Battle of the Discounters

From Fifth Avenue in Manhattan to Broadway in Los Angeles, the men who market the nation's goods were preparing for a knee-and-gouge brawl. On one side stood the avid discount sellers, who in the past six years have cornered nearly one-third of the nation's $14 billion-a-year department store trade; on the other were the old-line, fixed-price retailers. Hoping to juice up the sluggish trend in retail sales, each side is slashing into the other's territory as rarely before. In the process, the distinction between a discount house and a department store is getting harder to tell without a scorecard.

Up with Service. The cut-rate operators have learned that, as Cincinnati Discounter Homer Brown says, "you've got to offer something besides lower prices." What they are promising is better service, though volume is still their stock in trade, and they sometimes seemed to be offering 25% off for rudeness. Big discounters such as the East's E. J. Korvette, Inc., New York's Friendly Frost chain, and Chicago-based Goodman's Community Discount Stores are opening new branches with piped-in music and fancier displays to shuck off "that warehouse look," adding such customer lures as charge accounts and home delivery. In the eight-story branch he will soon open on Manhattan's Fifth Avenue, Korvette's Eugene Ferkauf will sell the usual discounted appliances and lower priced clothing in one part of the store, and "trade up" to higher income customers by offering better, high fashion clothes and accessories in another part.

In retaliation, some department stores are going in more and more heavily for discounting. "We can't wish away discounting, and so we are moving into it," says the president of one of the nation's biggest department store chains. Of the 3,000 department stores in the U.S., 7% to 8% are currently opening discount branches, sometimes under different corporate names so that customers will not demand equal bargains in the parent stores. And virtually all traditional department stores are rapidly borrowing many of the discounters' methods. Old-line retailers such as Boston's Jordan Marsh and Detroit's J. L. Hudson Co. vow that "we will not be undersold," and match discounters' prices for specific items. On the theory that shoppers delight in the adventure of picking out their own merchandise. Manhattan's Macy's and the nationwide Federated Department Stores group have added self-service and checkout counters in some departments.

Down with Markups. As they move onto each other's turf, both camps have to learn a lot. Department stores, which operate on a 39% markup, will have to snip off enough frills to make a profit on the usual discount markup of 19% to 24%. (One way would be to put a greater proportion of their employees to work at actual selling; fewer than five out of ten department store workers now are salespeople, v. eight out of ten discount house employees.) Discounters will have to learn how to buy, sell (as opposed to mere order taking) and service a broader range of merchandise. Korvette's first venture into apparel sales flopped because its buyers were appliance experts, who knew little about fashion; the company snapped back only after it raided experienced buyers from department stores.

Both sides bring some well-tested weapons to the fight. The old-line retailers, often the fashion arbiters of their communities, have built up a reputation for reliability and quality, and they boast a broader range of executive brainpower. The discounters, besides their price advantage, have grabbed some of the best suburban locations, and benefit also from the image of "newness" and the self-service craze.

Just Waiting. Though bargain-loving customers will benefit from the intensifying battle, many a retailer is going to be squeezed out of business. Both discounters and traditionalists agree that the most likely victims will be: 1) smaller neighborhood shops that can offer neither discount prices nor department store range of choice; 2) undercapitalized discounters who cannot afford to spend for service and a broad variety of merchandise; 3) stores whose owners are basically real estate operators leasing department space to individual merchants who operate under no central buying or pricing policy. Big Discounter Gerald 0. Kaye, chairman of Friendly Frost, estimates that at least eight leased-space stores on Long Island will fold within three years. Says he: "I hate to be a vulture, but I'm just waiting for them to fail. Then I'll pick them up."

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