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Discount Retailers
Brian Trumbore
President/Editor, StocksandNews.com

Why do some retailers make it and others fail? More specifically, why do some 'discounters' succeed, while competitors don't? Maybe there is a lesson in the story of E.J. Korvette, a leading discounter in the New York area, which went out of business on Christmas Eve 1980.

Born in Brooklyn, Eugene (Gene) Ferkauf learned the retailing business from his father, who owned two luggage stores in Manhattan. Gene worked for his dad at every opportunity growing up and then after serving in World War II, he decided to go off on his own. But first, a brief background on retailing in the America of the 1930s, 40s and 50s.

As part of Franklin Roosevelt's New Deal program, the National Recovery Act (NRA) drew up codes of conduct for businesses, including retailers, for the purposes of encouraging fair competition, including guidelines for hours worked, wages and trade practices. Prices were to be fixed, with the feeling being that, otherwise, the large retailers would force the small ones out of business at a time when unemployment was over 20%. Also, if prices were slashed too much, wages and profits would fall, and more businesses would be forced into bankruptcy, thus exacerbating the labor situation. But the NRA was deemed unconstitutional in 1935.

Along came different congressional legislation, however, in the form of the 1937 Robinson-Patman Act, another attempt at "fair trade," which obliged retailers to charge prices fixed by the manufacturers. So it was designed, like previous efforts, to prevent the powerful from swallowing up the weak. [The Robinson-Patman Act did not extend to clothing because it was too hard to police different styles, quality, etc.]

In June 1948 Gene Ferkauf made his move by opening up his first E.J. Korvette store on 46th street in Manhattan. [The name came from 'E' for Eugene, 'J' for friend Joe Zwillenberg, while 'Korvette' was a take on the Canadian WWII fighting ship, the Corvette. Ferkauf thought it was classy.] Gene knew all about Robinson-Patman, but he thought he could get away with offering discounted merchandise (the first stores specialized in appliances and standard items like pens) by calling his operation a "membership store," and thus not open to the general public.

Where did Ferkauf get this idea? Well, back when he was working with his father, he remembered a luggage wholesaler by the name of Charles Wolf, who sold luggage to the retailers at the usual markup, while distributing his business card. Invited customers could then come to his storage depot, where Wolf offered the goods at a discount. Since he wasn't a retailer, he didn't fall under the provisions of Robinson-Patman. Yes, Charles Wolf was really the first discounter.

So with Wolf as a role model, Ferkauf had his hawkers outside E.J. Korvette's doors, passing out membership cards, thus he was exempt from the regulations governing retailers. Once inside, the salesmen offered discounts of up to 33% on razors, televisions, refrigerators, everything but clothing it seemed.

Now you can imagine that the competition, like Macy's and Gimbel's, was none too pleased, so they filed about 35 fair trade suits by 1956, though most were simply dismissed. And the actions taken against Ferkauf were actually a godsend. Since the newspapers covered all of the filings, it was free publicity for his stores and customers flocked to check out the low prices.

By 1956, Korvette's had 6 locations, 4 in Manhattan and 2 in the New York City suburbs. Then by 1958 there were 12 stores, now generating over $100 million in revenue.

Ferkauf had started out by staffing his early operations with friends from the Brooklyn neighborhood where he grew up, as well as army buddies. Korvette's was run like a fraternity, or so outsiders would say. Everyone worked 6 days a week (as opposed to the competition's 5-day schedule) and employees did everything from hawk cards outside, to sales, to sweeping and locking up at the end of the day. For this they were paid $80 a week, considerably more than at Macy's (but they worked harder) and Ferkauf awarded generous Christmas bonuses as well.

1955 was a big year for the operation, with the arrival of Korvette's first full department store on Carle Place, Long Island. Despite a rush to get it open before the Christmas season (and thus taking shortcuts on construction), as well as financing problems, the store was a huge early success. Also in '55, Korvette's floated its first initial stock offering, at $10 a share. A year later it was $22.

But by 1956, expansion was taking its toll. Of course it was impossible to have only friends run each location and Ferkauf wasn't very good at hiring help. He also wasn't in the least bit organized, operating without an office, a secretary, or often records of his transactions. As Korvette's grew, so grew the problems. [Though in 1962, the stock hit $170 on a split- adjusted basis.]

Ferkauf recognized the issues and sought a merger partner in the late 50s / early 60s, but none came forward. It was then that he brought in Jack Schwadron from Alexander's to run the show and oversee Korvette's move into apparel, which they had been dabbling in. But the plan wasn't focused (if they could sell jeans at a discount, why not fur coats at a reduced price?) and profits were drying up.

Korvette's stores always had that bare-bones look, but by 1965 the appearance was increasingly shoddy, with stained carpets, fading paint, and cracks in the walls (due in no small part to the hurried construction practices).

Then in May 1966, Schwadron was replaced at the top by Hilliard Coan, who came over in Korvette's acquisition of Hill's Supermarkets. Coan immediately had the board try to oust Ferkauf, who really wanted nothing to do with this gigantic operation he had created. Ferkauf yearned for the days when he had just one or two small discount stores.

Coan didn't last long, just months, when Korvette's was folded into Spartan-Atlantic discount stores. The new CEO was Charles Bassine, whose son married Ferkauf's daughter. Bassine then really screwed up, by basically abandoning the discount model in favor of attempting to compete head-on with Macy's and Gimbel's. What this meant, of course, was that there was no real reason to shop at Korvette's anymore.

By the early 70s, Ferkauf was totally out of the picture, Korvette's had more management changes, departments such as furniture and carpets were eliminated and sales stagnated. Then in 1977 the chain had a loss of $4 million on $590 million in revenue. The losses quickly mounted from there. Outside consultants were brought in to figure out how to turn it around and as part of the process discovered that there was no typical Korvette's customer. It was a little of this and a little of that. It was only a matter of time and on Christmas Eve 1980, after a dismal holiday season, Korvette's ceased operations. What was once a 58-store operation was now nothing more than a bunch of ugly brick and mortar.

Wall Street historian Robert Sobel writes: "The reason for Korvette's failure certainly wasn't Ferkauf's lack of vision, but rather his inability to integrate all of his ideas into a cohesive strategy. Other reasons were mismanagement, weak personnel and financial policies, haphazard expansion and an inability to control costs. None of these had been a problem when Korvette's was a discount chain. The company hadn't been able to make the switch to department store status because its leaders, from Ferkauf on, could not decide what it wanted to be."

Eugene Ferkauf is but one in a long line of retailers who were once viewed as legends, only to fall on their face; men like Rowland Macy, A.T. Stewart, Bernard Gimbel, Frank Woolworth and Aaron Montgomery Ward, great merchants who took their eye off the ball.

Sources:

"When Giants Stumble," Robert Sobel
""The Pursuit of Wealth," Robert Sobel

Brian Trumbore

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