Few subjects are more interesting than the evolution of innovations and new technologies. When a new idea catches fire, new enterprises enter the fray. Then there is a shakeout, with many of the early movers dying. Then there may be additional industry changes which result in yet another generation of industry leaders.
This pattern can be seen in every business from fast food chains to personal computer makers. In the latter industry, early competitors were often short-lived. Austin’s largest PC maker before the rise of Dell was CompuAdd, which made PCs for 12 years, then disappeared. Other early entrants included Gateway computers (22-year lifespan), Commodore (18), Compaq (20), Texas Instruments (2), IBM (24), and RadioShack/Tandy (16). Out of the competitive battles, Apple, Dell, and HP emerged as survivors, along with the many Asian companies that came along later.
Yet new technologies and the enterprise creation and destruction they cause are not limited to the hardware and software we often think of when we hear the word “technology.” Here I use the term more broadly, to include new ways of doing things in society at large and in our financial, distribution, communication, and transportation systems. In this sense, money, credit, insurance, the hub airline system, cable TV, newspapers, and the feature length film were at one point all new “technologies.”
In these types of innovations, we rarely find a single inventor. Birth is not a one-time event; it is more likely a laborious process of “birthing.” Alert businesspeople study what others do and pick and choose the best ideas. As various adaptations on the theme emerge, definitions become blurry – what is a hotel? What is a motel? What is a “promotional department store” (the preferred term by many early discount store operators)?
Among the most important parts of the economy is “distribution” – the process of getting products from the factory to the kitchen table. Annual sales of US retailers now exceed $5 trillion, and wholesaler sales are more than double that (including industrial and construction products that do not flow through retail stores). When American shoppers go to the store, 25-30% of their spending goes to the retailers and their employees, after the stores pay for the merchandise.
New and more efficient ways of retailing come in waves. The chain store and the mail order catalog rose to power around the turn to the 20th century. The “five and ten” or dime store became prominent by the 1920s. The supermarket, an innovation heard around the world, came along in the 1930s. Applying supermarket principles to general merchandise (non-food), the discount store got its real start after World War II, and today its descendants remain the single most important factor in global retailing, led by the world’s largest company by revenues, Walmart.
These price-lowering innovations have saved Americans hundreds of billions of dollars a year, the equivalent of giving every consumer a pay raise. (And in their process of growth, these store chains usually offer their employees better wages, better benefits, more employer stability, and better career opportunities than their smaller and independent competitors.)
I believe it is worth noting the enormous number of people who make such innovations happen, workers who often spent their entire lives with one or a few companies. The founders and leaders of these enterprises range from the amazingly smart to astoundingly stupid, or sometimes too arrogant. The best entrepreneurs and managers can be considered heroic for the benefits they bring to us all. Like most parts of the economy, retailing is above else a human, social affair.
Here is a look at how this “technology” arose and evolved over time, leaving hundreds of dead companies along the tortuous trail.
The Context in which Discount Stores Began
If we roll back the clock to 1900, there were three major forces in US retailing. First in market power were the big downtown department stores like Macy’s in New York and Marshall Field’s in Chicago, which emerged in the 40 years following the Civil War. These giant stores, up to two million square feet in size, dominated the downtown retail business, where all the horsecar and streetcar (and later elevated and subway) lines came together.
While they often began as “discount” stores, offering the lowest prices in town, over time most of these stores focused on more upscale and fashionable products, and more affluent customers. Gradually these stores added services like restrooms, restaurants, credit, delivery, and gift wrapping. Urban shoppers filled the owners’ coffers with profits.
The second force, recently emerged, was the mail-order catalog, pioneered by Aaron Montgomery Ward but soon surpassed in size by Sears, Roebuck, both of Chicago. As of 1920, neither had opened any stores, as they continued to live off the majority of Americans, who were still farmers and small town and rural customers.
By the 1920s, the chain stores had risen up, led by grocers the Great Atlantic and Pacific Tea Company (“A&P”), Kroger, Safeway, and others. Most of these chains began in the northeast but soon covered the nation in towns of all sizes.
The Dime Store
Aping the A&P, James Cash Penney built a nationwide chain of small city soft goods (apparel, linens, textiles) stores while Frank Winfield Woolworth developed the dime or variety store, aiming to open one in every city. By 1920 Penney had 312 stores, Woolworth had 1111, and Woolworth clones SS Kresge, McCrory’s, and SH Kress, had 184, 156, and 145, respectively.
Along with Sears and Ward’s, all these chains emphasized value, aiming for lower prices than the older department stores, often through creating their own “private label” products. The most successful included the Kenmore, Coldspot, Silvertone, Allstate, Craftsman, and other brands of Sears.
The dime stores in particular were precedents of the discount store. They carried cheap staple merchandise, meeting the daily needs of people at prices well below the big department stores, in a much plainer shopping environment. Originally they only carried items selling for 5 cents or less, later raised that to ten cents, then on upward over time to 25 cents and beyond. WT Grant was a later entry, with bigger stores and more diverse merchandise.
All the dime stores sold large quantities of a broad range of merchandise, including goldfish, inexpensive toys, parakeets, school supplies, pins and needles, bulk candy, phonograph records, glassware, and hosiery. FW Woolworth became the nation’s most profitable big retailer through low operating costs and relatively high gross margins (the difference between what the retailer pays for goods and their selling prices, calculated as a percentage of the selling price).
The huge Chicago wholesaler Butler Brothers sold goods to independent dime stores but also created a unique franchise system which allowed independent stores called “Ben Franklin’ to compete with the big chains. By 1929, the US had over 12,000 dime stores operated by the big national chains as well as hundreds of local operators. The biggest chains Woolworth, Grant, and Kresge knew America’s states and cities and the opportunities they held.
Early Progenitors of the Discount Store
The most common definition of a discount store among retailers is a full line general merchandise store which sells “everything at a discount” and uses price as a critical marketing and competitive tactic. Full line indicates both soft goods including apparel and home textiles and hard goods from appliances and furniture to sporting goods, books, hardware, and auto parts.
But not groceries. The original Target, Kmart, and Walmart stores were all discount stores by this definition. None had a grocery department, a very different business requiring refrigeration, sales of perishables with short shelf lives, fast inventory turnover, perhaps longer hours, a different set of often powerful suppliers, and more expensive facilities.
Several decades later, the successful addition of food by Walmart was part of another store type, the Supercenter of Hypermarket, which evolved from the discount store concept whose story is told here. Nevertheless, throughout their history, discount stores have dabbled in food and sometimes focused on it, with mixed success with few exceptions until the Walmart Supercenter.
So defined, the earliest progenitors of the discount store were of two types, both emerging gradually in the 1930s. One trend started in New England, where textile mills were being underutilized. Some of them opened outlet stores selling their production overruns, seconds, and other leftovers or out-of-season apparel. Over time they began to open bigger, free-standing stores with names like Atlantic Mills and Ann and Hope (originally in the Ann and Hope mill). Their natural category broadening was into more soft goods.
In the second trend, big cities like Chicago and especially New York had small hard goods discounters in the heart of the downtown areas. These small stores were usually on the cheaper second floor of buildings, not renting expensive street frontage. They often only had samples of the cameras, toasters, jewelry, and luggage that they sold a few percent above cost.
The products were then drop-shipped directly from the distributor or manufacturer to the customer, with the customer paying all shipping charges. The stores thus had minimal investment in inventory. This basic idea and these merchandise categories had been sold by mail order companies John Plain and Bennett Brothers for years and came back in the 1970s temporarily hot retail concept of “catalog showrooms” including industry leaders Best Products, Service Merchandise, and HJ Wilson.
These hard goods discount stores were dirt-cheap to open up, with no barriers to entry. As industry pioneer Eugene Ferkauf said, “If I can make a dollar selling one refrigerator, I can make a million dollars selling a million refrigerators.” Such talk must have petrified the department store people, used to achieving a 20% gross margin even in highly competitive appliances, and 30-40% storewide.
All of these stores were self-service, a concept pioneered by Clarence Saunders of Memphis with his Piggly Wiggly and other grocery stores. This meant the discount stores also had far lower labor costs, the biggest expense in retailing aside from paying for the merchandise.
By focusing on the best-selling items and excluding slow sellers, discounters “turned” their inventory more often than traditional stores, often selling the goods before the stores had to pay for them. Coupled with leasing rather than owning their own buildings, this substantially lowered the upfront capital required to open a store.
E. J. Korvette’s
After high school in Brooklyn, Eugene Ferkauf enlisted in the Army in 1942. When he got out, he worked for two years in one of his father’s two small Manhattan luggage stores. He saw the opportunities in discounting, in selling more items at a smaller percentage markup, and offered customers better deals. When his father resisted, in 1948 the twenty-seven-year-old Ferkauf opened his own 200 square foot second-floor luggage store in midtown Manhattan, selling everything at a deep discount and gradually adding small appliances and some jewelry. Ferkauf named the store EJ Korvette’s based on his initial, his co-founder’s initial, and the English warship the Corvette. It was an instant success and the company soon became the first of the great discount store chains.
Working with friends from his high school and another nearby school, some with nicknames like Lobster, Leaky and Gimp, Korvette’s kept moving to bigger spaces and began expanding in 1954. First came a “big” new store of 29,000 square feet in Manhattan, followed by the first full line Korvette’s discount store at Carle Place, Long Island – a gigantic 162,000 square feet. Over time, the stores were built around the northeast, then in the Chicago and Detroit areas, and grew as big as 260,000 square feet in Cheltenham, outside Philadelphia in the mid-1960s.
By 1962, Korvette’s was the largest discount store chain in America as measured by sales (revenues). But Korvette’s was not the only important startup in the 1950s.
Other Discounters Founded before 1955
Fred Meyer began as a grocery store in Portland, Oregon, with a unique evolution. By 1931 the company had added home goods, and within another two years clothing. While “who came first?” is always a difficult question in retail evolution, a strong case can be made that this was the first discount store by our definition. Under the founder, the company had no desire to expand much beyond its home region or to “conquer the nation” as many others in this article desired. The company eventually went public and was later bought by Kroger, which continues to operate over 130 of these “first mover” type stores under the Fred Meyer banner in the Northwest.
Arlan’s came from a more traditional heritage – the mills of New England. It began as a factory store in an apparel factory, then added leased departments for jewelry, toys, hard goods, sporting goods, cosmetics, and automotive, and adopted the name “Arlan’s” after the founder’s kids. Based in New Bedford, Massachusetts, the company was one of the biggest early discount store chains. By 1962 its 27 stores stretched as far away as Minneapolis, St. Louis, and Roanoke. Four years before Arlan’s failed in 1975 at age 30, two key executives looked for another opportunity and founded Bed, Bath, and Beyond, which had a nice 52-year run before it, too, died.
Two Guys (brothers from Harrison, New Jersey) became another major early player. More focused on their home base, by 1962 their 20 stores were in northern New Jersey and eastern Pennsylvania, though they had also opened stores in Baltimore and Richmond. The company bought a maker of fans named Vornado and adopted that name for the company, eventually evolving into a real estate holding company, with the retail chain dying in 1982 after 36 years.
Schwegmann’s was a family-owned New Orleans grocer that started selling non-foods in 1950. The company never ventured far from home and lasted until 1999, 49 years. In the mid-50s, Schwegmann’s and Fred Meyer would have been among the very few operators in the country which had proven success in combining food and general merchandise; none of these other early movers were successful at running a serious grocery business. Few even tried.
Caldor was a more upscale, fashion-oriented chain in Connecticut which was highly admired in the industry. They stayed near home, without national ambition. Bought out by department store group Associated Dry Goods (which was late to the party among its peers) in 1981, it was sold off in 1989 and struggled on until 1999, 48 years. Walmart, Target, and others took over many of the buildings and leases.
Ann & Hope was the original mill store, and some sources regard the company as the first discount store. In 1962 they had only grown to 2 stores. The chain did not get very big and eventually morphed into outlet stores and survived until 2001, age 48.
The last name on the list, Fed-Mart, was a concept created by Sol Price in San Diego as a membership or “closed-door” store but eventually opened up to the general public. By 1962 he had 11 stores stretching as far east as Houston. Sol sold out to a German company in 1975. They ruined the company, which died in 1982 at age 28, leasing many of the buildings to Target.
Sol Price went on to found the Price Clubs, the first warehouse or wholesale club. He had many clones, including Walmart’s Sam’s Clubs and Costco, founded by a former Fed-Mart employee. Sol Price later sold his company to Costco.
Due to the impact of this innovation, Sol Price stands out as the most important person among all these early movers, from an overall historical perspective. Sol was also a good friend of Sam Walton, who admitted to taking more ideas from Sol than from any other single retailer, though Sam met with the leaders of virtually all these companies to ask probing questions and to “empty their brains.” Ever curious, he wanted to know what worked and what didn’t and was always seeking new ideas.
By 1955, the initial rise of discount stores was important enough to warrant a full story in the most prestigious business magazine, Fortune. A year later, the magazine did a big story on Korvette’s, its amazing rise and unique management style.
A Changing Society
Several societal trends contributed to the rise of these discount stores, both independent stores and chain stores.
Among the most significant were the rise of the automobile, the post-WW II rise of suburbs, and the decline of downtown shopping, furthered by the construction of new highways and the beginnings of the Eisenhower Interstate system.
The rise of suburban housing and shopping opened up vast acreage of undeveloped land, ideal for strip shopping centers, where the supermarkets and drug stores initially moved. Seeking more large space tenants to draw traffic, developers were often eager to lease to discount stores, even “fly-by-night” operators. The strongest companies could easily get a developer to build a store for them and lease it to them, saving them the capital required to build and own your own stores.
The big older downtown stores saw the writing on the wall, and starting in the early 1950s, began to build more suburban branches, and along with them shopping malls. The first enclosed mall came in 1956, Southdale, developed by Minneapolis’s Dayton’s department store.
Moving to the suburbs was challenging for the department stores. Their big downtown stores ranged from 200,000 square feet in smaller cities, up through 5-800,000 in larger cities, all the way to over 2,000,000 square feet at Hudson’s in Detroit, Marshall Field’s in Chicago, and Macy’s in New York, the last of the truly “big boxes.” These stores had elaborate services from art restoration to fur storage, fancy “tea rooms,” and often tried to carry everything under the sun.
The department store firms realized they could not replicate these monster stores in the less dense suburban areas, so something had to go. Almost without exception, they dropped many of the amenities but especially their “basement stores,” lower priced operations which often accounted for 20-30% of a downtown store’s revenues. Those basements might be the closest progenitor of the discount store, but they were nowhere to be found in the suburbs, leaving a vacancy in the market, as the department stores doubled down on quality and fashion.
Sears was the first giant retailer to open stores with parking lots, away from downtown, beginning in the 1920s and 1930s. Supermarkets in New York, Texas, and California also began to build stores with parking lots. Now the discount stores followed them, filling gaps left by the missing basement stores of the formerly dominant local department stores.
And this all took place in the context of the huge post-war rise in consumer demand, which had been limited by wartime shortages in the first half of the 1940s. In the 1950s and 1960s, the United States created an enormous number of well-paying jobs; unemployment was low and the economy grew, good for every retailer, but especially this hot new concept, discount stores. Even households with above average incomes loved a bargain.
At the same time, more Americans received more education, whether in colleges, trade schools, or just high school. Shoppers became more confident in their ability to make decisions, to be willing to buy an off-brand product, and to try new things, trends that continue today.
The timing was perfect for the discounters, but the innovation had just begun to take hold.
Discounters Founded 1955-1961
In the six years after 1955, opportunistic entrepreneurs all over America copied the basic idea, each in their own way and with distinctive geographical patterns. Here are the founding dates of the next round of industry entrants:
In this list, we see more grocers entering the business. These companies often put the discount store next door to the grocery store to offer “one stop shopping.” In other cases, the discount chains had a life of their own, going into areas where the grocer did not operate. Philadelphia’s Food Fair bought JM Field’s, an early mill type store. Employees from JM Field’s went on to found King’s, a Boston chain that quickly built as far away as Dayton, Denver, and West Palm Beach. Chicago’s Jewel Tea bought and expanded the TurnStyle stores, focused on the Chicago area. Boston’s Stop & Shop had the prominent Bradlee’s stores, and California’s Lucky Stores had GEMCO.
Chicago’s Polk Brothers was a nationally known appliance discounter.
GEM International of Kansas City was a membership store.
Most of the others in the list were regional chains, ranging from Los Angeles’ Zody’s to Hill’s of Youngstown, Ohio to West Virginia’s Heck’s. Connecticut’s Ames later consolidated some of these regionals in an attempt to fight Kmart and Walmart, but was finished by 2002 after 45 years.
Gibson’s, founded by Herbert Gibson out of Seagoville, Texas, near Dallas, used a franchise system to rapidly expand in Texas and the southeast. It soon became one of the largest firms, if the sales of its franchisees are included.
The two largest players to emerge from this batch of new entrants were Zayre and Interstate Department Stores.
Zayre was another Boston-area chain, which rapidly expanded as far as Tampa and Minneapolis. Zayre had smart management, in that when Kmart began to “take over” the industry, they entered other retail fields and sold off the Zayre stores to the above-mentioned Ames. Zayre shareholders ended up owning shares in spinoff BJ’s Wholesale and one of the most successful retailers of 21st century America, the TJX Companies (TJ Maxx, Marshall’s, and Home Goods).
Interstate Department Stores was a pre-existing company which owned small city department stores, many of them in the Midwest. At the time, it was not a major company or highly profitable, but the leaders saw an opportunity and jumped on it, buying Topps stores in the east and White Front in the west.
Note that while mill stores, hard goods discounters, and grocers kept entering the field, the biggest variety store chains and the still powerful conventional department store chains had not yet entered the field by 1961, even over a decade after it all began.
The one exception was family-owned LS Ayres, the dominant department store in Indianapolis. In 1961, they opened their first Ayr-Way store. The small chain gradually expanded around Indiana and was eventually sold in 1977 and bought by Target 3 years later. Being the first traditional downtown department store company to “give upscale discounting a try,” Ayr-Way must have been a hot topic in department store board rooms. The big department store companies, far larger than Ayres, had deep pockets, great supplier connections, and talented buying and marketing organizations, but as of 1961 they clearly saw discounters more as a threat or unimportant, rather than an opportunity.
Differing Strategies
By the end of 1962, there were an estimated 785 companies operating discount stores in metropolitan areas across the country, 484 of which were single-store operations alongside the 301 “chains” of two or more stores, including 37 companies with 11 or more stores each. Together they operated 2,767 discount stores. Now about 15 years into the evolution of the innovation, discounting was no longer small potatoes. In metropolitan areas alone, they did about $6 billion in retail sales, and in the next year, 1963, closer to $9 billion, about 10% of total American retail sales. These figures exclude the many stores that were starting up in smaller, non-metropolitan communities.
Each of these companies had its own unique history and style of operation. Most started with a “heritage” – coming out of apparel manufacturing, deeply discounted appliances, department stores, supermarket chains, dime store chains, and even opportunistic real estate developers. Those origins determined category mix: whether the stores focused on large hard goods like major appliances, on smaller items like cameras and jewelry, or on apparel, domestics, and soft goods. Over time, the successful chains tended to move into all these categories (but not groceries – yet).
Each firm also had to choose whether to try to be “fashionable” or just stick with basics like hammers and socks. Along with those decisions came the ambience, the “feel” of the stores, whether the fixtures were dirt cheap and pretty awful, or just cheap.
One critical factor in the industry’s rise was the use of leased departments. The big department stores had long leased out a few departments to specialized operators, especially in furs, jewelry, and hair salons. In fact, the family that operated the leased china and glassware department at Macy’s, the Strauses, were so successful that they bought the store and made it the famous institution it is today.
The nation had plenty of specialty store chains, from shirts to hosiery to hats to auto parts, and some of these chains were more than happy to lease space in a new discount store and apply their skills. Merchandise wholesalers or distributors who had been supplying retail stores and had similar skills also jumped at the opportunity to run leased departments in the booming discount stores.
Most important, the entrepreneurial founders of the discount store saw leased departments as “easy money” – they did not have to invest in fixtures or in inventory. At the extreme, membership store GEM and some of the other early entrants were entirely or almost entirely leased departments, so their startup costs were minimal, with the developer financing the building itself and leasing it to the discounter. Many of the discounters which came from a hard goods background leased out all their textile and apparel departments. Soft goods companies found lessees for hardware, auto parts and repair, and appliances.
The leased departments became something of a thorn in the industry’s side. In some cases, the lessees were making more money than the discounter, causing the discounter to buy them out or operate their own departments, picking the goods and investing in inventory. In other cases, the discounter required the lessee to sell at low prices, causing troubles for the lessee, and often hard to audit and enforce.
In some categories, particularly the inventory-heavy shoe departments, the leased departments lived on for a long time. Even today “rack jobbers” in effect operate some departments like books and magazines, where the jobbers’ employees come in the store and order and restock the merchandise. One large rack jobber, Handleman, operated a big share of the phonograph record departments in America; by 1980 they served 8,000 stores from coast to coast.
A distinctive strategy on the part of several discounters was the “closed-door” or membership system. Customers paid an annual fee that entitled them to shop in the store and get the discounts. Initially the idea was to offer memberships to a select group – employees of a major local employer or government workers. GEM stood for “Government Employees Mutual.”
Those who went in this direction believed that employed people working for durable organizations were better customers, and when the discounters (which almost all started as cash-only) later allowed credit, better credit risks. Like the cover charge at a bar, it tended to keep out the tire kickers, lookers, and thieves. Sometimes a big employer would offer membership as an employee benefit. While there were such discounters around the country, they were more prominent in California. Sol Price of Fed-Mart was an early advocate of this system, which lives on in his progeny, Costco. Of course those membership fees also added to the company’s profit, offsetting some of the low margins on the goods.
As has been noted, there was a huge range in the geographical and real estate strategies of the companies. Seeking a fast buck, some operators leased their building, leased all or most departments, did little advertising, and took over any old building. Others wanted brand new stores built to their specifications, a trend which accelerated as the industry matured.
More important, some chains expanded in a concise area around their first store, while others jumped all over the United States. Too often in retail history, companies have underestimated the merits of locational concentration: lower shipping and handling costs, fewer warehousing issues, shared advertising, customers who have been to one store and now have one in their neighborhood, ability of top managers and local or district managers to visit the stores and oversee operations, and the ability to restock quickly.
Such benefits are especially powerful in “clusters” of stores in a metropolitan area. If a company wants to enter Chicago, they might build 5 stores over several years or open them all at once. Going the slower route often meant bigger early losses. Customers would see the stores as one-offs, not so much a part of a chain or an important local competitor. Whereas with a cluster, a company could be #1 (or 2 or 3) in the area from day one, with a real impact on the market, along with all those benefits listed above. Those enterprises driven by a real estate mentality often seemed to only want to find the cheapest sites they could lease, no matter where they were.
Even with all these diverse strategies and tactics, the most important factor in success is always management. How smart are they? How good are their strategies and tactics? Do they have a clear vision, or at least a reasonable theory, of the future?
The majority of the early movers in the discount store industry were seat-of-the-pants, action-oriented entrepreneurs, not planners and analysts. Many had little or no retail experience. Ferkauf at Korvette’s was famous for not having an office or never using one – he never stopped moving. He took flack from the establishment when he refused to wear a suit and tie, even when meeting with investment bankers. He and his high school friends were achieving remarkable success, why change?
Few of these early movers foresaw the entry into the industry of more thoughtful and strategic leaders and their companies, often coming from a long tradition of retailing and managing stores. Their world was about to change, all at once.
The Turning Point: Spring 1962
As noted above, this was already a multibillion-dollar business by the start of 1962. Development had been in the works for 30 years, steaming along for the last 15, and the 800 discount store companies included some very large businesses for the era. Here were the 12 largest players:
That spring, Fortune magazine got back on the story, with a massive 3-part series on the “Revolution in Retailing,” with a heavy focus on these companies, especially Korvette’s.
At the same time, Ferkauf made the cover of their sister magazine, TIME. Korvette’s was the hot stock of the time, not unlike Xerox and Nvidia later. The top retailing professor at Harvard Business School proclaimed that Ferkauf was one of the 6 greatest merchants in American history, right up there with Frank Woolworth and Marshall Field (a judgement the professor had to withdraw within 10 years). The buzz on Wall Street was that Korvette’s was the “next Sears,” possibly even taking Sears’ place as the largest and most profitable retailer in the world.
Korvette’s annual reports of the era show how diversified their product categories had become, plus pictures of their delighted customers. The company made its biggest move yet, opening a very big store on 5th Avenue in New York, far from the suburbs (and in very expensive real estate). Korvette’s was taking Macy’s and Gimbel’s head on.
And Korvette’s had big plans to expand beyond the northeast, into new territory: Chicago, St. Louis, and Detroit, moves they would soon enough regret.
But the world of Korvette’s and those other early industry entrants, was about to change. Here are companies that opened their first stores in one four-month period in that pivotal spring of 1962:
Opening dates:
Kmart March 1, 1962, Garden City, Michigan
Shopko April 5, 1962, Green Bay, Wisconsin
Target May 1, 1962, Roseville, Minnesota
Woolco June 6, 1962, Columbus Ohio
Meijer’s Thrifty Acres June, 1962 Grand Rapids, Michigan
Walmart July 2, 1962, Rogers, Arkansas
Each of these latecomers had its own unique story.
Both Kresge and the much larger Woolworth were giants of the dime store business when they launched Kmart and Woolco. Both companies realized that the dime store was a tired concept and no longer growing. At Kresge, executive Harry Cunningham spent two years travelling the country, studying the discount store movement. Through strength of personality, with the backing of the founder and primary stockholder Sebastian Kresge and his son, Kresge committed virtually all of its resources to building a chain of discount stores.
Both Kresge and Woolworth had well-tuned operating policies, both had cash, both had longstanding relationships with suppliers in every category, both understood real estate, and both intimately knew the major metropolitan areas of the country and their potential. Yet over time it became clear that Woolworth, which might have been expected to be the big winner based on their illustrious and highly profitable history, did not have its heart in discounting, at least not to the degree that Kresge had. We can safely assume that many old-timers in both companies remained committed to the core dime store business and were hard to convince that discounting was where they should go. But at Kresge, Cunningham rallied the troops and was soon enough Kresge’s Chief Executive Officer.
Shopko of Wisconsin and Walmart of Arkansas (Wal-mart at first) were tiny specks, regional companies far from important metropolitan areas, of no concern to the giants at Korvette’s, Woolworth, and Kresge. Sam Walton, who began his retail life working for JC Penney, was already running a very successful small regional chain of Ben Franklin franchised dime stores – he was their largest franchisee in America. (He even tried to convince the parent Butler Brothers company to open discount stores in small towns, but no luck so he had to go out on his own.)
Meijer’s was the main grocer in Grand Rapids. Being a major privately owned regional grocer, it can be assumed that Fred Meijer knew Fred Meyer out in Portland and likely studied his transition from just groceries to general merchandise. He may have also studied Schwegmann’s down in New Orleans. Meijer’s new Thrifty Acres store was a full-blown discount store with a complete grocery department, an approach that was still very rare. Many of the other early companies including Korvette’s tried to mix food and general merchandise, without lasting success, never closing the cultural and operational gap between the two fields.
As interesting as those new entrants was the Dayton family of Minneapolis. Their downtown Dayton’s department store was one of the best run and most successful stores in America, generating revenues beyond what one might expect in a city that size. The family was always on the leading edge, looking to the future, including opening America’s first enclosed mall, Southdale, for their Dayton’s store.
Undoubtedly the Daytons had studied LS Ayres’ year-old Ayr-Way venture in Indianapolis, the first discount store opened by a major department store. Both companies were members of an organization called the Associated Merchandising Corporation, a co-operative in which non-competing department stores around the country, one in each major city, shared their ideas and their internal financial statements in order to learn from each other.
The Daytons reached the conclusion, like the Ayres leadership, that the future was in higher-end fashionable stores and in discount stores, that “those in the middle were dead.” Both companies continued to expand their department stores, going full fashion and giving up bargain basement stores, at the same time they experimented with discounting. Perhaps most remarkably, they were not frozen into inaction in fear of “cannibalization” – that the new stores would just take business away from their existing dominant local department stores, with no net sales or profit gain but at great expense and investment. Instead, these foresighted leaders decided that they could get an even bigger share of the consumers’ dollars, at least in Indianapolis and Minneapolis, by applying both strategies simultaneously.
These firms were not the only ones to enter discounting in the 1960s. Regionals ALCO (originally from Kansas) and Pamida of Iowa and Nebraska were begun in this era. Strikingly, two of the biggest department store operators, Federated Department Stores and May Department stores (and Atlanta’s famous Rich’s), were slower to come around to the viewpoint of Ayres and Dayton’s, but had caved in by the end of the decade.
First store dates:
Note that in 1962, Kmart’s sales (not counting the old Kresge dime stores) were $35 million, Target’s were $11 million, and Walmart’s were $700,000, compared with Korvette’s $257 million and Interstate’s discount stores at $168 million. Could the newcomers, entering the industry so late, ever catch up?
Pushback
As these stores rose to prominence, they were beset by loud voices decrying how awful they were. The book pictured below (which I read when it came out in 1965, 60 years ago) is a 200+ page screed on the evils of discount stores, rife with stories of cheated customers, years of congressional investigations of discount stores, and the conclusion that discount stores would lead to the collapse of American society. Included are claims that price-cutting destroys society, that no store can survive on a 20% or lower gross margin, and that discounting will result in monopolies (US retailing as a whole has never had anything remotely close to a monopoly, one company with 100% of the market. Walmart in the US has around one-tenth of that market share today).
This pattern was not unique in retail history. In the name of saving the small independent merchant, activists and many politicians tried to stop the mail order houses around 1900, tried to tax the dime store and supermarket chains out of existence in the 1930s, and even in recent years have stopped discount stores like Walmart from opening in their communities.
The core error in the above book is thinking that the customer is stupid and needs protection. Cheats and frauds need to go to jail, but few retailers qualify for that.
The customers, now better educated and more self-confident than ever, have long understood the old adage Caveat Emptor – “buyer beware.” Only if a person shops a store repeatedly and learns how good their merchandise is and whether the store delivers value for money does that person trust the store and give the store their valuable patronage. If a store cheats or misleads their customers, or engages in “bait-and-switch,” those customers are not going to return and the retailer will die. Shoppers are not victims of some conspiracy or monopoly. Any retailer who thinks customers are stupid is stupid himself or herself.
The early discounters also fought the “fair trade” or “resale price maintenance” laws which allowed manufacturers to cut off any store which sold their products below the suggested or list price. Discounters found ways around the laws, including buying goods on the “gray market” but also fighting the laws in the courts. Ultimately the battle, fought on behalf of small merchants, was a losing one, too hard to enforce. General Electric alone had filed 3,000 lawsuits against discounters when it finally threw in the towel in 1958. Over time those laws went away, but in more recent years the courts have allowed them to creep back in.
The stores also fought the state blue laws which banned Sunday openings. Discount store owners wanted to be open seven days a week, and to stay open every night of the week except Sunday, compared with the old department stores only opening one or two nights a week outside of the Christmas season.
Despite all the ruckus, as always the consumer wins, and those retailers which respond to them succeed while those who fail them die. The growth of discount stores continued unimpeded.
The Rise of Kmart and the Death of the First Movers
It should go without saying that the next big story in this history is the rise of Kmart. Under Harry Cunningham and his successors, the company put the pedal to the metal and built stores as fast as they could. Unlike many of the others, including Sam Walton, they did not test one store and wait a year or two to expand. In 1962 not only did they open their first store but added 17 more. Using their buying power, their merchandise expertise, and their well-established administrative and auditing structure, they proceeded with remarkable confidence. Here are the number of stores Kmart, as the Kresge company was renamed, had open at the end of each year:
The above numbers indicate that Kmart expanded faster with large stores than most any other retailer in US history, resulting in one of the hottest stocks of the 1970s (and that their new store growth came to a halt by the early 1980s).
By 1968, the list of the top ten was very different from just 6 years earlier, led by Kmart and the Gibson’s franchised organization (Gibson’s sales include those of its franchisees, so they are not directly comparable).
Top ten 1968:
Gradually, almost all of the initial stars of the industry perished, starting with the batch listed below, all gone by 1980 (in Ayr-Way’s case, it was sold based on a government decree that its new owner had too many overlapping stores). The death of each followed its own pattern which I will not describe here. Many of them had peaked years before the actual final closing as managers tried to figure out how to survive. While most would say that Kmart killed them, their haphazard management styles, illogical geographical patterns, and lack of basic retail skills all contributed to their deaths to varying degrees.
And then came Walmart.
At the same time, Sam Walton was plugging away with his goal of building not the biggest company in the world (which Walmart is today), but the best company in the world, ever testing new ideas, ever improving. Walton expanded region by region, adding stores in the closest new markets to where he already had stores. While he initially focused on the small towns that he and his wife Helen loved, by the 1980s he was building new stores in large metropolitan areas. But until the late 1970s and the 1980s, Walmart was not on most retailers’ radar or competing in their cities. Harry Cunningham at Kmart, retired but still on Kmart’s board of directors, kept telling the other directors that his friend Sam was very smart and they should beware of his company, to no avail. There was no way a stupid hick from Arkansas could matter to the great, booming, long-lived Kresge/Kmart organization. Hubris!
It took Walmart 5 years to get to 24 stores, a level Kmart achieved within a year. But once Sam started rolling, he was unstoppable. Listed below are the Walmart store counts in this era; note how smooth the growth rates were, eventually slowing a bit as all maturing companies do. Amazingly, this growth was funded by company profits rather than round after round of stock sales and borrowings, which Sam disliked. (The burst in 1981 was from the acquisition of the southern regional chain Kuhn’s Big K from Nashville, one of Walmart’s relatively rare acquisitions.)
By the 1980s, Walmart, not Kmart, became the one to watch, the great growth company of the industry. Target, with their emphasis on fashion presented in nicer stores, also kept expanding, but not with the ambition of Walmart. Walmart’s addition of full grocery departments, starting in the1990s with their “Supercenters,” further reshaped the industry, giving the company more frequent, high sales traffic. Based on the experience of so many others, the success of this effort was unexpected. Today over half of Walmart’s sales are groceries, making the company the biggest grocer in the world.
Survivors – for a while
While Kmart’s expansion had come to a standstill by the early 1980s, they were still a huge company with great public acceptance. Combined with the oncoming Walmart and the rising Target, few of the old-timers could survive.
Survivors – for a Little Longer
By the turn of the 21st century, the industry was in large part down to Walmart and Target. Kmart limped along, gradually closing stores in its last few years, with the final nail in the coffin in 2024.
Survivors and Age as of 2025
Thus, in the span of 60 years, the discount store industry went from over 800 companies to just 4 that really matter, and only 2 that are truly national chains. (North Carolina-based Rose’s, child of a dime store chain, went bankrupt in 1993 but was purchased by a private company which breathed new life into the stores, allowing them to continue on.)
The two Freds – Fred Meyer and Fred Meijer – have continued to prosper in outstanding but unique stories of good management, Meyer under Kroger ownership and Meijer still privately owned by the founding family.
But of course, the real story today is Walmart and Target, blanketing the United States and in Walmart’s case, expanding around the world.
The following charts and tables tell the story better than words can. (Walmart data is based on only the US Walmart operation, excluding Sam’s Club and International operations.)
Note that, in 1990, Sears, long the nation’s largest general merchandise retailer, had retail sales (excluding Allstate Insurance) of $25,093.0. So Kmart finally caught Sears in size, to briefly become #1 in the US, but Walmart blew by them at the same time, becoming #1 within a few months, by the time 1990 ended.
Another interesting evolution is the increase in sales per store, which includes inflation but really changed as Walmart added groceries, closing old discount stores and replacing them with new Supercenters. These numbers are in millions of dollars:
Offspring
Just as the supermarket and dime store principles of self service and low prices gave rise to the discount store idea, the discount store has had several conceptual children.
Beginning with Charles Lazarus and Toys R Us, entrepreneurs began to build chains of discount stores that specialized in one category of merchandise, “superstores” or “category killers” (because they killed off other stores in their specialty). The biggest to emerge include Home Depot, Lowe’s, and Best Buy. The best of these have a proven ability to not only survive but prosper in a world full of Walmarts and Targets. Home Depot in particular is among the most profitable retailers in history.
Sol Price of Fed-mart dreamed up the wholesale club idea with a store called the Price Club, which later sold out to clone Costco, and was copied by Sam Walton with Sam’s Club. Today Costco is the third biggest retailer in the world, behind Walmart and Amazon, and is beloved by Wall Street, all while living on gross margins among the lowest in US history (12-15%).
Modified forms of the discount store not only still exist but are prospering and expanding. Dollar General and Family Dollar are small stores, in some ways not unlike the dime stores of old. Dollar General has more stores than any other American retailer, 20,000. Dollar Tree and Five Below are even closer to dime stores, setting the highest price they will sell things for, though recent inflation has caused them to break some of those limits, just as it did to FW Woolworth in the 1930s. As of this writing, one of the hottest companies is Ollie’s, which is true to discount store history with its cheap fixtures filled with close-outs and production over-runs piled high.
The huge and highly competitive apparel retail segment has also seen the rise of newer stores offering excellent value, including TJ Maxx, Marshall’s, Ross Stores, and Burlington. Like Home Depot, the TJX companies, the child of Zayre that owns TJ Maxx and Marshall’s, is one of the most profitable and best-run retailers in the world.
Our digital age has done away with most airline tickets, bank deposit trips, phonograph records, and VHS tapes. The new world has also changed retailing, and now we have Amazon, which may soon pass Walmart to become the biggest company based on sales. (Though online companies still represent less than 20% of total American retail sales.)
The only thing a retailer can count on is change, sometimes gradual but at other times faster than one could imagine. Only those organizations with a solid plan, clear-headed management, strong training and employee programs, good supplier relationships, and a smart store location and expansion strategy can survive. History shows us that no one stays on top forever, there are always innovative disruptors like Eugene Ferkauf coming along.
If you enjoyed this article, you might find the following links of interest, other stories we have produced about retail companies, their founders, and retailing at large.
A fairly complete history of US retailing of all types, in a one-hour video.
The story of the great department stores.
How Federated rose to the top of that heap.
The story of Gimbel’s department stores.
The huge warehouse buildings Sears built that have been reused.
The man who tried to turnaround Montgomery Ward, the original catalog giant.
A note on the life of Sol Price, Fed-mart, and the wholesale club.
The birth of the supermarket concept.
A note on change among grocery stores.
The battles against chain stores, the importance of chain stores and franchises, why they work.
My own experiences at May Department Stores, acquiring other companies.
My own experience analyzing retail stocks on Wall Street in the mid-1970s.
My own ideas about how to save the department stores.
My story of the “superstore” bookstore chain I started.My story of my travel superstore concept that failed.
Gary Hoover
Executive Director
American Business History Center