by the Discount Stores, Comparison Between 1964 and 1962, by Merchandise Line.
Merchandise Line Per Cent of Departments
Owned Leased 1962 1964 1962 1964
Paint, Glass & Wallpaper 72.8 71.4 27.2 28.6 Electrical Supplies 75.6 77.8 24.4 22.2 Hardware 76.2 79.3 23.8 20.7 Dry Goods & General Merchandise 81.6 82.6 18.4 17.4 Groceries-Food 48.2 57.6 51.7 42.4 Tires, Batteries & Accessories 67.5 74.3 32.5 25.7 Men's & Boys' Clothing 76.8 76.4 23.2 23.6 Women's Ready-To-Wear 78.5 73.3 21.5 26.7 Women's Accessories 78.2 77.0 21.8 23.0 Children's & Infants Wear 79.8 72.6 20.2 27.4 Family Clothing 79.4 78.2 20.6 21.8 Shoes 59.2 66.1 40.8 33.9 Furniture & House Furnishings 80.5 83.5 19.5 16.5 Household Appliances 83.1 87.8 16.9 12.2 Radio, TV, Appliances 83.7 86.1 16.3 13.9 Drugs 69.4 73.0 30.6 27.0 Books & Stationery 74.7 74.7 25.3 25.3 Sporting Goods, Bicycles 78.9 82.7 21.1 17.3 Farm & Garden Supplies 76.3 87.5 23.7 12.5 Jewelry 72.3 79.1 27.7 20.9 Toys, Luggage, Cameras, Gifts, Other 80.2 82.6 19.8 17.4
Source: "What is the Leased Takeover Trend," Discounters Digest (New York: Dun & Bradstreet, Incorporated, October 26, 1964), p. 1. CHAPTER IV
FINANCIAL CONDITION OF LEASED DEPARTMENTS IN DISCOUNT STORES
The years 1962 and 1963 saw a major shake-out develop in the discount field. It seems inevitable in any growth industry that suc cess and profit always attract many individuals who lack the acuity of management needed for success. Particularly, when competition thickens or sales begin to slowdown, the marginal operator falters.
Bankruptcy, liquidation, or merger follow. In 1962 the intra-trade competition between discounters began in earnest and a period of shake out ensued. This competition was in addition to the ever present inter-trade rivalry.
Failures of Discounters
Dun & Bradstreet, Incorporated listed 146 discount firms that
failed during 1962 with total liabilities of $74 million. For pur poses of computing failures a discounter was defined as an organization with a sizable dollar volume of sales or an important part of its busi ness from discount store operations or from leased departments. Dis
counters made up only 2 per cent of the total number of retail failures
in 1962; but they accounted for a significant 21 per cent of total retail liabilities. Of the discount failures, 63 per cent had liabili
ties ranging from $150,000 to $1,000,000 and 7 per cent indicated
liabilities exceeding $1,000,000. Inadequate sales volume was the
65 66 greatest stated cause of insolvency while poor location was listed
i second.
In August 1962, a significant Chapter XI bankruptcy resulted when Grayson-Robinson experienced financial troubles. The company was a major lessee of women's apparel departments in discount stores. In
1962 the corporation's discount operations accounted for 40 per cent of its total volume. Management blamed the failure on its inability to liquidate a major bank loan and on the May 1962 stock market tumble 2 which made a proposed debenture issue unfeasible to market.
The year 1964 marked a turn around in the financial hiatus.
In 1963 discounters' bankruptcies totaled 158 with liabilities of nearly $60 million, but in 1964 there were only 94 bankruptcies with a combined liability of $21.8 million. The 94 failures accounted for
1.5 per cent of the 6,241 retail bankruptcies in that year, and this 3 amounted to only 7.8 per cent of all retail liabilities.
Financial Ratios
Leased department organizations
As shown in Table 4.1 the net profits to sales position of the
leased departments in discount stores improved considerably over 1963.
-*■"1962 Discount Liabilities Were Steep," Modern Retailer (February 8, 1963), pp. 1 and 9.
^"Roth Claims Grayson-Robinson Will Operate at Profit From Now On," Modern Retailer (February 1, 1963), pp. 1 and 24.
3,,Discount Bankruptcies Dropped Sharply in 1964, Says D & B Letter," Modern Retailer (April, 1965), p. 3. 67
TABLE 4.1-Financial Ratios: Key Financial Ratios of the Companies Operating Leased Departments in Discount Stores for the Years 1961, 1962, 1963, and 1964a
Financial Ratios Leased Department Operators
1961 1962 1963 1964 Number of Reporting Org. (39) (37) (49) Upper (36) Lower Median Median Median Quartile Median Quartile
Current Assets to Current Debt 1.44 1.47 1.64 2.01 1.75 1.37 Net Profits on Net Sales (%) 1.83 0.92 0.73 2.26 1.69 0.86 Net Profits on Tangible Net Worth (%) 16.76 12.19 7.93 27.20 10.64 3.30 Net Profits on Net Working Capital (%) 24.89 13.64 9.22 27.98 11.72 4.43 Net Sales to Tangible Net Worth 8.95 10.49 8.39 18.35 9.25 4.51 Net Sales to Net Working Capital 10.47 13.58 11.33 21.29 9.88 5.42 Net Sales to Inventory 4.6 5.8 6.21 7.4 5.9 3.2 Fixed Assets to Tangible Net Worth (%) 25.6 26.9 22.6 9.4 17.0 40.1 Current Debt to Tangible Net Worth (%) 172.1 137.6 122.2 79.8 115.1 214.6 Total Debt to Tangible Net Worth (%) 313.8 201.3 184.9 115.8 171.5 259.7 Inventory to Net Working Capital (%) 284.9 203.1 167.2 111.6 168.8 276.1 Current Debt to Inventory (%) 97.0 90.9 90.6 67.4 86.9 124.2 Funded Debt to Net Working Capital (%) 72.3 42.1 40.2 12.1 34.5 40.7
aNo proprietorships or partnerships are included in this tabulation.
Source: "improved Profits and Debt Positions Highlight 1964 Ratio Study of Leased Department Operators," Discounters Digest (New York: Dun & Bradstreet, Incorporated, September 28, 1965), p. 1. 68
The profit figure for 1964 was still below the high of 1.83 per cent obtained in the less competitive year of 1961. Net profits on tangible net worth and on net working capital declined from 1961, but were higher than in 1963. A decrease from 1961 would have been expected since the lessees in 1964 were financing their assets with less debt and more equity. The debt to net worth ratios were down indicating the greater reliance on the equity of the owners in the firms.
The higher current assets to current debt ratio indicated a trend toward greater solvency in the organization. Since 1962, the net sales to net working capital ratio had decreased. This contraction of the ratio indicated a small reduction in the turnover of working capi tal and a shrinking of the margin for operating funds. Net sales to inventory, which is the measure of inventory turnover, dropped slightly from 1963 but it was still well above the 1961 level. For all leased departments nearly six turns a year was a gratifying performance.
The fixed assets to tangible net worth ratio had decreased from
1961 to 1964. Perhaps, this lower figure indicated the extent to which the leased department operators had begun using more of their own equity in financing.
Improvement occurred in the inventory to net working capital position between 1961 and 1963, but the relationship remained the same for 1964 as in 1963. As a measure of inventory balance, this ratio was higher than desired.
The current debt to inventory relationship in 1964 was only 10 points below the 1961 figure. The purpose of this ratio is to show the 69 extent that an organization can satisfy current debt from funds yielded by the disposal of unsold goods. Trending downward since 1961 was the funded debt to net working capital relationship. This ratio is used to indicate if the long term debt is in proper proportion to the net working capital of a firm.
As a whole, the leased departments appeared to be on a better financial footing in 1964 than in any of the previous three years, but additional financial improvement was warranted.
Comparison among leased departments, discount stores, and department stores
Table 4.2 reveals that the net profits on sales for the leased departments in 1964 were the same as the discount stores experienced, but slightly below the performance of department stores. The lessees1 profits have been subject to more variation than in the other two types of establishments. The discount store shows the highest profit on tangible net worth and on net working capital. For each reporting year these profit figures were greater for both discount stores and
leased departments than for department stores. This condition should
have been anticipated since department stores have utilized equity
financing to a greater extent than the other two forms of organizations.
Through the years the leased department has had the highest debt
to net worth ratios, followed by the discount stores. The department
stores1 debt position has been much lower reflecting their use of
owner1s equity.
The current assets to current debt ratio progressively increased 70
TABLE 4.2-Financial Ratios: Median Financial Ratios of Leased Departments in Discount Stores, Complete Discount Stores, and Department Stores for the Years 1961, 1963, and 1964a
Median Ratios Financial Ratios 1961 1963 1964 Leased Discount Dept, Leased Discount Dept. Leased Discount Dept. Depts, Store Store Dept, Store Store Dept, Store Store Number of Reporting Org, (39) (204) (416) (49) (196) (266) (36) (186) (196)
Current Assets to Current Debt 1,44 1.49 3.49 1.64 1.67 3.48 1.75 1.79 3.13 Net Profits on Net Sales {%) 1.83 1.42 2.00 0.73 1.14 1.60 1.69 1,68 1.80 Net Profits on Tangible Net Worth (%) 16.76 14.98 5.30 7.92 10.62 4.59 10.64 13.00 5.27 Net Profits on Net Working Capital (%) 24,89 18.63 6.98 9.22 12.85 5.91 11.72 17.61 6.85 Net Sales to Tangible Net Worth 8.95 9.94 2.76 8.39 8.13 3.33 9.25 7,79 3,57 Net Sales to Net Working Capital 10.47 14.85 3.66 11.33 11.25 3.97 9.88 9.46 4.35 Net Sales to Inventory 4,6 6.5 5.3 6,2 6.1 5.4 5.9 5.9 5.4 Fixed Assets to Tangible Net Worth (%) 25.6 28.7 26.4 22.6 27.3 25.9 17.0 23.2 22.5 Current Debt to Tangible Net Worth (%) 172.1 145.7 29.4 122.2 115.6 31.8 115.1 94,3 34,9 Total Debt to Tangible Net Worth {%) 313.8 182.1 69.5 184.9 160.1 63.2 171.5 146.7 71.6 Inventory to Net Working Capital (%) 284.9 208.5 66.2 167.2 165.4 75.2 168.8 153,5 79.0 Current Debt to Inventory (%) 97,0 95.1 61.5 90.6 83.7 61.1 86.9 78.6 62,5 Funded Debts to Net Working Capital (%) 72,3 43.5 31.3 40.2 45.0 30.8 34,5 37,8 34.6
aNo proprietorships or partnerships are included in this tabulation,
Sources: "The Leased Department-A Financial Look," Discounters Digest (New York: Dun & Bradstreet, Incorporated, February 18, 1963), p, 1; Key Business Ratios in 125 Lines-1963 (New York: Dun & Bradstreet, Incorporated, 1963), p, 2; Key Business Ratios in 125 Lines-1964 (New York: Dun & Bradstreet, Incorporated, 1964), p. 2. from 1961 to 1964 for both types of discounters. This indicated an increasingly solvent position. Department stores have consistently maintained a much higher degree of solvency. Leased departments and discount stores had over twice as high a net sales to net working capital ratio as did the department stores. These latter establish ments were doing the best job of turning over their working capital and of providing a margin for operating funds. The rate of inventory turnover was a half turn better for the lessees and the discount stores than for the department stores. From 1963 to 1964 the discount ing organizations had reduced their number of stock turns, but the department stores had been able to firm their turnover.
The fixed assets to tangible net worth ratio remained about the same for all three types of operations. Only in 1964 did the position of the leased department operator drop below the other two classes.
The inventory to net working capital relationship produced a figure nearly twice as high for the two discounting businesses than for the department store. This is an indication that the department store had a much better balance of inventory to net working capital than the other two types.
The highest current debt to inventory position was experienced by the leased department. The lowest current debt to inventory ratio was attained by the department store. In comparison with the other two classes through the years the leased department operator was the most dependent upon funds from the sale of his inventories to meet his current debts. 72
Since 1961, the leased department to a greater extent and the discount store to a lesser extent have decreased their funded debt to net working capital in an effort to match the department store. In
1964 the long term liabilities of the discounting organizations were in a much better balance with the net working capital than in any previous year.
In conclusion it appears that both the leased departments and the discount stores have considerably improved their financial posi tions since 1961. For 1964 there were some ratios where the discount stores were strongest and other relationships where the leased depart ments excelled. Overall the discount store presented a slightly better financial picture than the lessee. The department stores maintained a conservative financial structure in 1961 and it was still preserved in
1964. The leased departments and the discount stores must continue to strengthen their financial bases in an effort to meet the stronger position of department stores. CHAPTER V
PROFILE OF THE TYPICAL LEASED DEPARTMENT IN DISCOUNT STORES
A profile of the vital statistics for a typical leased depart ment in a discount store is recorded in this chapter. The geographic location of the leased department operators is examined. The number of leased departments operated by the typical organization in each merchandise line is reported. A large section of the chapter is devoted to the measurements of the leased departments which include size in square feet, dollar sales, sales per square foot, transaction size, and number of items stocked.
Location
Headquarter's location
Of the leased department organizations participating in the research the largest number of reporting firms were from the East North
Central states followed by the Middle Atlantic, New England, and
Pacific regions, respectively. Since fifty personal interviews were
limited to operators of leased departments in only the East North
Central states, it could be anticipated that from a total of 331 respon dents a large proportion would come from this one region.
Table 5.1, showing the organizational headquarters of the leased department organizations, can be compared to a report on discount
stores indicating the areas of greatest store concentration. In order
-73 74
TABLE 5 .1-Headquarters Location: Number of Leased Department Organizations Reporting Their Organizational Headquarters Location by Census Region, by Merchandise Line, 1965
Merchandise Total New Middle South East East West West Mountain Pacific Canada Line Reporting Org.a England Atlantic Atlantic North South North South States No. Per Cent Central Central Central Central
0 2 0 Women's & Children^ 29 8.8 5 9 2 6 1 2 0 2 0 1 5 1 Men's Wear 22 6.7 4 3 2 4 0 0 3 0 Domestics & Linens 21 6.3 9 2 1 4 1 1 0 2 0 1 7 0 Shoes 29 8.8 5 5 0 8 1 2 0 0 1 1 Health & Beauty 30 9.1 5 8 1 12' 0 0 0 5 3 Pharmacy 12 3.6 0 1 0 3 0 0 2 0 0 0 1 Records 16 4.8 1 6 2 3 1 2 1 5 0 Sporting Gds. & Toys 22 6.7 0 3 3 7 0 1 2 0 0 0 0 Bakery 5 1.5 0 2 0 1 0 1 2 0 1 1 Hard Lines 40 12,1 12 10 2 11 0 1 0 6 0 Auto Accessories 19 5.7 0 3 1 5 0 3 2 0 2 0 Furn. & Fir, Covrg. 24 7.3 0 4 4 10 1 1 0 0 2 0 Appliances 13 3.9 0 2 4 4 0 1 1 0 2 0 Jewelry 26 7.8 5 4 0 8 1 5 0 2 0 Camera 14 4.2 3 4 3 2 0 0 0 0 0 0 1 Pet Supplies 5 1.5 0 2 0 2 0 0 0 1 0 1 0 Misc, 4 1.2 0 1 0 1 0 3 44 8 All Mdse. Lines 331 100.0 49 69 25 93 6 25 9
Per Cent of Total Reporting Org. List 0.9 13.3 2,‘ ing Each Region 100.0 100.0 14.8 20.8 7.6 28.1 1.8 7.6 2.7
aAll organizations reported. 75
to simplify this comparison the following tabular presentation is made:
Per cent found in census region
Census Region Discount Leased dept, Stores* org. hqtrs.2
New England 10.8 14.8 Middle Atlantic 20.6 20.8 South Atlantic 9.4 7.6 East North Central 25.9 28.1 East South Central 4.2 1.8 West North Central 6.6 7.6 West South Central 7.8 2.7 Mountain States 3.9 0.9 Pacific 10.8 13.3 Canada 0.0 2.4
Total 100.0 100.0 1. Source: "1965/66 Discount Census, Facts and Figures," Discount Store News (August 23, 1965), p. 7.
2. Source: Table 5.1 of this research.
The locations of the leased department organizational headquarters do not differ perceptibly from the locations of discount stores.
Similarity of location was to be expected since the leased department organizations operated departments within the discount stores.
Area of operation
A hypothesis of this study is that the region of operations for
leased department organizations is mainly in a single metropolitan area.
The survey data did not completely justify the hypothesis. Of the 330
reporting organizations, approximately one-third operate in a single
metropolitan area while another one-third operate only in a local region.
Nearly one-sixth consider themselves regional in scope and a second sixth
consider their organization national in scope. 76
Table 5.2 indicates that the furniture and the appliance leased department organizations were mainly of the single metropolitan type.
The bulkiness, large unit price, purchase of only one or a few dis tinctive units at a time, and the need for trained sales personnel may have precluded the economies of large scale operation in these lines.
A large proportion of the health and beauty aids, the hard lines, and the jewelry organizations also were single metropolitan in charac ter. These lines also had numerous leased department organizations operating on a broader scale. There is often an opportunity for con ventional retailers and wholesalers in a given merchandise field to expand at a minimum cost into local discount stores with a leased de partment. This could account for many small leased department operations
in all merchandise lines.
The women's and children's, the sporting goods and toys, the
auto accessories, and the camera organizations indicated they operated mainly local region chains. Because of either style, seasonal, or
technical factors relating to their products, these businesses may
have desired to keep their lines of logistics short and their managerial
control close by.
Of all the different merchandise lines reporting, domestics and
linens had the greatest proportion of operations at the regional and
national level. The women's and children's, men's wear, shoes, health
and beauty aids, hard lines, and jewelry leased department organiza
tions experienced some strength on a regional and national level. For 77 TABLE 5.2- Geographic Operation: Number and Per Cent of Leased Department Organizations Identifying Their Primary Area of Geographic Operation, by Merchandise Line, 1965
Total Total Single Local® Merchandise Line Org. Reporting Metropolitan Region Regional** National® Org. Number of Organizations Reporting
Women's & Children's 29 28 4 12 5 7 Men's Wear 22 22 7 8 2 5 Domestics & Linens 21 21 1 7 9 4 Shoes 29 29 7 9 6 7 Health & Beauty 30 30 13 5 4 8 Pharmacy 12 12 4 6 1 1 Records 16 16 5 6 1 4 Sporting Gds. & Toys 22 22 5 11 4 2 Bakery 5 5 4 1 0 0 Hard Lines 40 40 19 3 12 6 Auto Accessories 19 19 4 12 1 2 Furn. & Fir. Covrg. 24 24 16 6 1 1 Appliances 13 13 8 3 1 1 Jewelry 26 26 9 9 3 5 Camera 14 14 2 8 3 1 Pets 5 5 2 2 1 0 Misc. 4 4 2 1 1 0 All Mdse. Lines 331 330 112 109 55 54
Per Cent of Organizations Reporting
Women's & Children's 100.0 14.3 42.8 17.9 25.0 Men's Wear 100.0 31.8 36.4 9.1 22.7 Domestics & Linens 100.0 4.8 33.3 42.9 19.0 Shoes 100.0 24.1 31.1 20.7 24.1 Health & Beauty 100.0 43.3 16.7 13.3 26.7 Pharmacy 100.0 33.3 50.0 8.4 8.3 Records 100.0 31.3 37.5 6.2 25.0 Sporting Gds. & Toys 100.0 22.7 50.0 18.2 9.1 Bakery 100.0 80.0 20.0 0.0 0.0 Hard Lines 100.0 47.5 7.5 30.0 15.0 Auto Accessories 100.0 21.1 63.1 5.3 10.5 Furn. & Fir. Covrg. 100.0 66.7 25,0 4.1 4.2 Appliances 100.0 61.5 23.1 7.7 7.7 Jewelry 100.0 34.6 34.6 11.6 19.2 Camera 100.0 14.3 57.1 21.5 7.1 Pets 100.0 40.0 40.0 20.0 0.0 Misc. 100.0 50.0 25.0 25.0 0.0 All Mdse. Lines 100.0 33.9 33.0 16.7 16.4
aOne state or adjacent portions of two or three states; e.g., Eastern Ohio and Western Pennsylvania; **A geographic region composed of several adjacent states; e.g., New England states, Southwestern states; cIn two or more regions. 78 some merchandise lines involving personal selling and service, perish ability, and purchasing in small quantities, such as pharmacy, bakery, furniture and floor covering, appliance, and pet supplies, a large chain organization would seem to be more difficult to achieve than in other lines.
Table 5.3 indicates the primary area of geographic operation for selected leased department organizations based upon the number of departments operated by each organization. In most cases those org anizations operating a single department identified themselves with a single metropolitan area. Of those organizations operating two to four departments the majority of the firms indicated they operated mainly in a single metropolitan area and a slightly lesser number of firms stated they were a local region enterprise.
Businesses managing 5 to 10 units were predominantly local region or larger in their scope of operations. However, in the furni ture and floor covering and the hard lines departments these size organizations were mainly of a single metropolitan type. The health and beauty aids line had several organizations in this category, too.
Since the hard lines and the health and beauty aids departments do not require any distinctive merchandising treatment, it is possible to set up several departments in the same trading area carrying branded con venience goods.