Everybody Loves a Bargain
(See Cover) He is probably the most unorthodox tycoon in the land. He has no office, no secretary, no personal files. He has never dictated a business letter or made a speech. "I pay other people to do things like that," he says. He seldom makes a telephone call or negotiates a business deal personally ("I feel my people can haggle better than I can--so why waste my time?"). He shuns credit cards; he regards them as a temptation to spend company money. He never goes to cocktail parties or conventions; they cost time. Though he is worth $40 million, his only luxuries are homely middle-class comforts. His name is Eugene Ferkauf, he is 41 years old, and he is the founder, controlling stockholder and audacious boss of E. J. Korvette, Inc., the nation's most successful and most unusual chain of discount department stores.
Wiry, crew-cut Gene Ferkauf (the name is pronounced Fur-cowf and means "sell" in Yiddish) started out in a Manhattan loft 14 years ago with a total capital of $4.000. Today he rules a fast-growing retailing empire that consists of 17 stores in the Northeastern area between Hartford, Conn., and Harrisburg, Pa. In the past nine months alone, Korvette's profits have risen 81% to $4,268,000, and the company's sales in fiscal 1962 will amount to $230 million. All this Ferkauf has accomplished by pursuing a business philosophy that is as old as the Industrial Revolution: discard costly frills, use low prices to lure customers, and make up for low profit margins with high volume. Familiar as this philosophy is (and a lot of people are working at it), it takes acumen to practice. By succeeding at it in the sluggish 1960s, Eugene Ferkauf has seized the lead in a retailing revolution that is shaking up every U.S.
merchant from Main Street to Manhattan's Fifth Avenue.
The Strongest Leg. "Thanks to the dis count houses," says San Francisco Marketing Consultant Frank Meissner, "we in the U.S. are coming close to matching mass distribution to mass manufacture for the first time." All told, there are now an estimated 4,000 discount stores in the U.S., and the number is increasing almost daily. This year, discounters will open six new stores in Cleveland, twelve in and around Minneapolis, another twelve in Detroit and 20 in Los Angeles.
Inevitably, the swelling number of dis count houses accounts for an increasingly large share of U.S. retail sales (see chart}.
But more important, the discounters are making the pie bigger. Last year's dis count store sales of $4 billion are expected to grow this year to more than $5 billion--and conventional retailers are also ringing up increased sales.
In the beginning, nobody but the cus tomer had a good word to say about dis count houses. But it has been found that when a discount buyer pays less than he had expected for a TV set or refrigerator, he is usually in the mood to spend the extra money on other goods. Discounters thus contribute their bit to economic growth every time they induce a customer to swap dollars for goods that he would not have bought had prices been higher.
And they have done a lot to keep the consumer economy from stagnating. The U.S.
economy moves basically on three legs: capital spending. Government spending and consumer spending. But the economy has not been progressing very fast lately because its legs are moving at different speeds. Businessmen's capital spending is disappointing this year. Government spending has begun to level off. Consumer spending, though it shows some danger signals, is the best performer of the lot.
The storekeeper used to get more of it.
In 1955, 60% of the average consumer's disposable income went into retail sales; now only 54% does. Much of the money that the shopkeeper used to get is now being spent on services such as entertainment and travel. Merchants point out that U.S. manufacturers have not devised any really irresistible new product since television. Where the manufacturers have failed, the merchandisers hope to succeed.
From Concrete to Carpets. To tempt the consumer in an economy that is becoming increasingly sophisticated, Gene Ferkauf has decided that the discounter's low prices are not enough and must be accompanied by at least a minimum of atmosphere and service. By so doing, he, more than any other discounter, has brought respectability to a business in which the clerks all too often seem to be taking 10% off for rudeness. At Korvette's, the discounter's original pipe racks and cold concrete floors have given way to piped-in music and wall-to-wall carpeting. But Korvette's prices still range 10% to 40% below "list" (list price itself is getting to be more of a fiction).
Six weeks ago, Ferkauf brought discounting to the royal row of American retailing. On Manhattan's Fifth Avenue he opened a seven-story, crystal-chandeliered store in the quarters formerly occupied by W. & J. Sloane, Manhattan's best-known carriage trade furniture store.
The opening-day armies of bargain hunters gathered so rapidly that the police were obliged to throw up barricades to keep traffic moving, and fire marshals let latecomers into the store only as other shoppers left. Since this smashing debut, Korvette's Fifth Avenue has become one of Manhattan's foremost tourist attractions--and the name of publicity-shunning Eugene Ferkauf is beginning to be nationally known.
"Eugene Ferkauf is one of the great merchandisers of our time," says Acting Dean George W. Robbins of the U.C.L.A.
School of Business. Even higher tribute comes from Malcolm McNair, professor of retailing at the Harvard Business School, who rates Ferkauf as one of the six greatest merchants in U.S. history.
(The other five on McNair's list: Frank W. Woolworth, John Wanamaker, J. C.
Penney, General Robert E. Wood of Sears, Roebuck, and Michael Cullen, the first supermarketeer.) From Bags to Riches. The man whom McNair hails as the greatest of contemporary U.S. merchants is by turn profane and philosophical, charming and fiercely combative. Eugene Ferkauf is a boy from Brooklyn, and he does not pretend otherwise. Brooklyn is only a 15-c- subway ride and half a world away from Fifth Avenue.
Ferkauf made the trip unselfconsciously.
But success, though it has not spoiled him, has wrought some changes. He no longer shows up for a meeting with his investment bankers dressed in sports shirt and rumpled slacks.
The son of Rumanian immigrants, he was a shy, woolgathering boy who finished Samuel J. Tilden High School with a so-so 82% academic average. Instead of going to college, he went to work in his father's two small luggage shops in Manhattan. "I got an education there at my father's expense." he says. One homely lesson he has never forgotten. One day Father Ferkauf took a belt off a rack in his store, put it on, then walked to the cash register and deposited the money for it. Recalls Gene Ferkauf: "I said to him, 'Why did you do that? This is your shop, isn't it?' My father answered, 'If you're good to a store, it will be good to you.' " To this day, Ferkauf buys all of his clothes in his own stores, does most of his shopping on slow days because "I can't stand for those cash registers to just sit there." "Realistic Pricing." After four wartime years in the Signal Corps, Sergeant Ferkauf came back to his father's luggage shops, and was discontented. His father was satisfied simply to ring up sales of $80 a day per store on a conventional 40% markup. Gene wanted to chop the markup in half to boost sales, and was determined to try out his theory. In 1948 he went into business on his own, rented a small, second-story walkup on Manhattan's East 46th Street and started selling luggage at discount. He called the place EJ. Korvette--E. for Eugene. J.
for a Brooklyn chum named Joe Zwillenberg, and Korvette after the catchy name of a World War II subchaser, which underwent a slight change in its spelling. Ferkauf had only his own savings to begin with, but he got credit with surprising ease. Unknown to Gene Ferkauf, his father had underwritten all of his loans.
Almost as an afterthought, Ferkauf decided that the way to pull customers into his store was to stock some hard-to-get appliances and price them at cost. As fast as he got the appliances, he sold them, and soon he realized that he was onto something bigger than Gladstone bags. He started to take small markups--5% here, 20% there--and the customers kept coming. His competitors, who were marking up appliances 40%, damned this practice as "discounting." Ferkauf preferred to call it "realistic pricing." Before long, rival retailers were putting pressure on distributors to stop selling to Ferkauf, and had challenged him with nearly a hundred Fair Trade suits. When he was denied one brand, Ferkauf simply stocked others. Soon he had become so big that distributors came back to him hat in hand, not only solicited his business but also cut their prices to land his mass orders. By 1950 Korvette's was turning over $2,000,000 a year, and Ferkauf was plowing back all the profits into new stores on leased sites. The Korvette chain grew to three cash-and-carry stores in 1951, four in 1952, eight in 1955.
Who's Minding the Store? For executive talent to mind his multiplying stores, Ferkauf turned to the recruiting ground he knew best: Brooklyn. Determined to keep himself free for decision making--he did not even hold a title at Korvette's until 1955 when, at his bankers' insistence, he invented for himself the job of chairman of the executive committee--Ferkauf delegated to one old friend after another all the time-nibbling detail work. A grammar school chum named Marty Agins has charge of the Westbury, Long Island, store. Joe Zwillenberg became company treasurer. Another executive job went to Abe Goldstein, a fellow Brooklynite whom Ferkauf met on K.P. duty at Camp Crowder, Mo. Recalls Ferkauf: "I was washing dishes, and Abe came over to me and said, 'Move over, I'll help you.' I've just gotten around to rewarding him. I've made him manager of the Fifth Avenue store." This crowd Ferkauf affectionately calls "The Boys." When money was needed in the early days to keep the stores stocked, Ferkauf passed the hat among The Boys.
He gave them stock in return, also handed out stock warrants in lieu of high salaries.
Even now Ferkauf himself draws a salary of only $30,000 a year (plus a $10,000 expense account), and all other Korvette salaries scale down from that. But at least ten of The Boys have become paper millionaires, and all work a frenetic 70 hours or more a week for their equity.
The Boys call one another by such Brooklyn schoolboy nicknames as "Doodie" or "Schmultzie." "This is a relaxed company," says Ferkauf, "so there is no need for formalities." At Korvette's, in fact, it is imprudent of any executive to throw his rank around. One store manager who got too highhanded with his subordinates was conspicuously omitted from a stock bonus list. Says he: "I'm nothing but a nice guy now. I learned the hard way.
It cost me $100,000." Do-It-Yourself Merchandising. For all their open-shirted informality, this band of amateurs demonstrated a remarkable knack for gauging correctly the profitable trends in retailing. Under Ferkauf's endless prodding, they began to move into the rich markets of suburbia, added to their basic stock in trade--appliances--most of the lines of merchandise that department stores carry. Korvette's also began to put out its own private labels, from Kor-Val vitamins to the booming XAM stereo hi-fi line (named in a backward way after Max, an alley cat of Ferkauf's acquaintance).
Part of Korvette's mounting success consisted in riding a trend. In the early '503, Gene Ferkauf was only one of many brash young discounters onto a good new thing. A retailing upheaval was under way. The nationwide move to the suburbs was undercutting the downtown department stores. Not having their money tied up in huge and costly property, the discounters moved out to where the housewives and buyers were, catered to the car-borne family trade by providing huge parking lots, kept night hours, and sold on Sundays. The typical discount center became part supermarket, part department store, part carnival. (The pretzel vendor who operates in front of Korvette's discount center in Westbury, Long Island, pays Korvette $800 a month rent.) Even when the department stores began opening more and more suburban branches, the discounters continued to prosper.
Capitalizing on the self-service trend set by the food supermarkets, they undercut department-store prices by replacing paid saleswomen with pushcarts.
For a while almost anyone could break into discounting by renting an abandoned mill or warehouse on a highway and borrowing enough money to buy an inventory. And almost anyone did. At first, old-line department stores jeered at the discounters. They pointed out that the discounters' stores were messy, that the goods they sold were often distress merchandise, and that the clerks were few and were usually order takers who did not know their stock. Department stores offered credit, wider selection, home delivery and more amenities. All true; but many department stores, and their help, had become indifferent in service and set in their ways. Besides, it turned out, people would put up with a lot if the price was right.
There was another changing circumstance too. When the pent-up hunger for hard goods created by World War II was finally sated, many U.S. manufacturers found themselves stuck with slackened production lines, and to keep their plants busy abandoned their insistence on Fair Trade pricing of their products in order to get the discounters' fat orders. At that point, the old-line department stores decided that they had to do more than jeer at the discounters. No longer could a discounter send his customers over to a department store for free demonstration of an appliance or to a music store to listen to a phonograph record, confident that they would come back to buy at the discount price. More and more department stores began to match the discounters penny for penny on such competitive items as refrigerators, television sets, transistor radios and toys, using them as loss leaders and making up the difference on other high markup items --notably clothing.
Not by Price Alone. This put Ferkauf in a two-way bind. He had expanded too fast on a small capital base--four big new branches in 1957 alone--and department stores were beginning to win back business from him. His after-tax profits on invested capital plunged from 29% in 1956 to 9% in 1958. (Currently, they stand at 23%.) Fighting back, Ferkauf determined to challenge the department stores in the place where they were strongest. This meant getting into service, style--and soft goods.
In the retailer's lexicon, "soft goods" means anything with a short life--clothes, accessories, costume jewelry. Soft goods take up far less store space than "big-ticket" hard goods such as washers or TV sets. They also turn over much faster and are generally more profitable because people--particularly women--are willing to pay more for that intangible called "fashion." But the world of soft goods is a pink jungle in which stores compete savagely for the best styles and stylists, and a great deal depends upon cozy relationships built up over the years between the manufacturer's "vendors" and the store's buyers. Almost from the start, Ferkauf had had soft goods of sorts in his stores.
"But let's face it," he shrugs, "we were rag merchants." In soft goods, his tough and able boys from Brooklyn simply did not have the savvy.
Blackballs & Back Doors. To get rid of his rags, Ferkauf in 1958 abruptly sold $5,000,000 worth of them below cost and set out to restock with better goods. But to do so, he desperately needed an experienced soft-goods buyer. He ran through four merchandising managers in three years until last year he hooked boyish-looking Jack Schwadron, 36, the whip-smart scion of a family that helped to found New York's Alexander's cut-rate department stores (in which Korvette's has a 43% voting interest). Schwadron knows soft goods. More important, he knows the men who sell them.
Buying the name brands of soft goods is still hard for Korvette's because manufacturers who openly deal with discounters are often blackballed by conventional retailers. To get high-fashion goods, Ferkauf and Schwadron sometimes have to go through cloak-and-dagger maneuvers that the CIA might study with profit. Korvette's Fifth Avenue recently scored something of a coup by offering its customers Pringle of Scotland fur-trimmed cashmere cardigans for as little as $25.90 each, despite the fact that Pringle tries to hold the price to more than twice as much by refusing to sell to discounters. How did Korvette's get the cardigans? Pringle tracked them back through at least two intermediaries: Pringle had sold them to a manufacturer of sweater linings, who had sold them to a manufacturer of fur collars, who then presumably sold them to Korvette's.
Most other brand-name soft goods enter Korvette's through the back door, if at all. Pantino women's slacks, which retail for $10 to $18, sell in Korvette's for several dollars less--but without the Pantino label. Jantzen and Catalina swimsuits--also stripped of labels--sell for 10% to 15% off regular retail prices, but the choice is limited. For the most part, Ferkauf relies on private-label soft goods put out for him by big-brand manufacturers. Korvette's calls them "compara-bles"; they include such items as Kayser-Roth "Nolde" nylons at $2.55 for three pairs, v. $4.05 for Kayser's better known "Kayser" hose, and Kentshire sheets by Pacific at $2.57 apiece, v. $3.49 for regular Pacific sheets. Though his competitors sneer that some of Ferkauf's "comparables" look more like sacks than Saks, he does offer many a genuine bargain. Samples: Italian hand-knit men's sweaters for $8.99, Dacron and wool men's summer suits for $25.48, French alligator handbags for $50.
The Foot Race. While department stores throughout the land work on an average price markup of 36%, Korvette's prospers at 21%. How does Ferkauf do it? Self-service makes for fewer employees and lower wage costs: each Korvette employee accounts for an average $38,000 in business a year, nearly twice the average for big conventional stores. Employee markdowns are rare, and executive expense accounts (except for Ferkauf's $10,000) are painfully austere. If customers want alterations or home delivery of portable goods, they pay for it. (Credit is free because it more than pays its way by making sales.) Most of all. the discount price itself generates so many sales that Korvette stock turns over seven times a year, twice as fast as in the typical department store.
No old-line store in New York comes close to matching Korvette's Fifth Avenue in annual sales per square foot of selling space. By best accounts, Macy's does $130 to $155 per sq. ft., Brooklyn's Abraham & Straus $175, Saks Fifth Avenue $190--and Korvette's more than $300. At current rates, Korvette's first full-year sales on Fifth Avenue will easily top $30 million.
"Cy, Do Me a Favor." Though the low-markup, high-volume formula seems simple, it requires an artful balance of costs, prices and presentation. Ferkauf believes that "a store is like a theatrical production. The setting is vital in soft goods. We had to learn the hard way." Presiding over the presentation, and pursuing his goals of neatness and taste in a volume operation, Ferkauf spends most of his working days in an endless trek from one store to another, sparking The Boys to do just a little bit better.
He scolds incessantly in Yiddish-spiced Brooklynese. It is almost always done gently and with a smile, but the point gets across. "Cy, please, so why is it so schmootzig [dirty] around the soft-drink machine? I told you that should never happen. Cy, do me a favor. Clean it up.
I mean go get a boy and clean it up right now . . . So Dave. I was downstairs, and there was a line at the cash register and only a part-timer to handle the traffic.
Dave, tell me. so what happened to the other girl? Dave, you know it will hurt the store. So why do you let it happen? . . . Irving, so why doesn't someone pick up this shirt? It looks like a schmuttie [rag]. And Irving, take more of this colored costume jewelry out of the drawers and put it on the cases. In two weeks it's not worth a nickel. So why don't you have it all out now? You don't want we should get stuck with it, do you. Irving?" Initial Offer. In his private life as in his business, Ferkauf operates with uncluttered simplicity and directness. He proposed to his wife, blonde Estelle Silverstein Ferkauf, on their second date by presenting her with a small suitcase engraved E.S.F. "because that's what your initials will be because you're going to marry me.'' They live in a ten-room brick house in an upper-middle-class section of Queens, where they settled ten years ago, because, as Estelle explains, "It was the nicest neighborhood closest to Brooklyn." Social life consists of visiting the family back in Brooklyn, or having perhaps one other couple to dinner. Their circle of friends is small; the Ferkaufs are ungregarious by nature, never entertain anyone from the company in their home, and have never had a party big enough to be catered. On Sunday, the only day he does not work. Gene Ferkauf loves to leg it around Manhattan with Estelle and their three daughters. At home, he reads bestsellers (recent favorite: The Agony and the Ecstasy) or listens to operas from the huge record collection that he has been building since high school days.
Workdays, Ferkauf gets up before 7 a.m. without an alarm clock, prepares his own breakfast, then washes the dishes, using rubber gloves. No matter how far he must travel to inspect one of his stores, whether to Hartford or Harrisburg, he is always home before the children bed down. Only six nights during the past 14 years has Ferkauf spent away from home--and four of them were on a recent business jaunt to Italy.
Ringing the Bells. The determined rush and dedication of Gene Ferkauf and his boys have not gone unnoticed on Wall Street. Investors who bought Korvette common at its 1960 high have more than tripled their money, and Ferkauf has benefited most of all because he owns 28% of the outstanding shares. From a 1960 peak of 121, Korvette soared to 57 earlier this year, slumped to 32! in the general market plunge, then recovered to last week's close of 38!, where it was selling at 26 times expected 1962 earnings.
Korvette has never declared a dividend, and Ferkauf insists it never will. "As long as I have anything to do with this company," he says, "all the profits will go into expansion. The hell with the stockholders." Then he grins: "And don't forget I'm the biggest one." The Ferkauf calendar is full of expansion plans. Later this month, Korvette's will branch out into door-to-door selling of cosmetics (its own new Eve Nelson line) in all the areas where it has stores, tackling such tough--and profitable--competitors as Avon and Fuller Brush. Within the next 18 months, Korvette's is scheduled to open 16 new discount centers, most of them including separate supermarkets and furniture stores. Set to open before year's end are a big new center near Valley Forge, Pa., two near Baltimore, two in New Jersey. Coming next year: three centers around Washington, D.C.. four in the Chicago area and others in Connecticut, Philadelphia and The Bronx. After that, perhaps. Detroit, Milwaukee. St. Louis. Ferkauf is also eager to get into the Common Market and is dickering for outlets in Western Europe.
In most new areas, Ferkauf plans to open several stores simultaneously--he figures this helps spread out the advertising cost involved in imprinting Korvette's on the local consciousness.
He is not wholly kidding when he says, "All we hope for this company is that it should do all the merchandising business in the U.S." He would if he could. For a time, there were some who believed that in the final shake-out there would only be expensive specialty stores at one end and discounters at the other. Certainly some familiar department-store names in the big cities have already disappeared. But it now looks as if there will always be a place for alert conventional retailers, just as there is room for luxury restaurants, cafeterias, and everything in between.
Customers presumably will never weary of the unmatched services of a Neiman-Marcus or the eye-boggling variety of a Macy's, which stocks 135 different kinds of men's shirts.
And just as Korvette stores are trading up to become more and more like the traditional department stores, so the old-line stores are slimming down to emulate the discounters when they can. Detroit's J. L. Hudson plans to open a dozen "budget" branches, and Federated Department Stores, the biggest chain in the retailing business, has recently launched several discount shops. Woolworth and Kresge are going into discounting. So, even, is the A. & P. From Rich's in At lanta to the May Co. in Los Angeles, many of the nation's better department stores now promise to match almost any price that a customer can prove a discounter is offering. Once again the old retail battle cry reverberates across the land: "We Will Not Be Undersold." In the battle not to be undersold, the casualties are likely to be heavy. Many of the Mom-and-Pop shops in "overretail-ized" neighborhoods will fail. So will some of the discounters. With the increased need to emphasize style and service, survival will become progressively more difficult for undercapitalized rag merchants who shortsightedly insist on remaining in barnlike surroundings and forcing the customer to make a flying tackle before he can nail a clerk.
Force and "Figures." In this newly competitive atmosphere, most of Fer kaufs competitors grudgingly agree that he will continue to prosper and to teach lessons to all businessmen. By his own estimate, he will ring up sales of $400 mil lion and record profits as well next year.
This delights Ferkauf, who says: "It's a matter of pride with me that we become a great company--part of the American scene and very, very profitable. It's the figures that count, the profits." But along with his concentration on the figures, Ferkauf has done considerable thinking on the social and economic utility of the discounting revolution. "Man was made to be a competitive animal," he says in a moment of reflection. "It's what keeps him from becoming slovenly." Though Ferkauf now prefers to call his stores "promotional department stores" and professes nothing but admiration for most of the traditional department stores, he clearly feels that the discounters have been the major force in preventing conventional retailers from becoming too slovenly--at the consumer's expense. Says Gene Ferkauf with justifiable pride: "If Macy's, Gimbels and Carson's are selling at lower prices, it's because we've in spired this competitive situation. We have done more to stretch that buck than any one in American distribution. I don't know by what percentage we've increased the purchasing power of the American dollar, but I know it's significant."
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