Retailing: Discounter on 34th Street

THE WORLD’S LARGEST STORE GREETS A NEW NEIGHBOR ran the full-page newspaper ad. Thus the daddy of department stores said hello last week to the daddy of discounters. With the opening of a new nine-story, marble-and-glass store directly across from Macy’s, E. J. Korvette, Inc., has moved into Manhattan’s bustling Herald Square-34th Street retailers’ lair, which also houses such formidable outfits as Gimbel Bros., B. Altman and Ohrbach’s.

As Macy’s president, David L. Yunich, sees it, the newcomer “will generate business on its own, which will benefit all of us.” Though plagued by recent troubles, Korvette obviously has high hopes too. Built for $1,500,000 from the shell of the defunct Saks-34th Street, the new store—Korvette’s 45th—is meant to be the nine-state chain’s biggest revenue earner, with expectations of $35 million in annual sales. The store will stress conveniently arranged, gaily displayed merchandise while playing down the head-on price rivalry that is supposed to characterize discount operations.

“Tell Us.” Together with its sister store on Fifth Avenue, Korvette’s new branch dramatizes the fact that the line between discounters and department stores is getting blurred. Not only are there more suburban-style discount stores in downtown areas, but conventional department stores continue to open branches in the suburbs. Many old-line retailers have also drawn on their familiarity with bargain-basement merchandising to open “budget stores”; in Columbus next year, Ohio-based Federated Department Stores will branch out with its first two Gold Circle discount houses. Like other department stores, Detroit’s J. L. Hudson Co. meets cut-rate competition with a we-won’t-be-undersold policy: “You pay no more at Hudson’s—Tell us if we’re wrong.”

Discount operators, meanwhile, have had difficulty adhering to their old high-volume, low-overhead gospel. “Customers are demanding from us what they get in traditional department stores,” explains Sherwin Newar, president of the Houston-based Sage International discount chain. This means credit, home delivery and more attractive stores—all of which cost money. Though many discount houses cut costs by using checkout counters and shopping carts instead of big sales forces, other increases in overhead have sent their price markups, once about 25%, as high as 35% —ominously close to the typical department store’s 40%.

The so-called discount stores are nonetheless multiplying fast; they now account for about $15 billion in annual sales. S. S. Kresge Co., which last year passed Korvette as the biggest discount chain, has 204 K Mart discount stores and plans to add 50 new ones in the next year. In the face of such breathless expansion, as well as the aggressive stances of established department stores, many a marginal discounter may be doomed. A discount furniture store in Atlanta, for example, went broke after Rich’s, the city’s largest department store, consistently matched its prices.

Into the Midwest. Nor are bigger operators immune from pressures, as Korvette’s experience plainly shows. Though Founder Eugene Ferkauf revolutionized retailing with his approach to discounting (TIME cover, July 6, 1962), Korvette’s haphazard management was not equal to its ambition of simultaneously upgrading merchandise, adding new services and expanding the New York-based chain into the midwest. To check his chain’s decline, Ferkauf last year merged into apparel-making Spartans Industries (which has promised the Federal Trade Commission to sell its own 96 Spartan-Atlantic discount stores) and turned over the reins to Spartans Chairman Charles Bassine.

Korvette’s is still making no money on its furniture operations, but Bassine insists that the long-ailing string of 61 Korvette supermarkets is finally in the black. Even so, he is considering selling off the food stores in hopes of streamlining operations. Last week Bassine announced that Spartans’ overall sales during the year ending July 31 were almost $1.2 billion—virtually unchanged from 1966—with Korvette’s accounting for $600 million of the total (excluding supermarkets). Spartans’ earnings slipped slightly, to a slender $7,100,000. Instead of continued expansion, Bassine’s most pressing task is to do something about wafer-thin profit margins at existing stores. It is significant that along with Korvette Herald Square, he has added only one other store in 1967.