DISCOUNT HOUSES

They Are Teaching a Lesson in Retailing

FOR many U.S. retailers, the greatest worry is not a recession. It is a fear of the discount houses at which shoppers can buy electrical appliances and hundreds of other articles at 20% to 40% off the list price. Since World War II, discount houses have cropped up in almost every large U.S. city; there are now some 6,000 stores, which operate from Maine to the Mexican border. This year, total discount-house sales in the nation will be about $5 billion. Many small retailers worry that the booming discount houses will do to them what cash & carry supermarkets did to the old corner grocery.

The discount house is not a new idea. "Wholesale" houses of one kind or another have existed for years. What is new, and frightening to retailers, is the small markup on which the discounters operate. Since they usually spend no money on displays, give no credit or free delivery, and rarely advertise their wares, their overhead is small and the saving is passed on to the consumer. "In addition to the trade discount, we get an extra 1 1/4 discount by paying cash for everything we buy," says Los Angeles' William E. Phillips, whose discount house grossed $6,000,000 last year. "Lots of times, our margin of profit is not much wider than that." Discount houses can turn penny profits into dollars by their huge volume of business and the fact that they can cash in on brand names. The manufacturer bears all the cost of advertising and promotion. -

The rise of the discount house is in almost direct ratio to the passage of the Fair Trade laws in the 30s, which were designed to stop "discounts" and drastic price-cutting. The Fair Trade prices were so high that they left a fat margin for the discounter to cut. The laws can be enforced against big, well-known stores (e.g., New York's R. H. Macy & Co., Bloomingdale Bros., Abraham & Straus), but few manufacturers have the time or energy to slap a lawsuit on every small discounter. Some big companies such as Sunbeam, Magnavox and General Electric are trying to police their dealers rigidly. But many companies are none too anxious to lower the boom on discount stores that move large quantities of goods, since the manufacturer still gets his full markup. In fact, even businessmen who publicly condemn discount houses often deal with them privately. One big Chicago corporation recently bought all its employees Christmas presents from a discount house, picked up 700 radios at $9.45 each, v. $19.75 list price.

Over and above the Fair Trade laws, another big reason for the growth of the discount houses is the attitude of the established retailers themselves. Too many businessmen have not made the adjustment from a wartime sellers' market with its shortages and high prices to the buyers' market of 1954. Instead of shaving profit margins to give consumers the benefits of the enormous postwar volume of sales, they have kept their prices high.

There are plenty of complaints about the way discount houses operate. Shoppers are often taken in by slick, fly-by-night operators who fake big discounts by quoting fictitious list prices, substitute off-brands, factory seconds or defective models for first-line appliances. Consumers also complain that many discount houses are usually littered and the clerks gruff. On top of the lack of credit and free delivery, few have service and repair departments. A few big discount houses such as Chicago's Polk Bros, and Manhattan's Masters, Inc. now give credit and deliver, have put in displays. But such steps toward better service leave the way clear for stripped-down discount houses to undercut their prices.

Most old-line retailers accept the fact that, good or bad, discount houses are here to stay, and they have worked out some methods to fight them. It is no longer easy for a consumer to "shop" the displays in a department store just to get information about a vacuum cleaner, including the code number, so it can be ordered through a discount house. In other ways, the older stores are learning to compete. Chicago's Carson Pirie Scott and Newark's L. Bamberger hold "warehouse sales" (TIME, March 1) to sell at big discounts to customers who pay cash and carry off their own purchases. In areas where there are no Fair Trade laws, stores such as Washington's Hecht Co. keep their normal services but cut the price of appliances by as much as 40%.

For all their faults, the discount houses have touched off a change in retailing that cannot help but lower prices to U.S. consumers. To stay in business, many retailers must find a way to cut down the heavy distribution cost (about half the regular retail price) of getting a product from the manufacturer to the consumer. Discount houses may not be the best way to cut such costs, but at least they have awakened retailers to the hard fact that, in one way or another, they must be cut.

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