The Rise and Fall of Mervyn’s
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Big Brands. Small Prices. That was the catchy slogan of Mervyn’s. The chain essentially pioneered the branded apparel discounting concept and grew rapidly on the West Coast. But it seems that it could not take the heat from the rise of other discount chains. The chain finally filed for bankruptcy in 2008. So, what really went wrong along the way? Let’s dive in.
In 1949, Mervin Morris opened the first Mervyn’s in San Lorenzo, California. Notice that Mervyn’s is spelled with a ‘y’ instead of an ‘i’. This is because Morris took the advice of an architect who told him the ‘y’ would make the name stand out. The whole concept of the store was to offer brands and private-label apparels at relatively lower prices. The first year in business, the store grossed 100,000 dollars. This is actually impressive, given that it was in the 50s.
Morris worked relentlessly to provide value to his customers. He increased brand awareness through the use of tabloids that were distributed in stores and printed in newspapers. The weekly promotions that he carried out attracted a decent customer base over time, and Mervyn’s built its value-oriented reputation from there. The business model proved to be profitable and the company went public in 1971. Most of the funds were used to pay down debt. In the 70s, the chain expanded to around 40 stores, with all of them situated in California and Nevada.
Mervyn’s sales ballooned to over 260 million dollars by the end of the 70s when it caught the attention of Dayton Hudson. Most of you probably know Target, the discount retailer. Target was actually one of Dayton’s subsidiaries at the time, until Dayton Hudson renamed to Target in early 2000s. Dayton Hudson acquired Mervyn’s for 300 million dollars in 1978, as it sought to expand on the West Coast. Under Dayton Hudson, Mervyn’s expanded aggressively. At the time of acquisitions, there were 55 Mervyn’s stores. By mid 80s, that increased to 148 stores, which brought in over 2 billion dollars in sales.
Dayton Hudson was so impressed by Mervyn’s performance that they allocated half of their capital budget to opening new stores through the late 80s. Mervyn’s focus on apparel became a reference for full-line department stores in the likes of J.C. Penny. Competitors began imitating Mervyn’s concept by offering department store-quality goods at reduced prices. Despite Mervyn’s revenue rising, profits were falling amid increased competition from other stores. Operations were optimized to derive cost savings. They consolidated their buying operations, focused on quality control and installed checkout scanners to improve the inventory cycle.
But Mervyn’s cachet faded away as larger retailers like Kmart were replicating the concept. This prompted the chain to focus on their core products, which was apparel. And within apparel, they axed all non-performing items in favor of best-selling ones. They decided to upgrade the quality of their products as well, even though that meant charging higher prices. Newer colours and designs were introduced to compensate for fewer apparel selections. All of this helped the chain maintain some form of profitability for a short period of time.
In the 90s, the chain was badly hit by a downturn in California’s economy. Revenues were not growing and profits started slipping away. A lot of changes at the management level were made but the chain, which operated 286 stores, continued to struggle. Plans called for redesigning store layouts and introducing new product lines to revitalize sales. The chain even renamed to Mervyn’s California in 1995. But the chain remained a drag on Dayton Hudson’s earnings. Let me emphasize on this. As a holding company of three companies, Dayton wanted to focus on the best performing ones. They naturally put up their best resources at play in the best performing one, which was Target.
Mervyn’s started closing stores in Florida and Georgia. And department stores like Dillard and J.C. Penney wasted no time to snap up the locations. The funds from the sale would be used to pay down debt. By the way, the stores in Florida were not losing money per se. It’s just that there were so few locations spread across the state that marketing and distribution costs were inflated. And going back to the holding company emphasis, Dayton was comparing metrics amongst its holding companies. And as Mervyn’s Florida stores showed sub-par metrics, they were immediately closed.
Management at Mervyn’s recognized that they were losing grounds to discounters such as T.J. Maxx and Marshalls. To compete effectively, they tried to widen their offerings of national brands. They even ran multiple marketing campaigns to lure back customers. By the early 2000s, Mervyn’s was stagnating and the weaker retail environment did not help its situation. There was a lot of speculation around Target Corp. selling Mervyn’s to focus on Target stores. That eventually happened in 2004 when it was sold for 1.25 billion dollars to a group of investors. And your usual suspects were amongst the ones who bought the chain. Can you guess who? Sun Capital Partners and Cerberus Capital Management. If you have been watching our videos, you have probably heard their names a bunch of times.
By now, you probably already know what the new owners did. Sale and leaseback of the real estate. In this case, the real estate was allegedly transferred to newly formed companies and rents were hiked up. Mervyn’s had assumed around 800 million dollars in debt when they were bought out in 2004. In addition to paying the interest, they also had to pay the hiked-up rent as well. The financial crisis exacerbated Mervyn’s fragile financial position up to the point that it had to file for bankruptcy. Creditors of Mervyn’s filed a lawsuit against the private equity firms, claiming the buyout transaction set up Mervyn’s for failure.
But the private equity firms claimed that Mervyn’s was well capitalized at all times and that the rent were priced at market value. A settlement was eventually reached, attributing over 165 million dollars to the creditors. During that time, Mervin Morris’ son bought the Mervyn’s intellectual property and had plans to relaunch the company. However, that never came to fruition.
Do you think that Mervyn’s failed solely due to competition? Or do you think it would still be operating if it did not get bought out by the private equity firms? As always, let us know what you think.
