Mervyn’s California

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Mervyn’s California

22301 Foothill Boulevard
Hayward, California 94541
U.S.A.
Telephone: (510) 727-3000
Toll Free: (800) 637-8967
Fax: (510) 727-5770
Web site: http://www.mervyns.com

Wholly Owned Subsidiary of Target Corporation
Incorporated: 1949 as Mervyn’s
Employees: 32,000
Sales: $4.09 billion (2000)
NAIC: 44812 Women’s Clothing Stores; 44811 Men’s Clothing Stores; 44815 Clothing Accessories Stores; 44819 Other Clothing Stores; 44815 Clothing Accessories Stores; 44813 Children’s and Infants’ Clothing Stores; 45211 Department Stores

Mervyn’s California, owned by retail giant Target Corporation, operates 267 department stores in 14 states. Whereas most of Mervyn’s stores are located in California and Texas, the company also operates outlets in Arizona, Colorado, Idaho, Louisiana, Michigan, Minnesota, Nevada, New Mexico, Oklahoma, Oregon, Utah, and Washington. Mervyn’s is a middle-market promotional department store offering moderately priced name-brand and private label casual apparel and home fashions.

Company Origins

Mervyn’s was founded in 1949 in San Lorenzo, California by Mervin Morris, who took the advice of an architect who told him that exchanging the “i” in his first name for a “y” would add flair to the department store that he named after himself. The centerpiece of Mervyn’s merchandise was a line of private-label family apparel, which Morris sold in season at prices higher than a discount retailer’s but still below what his customers would pay for similar goods in other department stores. With the help of two full-time employees, Mervyn’s sales reached $100,000 in its first year of business.

1960s and 1970s: Innovative Marketing and a Focus on Value

Morris relied on rapid inventory turnover to secure profits, maintaining a loyal customer base by ensuring that Mervyn’s products represented good value. Innovative advertising also helped keep Mervyn’s in the public eye. For many years, it was the only retailer in California to publish its own tabloid advertisement. The tabloid, which was distributed in the stores and through the Sunday newspapers, pushed weekly promotions and helped establish Mervyn’s reputation as a value-oriented retailer.

This emphasis on providing customers with value, rather than on offering a luxurious shopping experience, was an unusual concept at a time when the full-service department store was still the standard in general merchandise retailing. It proved profitable, however, and Morris gained a reputation as a pioneer in the industry. By the early 1970s, the company was in a position to expand considerably. In 1971, it went public, raising $5.4 million over the counter to retire all of its outstanding debt. Then, between 1972 and 1978, Mervyn’s nearly quadrupled in size, opening 31 stores, all of them in California and Nevada. In 1977, the company earned $11.8 million on sales of $264 million.

1978 Acquisition by Dayton Hudson

Mervyn’s success attracted the interest of Dayton Hudson, a midwestern retailer known primarily for operating the upscale Dayton’s and Hudson’s store chains. Both Dayton’s and Hudson’s had venerable histories as big city department stores. Hudson’s began as a haberdashery established in Detroit in 1881 by Joseph L. Hudson, who was looking for a way to rebuild his fortune after going bankrupt in the panic of 1873. In 1954, the company built Northland, then the largest shopping center in the United States, in suburban Detroit. Dayton’s was founded in Minneapolis in 1902 by George Dayton, a former banker. In 1956, the company built Southdale, the world’s first fully enclosed shopping mall, in Minneapolis. In 1962, Dayton’s created two subsidiaries that would prove highly successful, the Target chain of discount retailers, and the B. Dalton chain of bookstores.

Dayton’s went public in 1966 and three years later acquired Hudson’s, which was then still privately owned. Dayton Hudson promptly expanded by acquiring shopping malls and specialty retailers. Despite this aggressive course of expansion, however, the company was not well known outside the upper Midwest. With its B. Dalton stores well established in California, Dayton Hudson sought to introduce its department stores on the West Coast and, in 1978, the company acquired all 55 Mervyn’s stores in a stock swap valued at nearly $300 million.

Mervin Morris became a director at Dayton Hudson, and his family became one of the company’s largest stockholders as a result of the deal. John Kilmartin replaced Morris as CEO of Mervyn’s, overseeing a period of impressive growth. Backed by Dayton Hudson’s financial resources, Mervyn’s embarked on a remarkable course of expansion. By the mid-1980s, the chain was operating 148 stores. In 1984, Mervyn’s opened nine stores in Texas—its first adventure outside the western United States—and posted a $223.3 million profit on sales of more than $2 billion. The following year, Mervyn’s contributed 37 percent of Dayton Hudson’s operating profit. Impressed with this success, Dayton Hudson planned to allocate approximately half of its capital investment budget from 1986 through 1990 for new Mervyn’s stores.

Mervyn’s was highly regarded in the retail industry in the mid-1980s, when many of its competitors for the mid-range department store customer were floundering. During this time, many of Mervyn’s rivals retooled themselves, adopting many of Mervyn’s best ideas. Most notable, J.C. Penney abandoned its old identity as a full-line department store and like Mervyn’s, focused on apparel and soft goods. Moreover, competitors began publishing their own tabloid advertisements, imitating the marketing tactic Mervyn’s had used for decades. Perhaps most important, several retailers across the retailing spectrum began selling department store-quality goods at discounted prices. Faced with increased competition, Mervyn’s business began to taper off, particularly when factory outlet stores started becoming popular.

Late 1980s and 1990s: Competition and Financial Instability

Perhaps led by a false sense of security, Mervyn’s made no aggressive moves to stay ahead of the competition. Dayton Hudson executives later admitted that they did not pay close enough attention to their star performer. Mervyn’s profits sank sharply in 1986 and remained depressed in 1987, despite continuing strong revenues. Earnings at Dayton Hudson sank correspondingly, and speculation surfaced in the financial press that the company might become a takeover target as a result of this weakness.

During this period, Mervyn’s centralized its buying operations that previously had been split between its stores in the West and its fledgling stores in Texas. Consolidating buying operations in California speeded up inventory replenishment and cut costs. The chain also contained costs by focusing more of its resources on product quality control and by installing checkout scanners to help manage inventory, among other things.

More important, though, Mervyn’s began to recalibrate its merchandise lines. Since low prices and good values no longer made Mervyn’s unique, in an era when Kmart became the largest retailer in the United States and intramural rival Target prospered, the company had to find a way to distinguish itself once more. The chain responded by focusing its attention even more closely on apparel, which had been responsible, in large part, for founder Morris’success in the first place. “We dropped toys, infants’ furniture and draperies because we couldn’t be dominant in them without sacrificing potential in our core businesses,” Walter Rossi commented. Even within its apparel lines, Mervyn’s sacrificed variety to concentrate on its best-selling items. For instance, it pared in half the number of women’s blouses that it offered, leaving only the most popular ones.

Mervyn’s also responded to heavy price competition from its rivals by trying to upgrade the quality of its clothing, even when that meant raising prices slightly. One of the chain’s most popular clothing lines was its men’s and women’s sweat clothes. Mervyn’s sweats, however, tended to shrink substantially in washing and did not have a reputation as high-quality garments. Mervyn’s decided to size them more generously and upgrade the fabric and the sewing, even though it meant a price increase of nearly 20 percent. To compensate for the price hike, Mervyn’s offered a broader range of colors and more fashionable designs.

As a result of these changes, Mervyn’s sales and profits slightly rebounded in 1988 and 1989. In the 1990s, however, the chain’s recovery stalled, hurt by the sharp downturn in the California economy. Sales flattened out during the first half of the decade, and profits dropped sharply from $284 million in 1991 and 1992 to $179 million in 1993. During this time, Rossi was succeeded as CEO by Joe Vesce, and then Mervyn’s received five new top executives, including three transfers from Target.

Mervyn’s struggle continued into the mid-1990s. Dayton Hudson’s 1993 annual report characterized Mervyn’s performance as disappointing, and that year Moody’s announced that it was considering lowering Dayton Hudson’s debt rating due to Mervyn’s financial problems. Some analysts were skeptical as to Mervyn’s ability to overcome its losses and began to speculate as to whether or not its parent would sell off the faltering retailer.

Company Perspectives:

Big Brands. Small Prices. Mervyn’s California strives to offer national brands and never be beat on regular or advertised prices. The company is dedicated to offering its guests the national brands they expect, and its private label brands, which are of better quality—and at better prices—than our competitors.

Late 1990s: A New Name, A New Image

As part of a plan to bolster its merchandise image, the company changed its name to Mervyn’s California in 1995. Management hoped the new, brighter logo and casual, fun image would appeal to consumers who had been disenchanted with the old look. The store also received a modest face-lift by moving its cash registers to the front of stores and hanging new ad banners in the aisles. In 1996, the company established the Mervyn’s California/Women’s Sports Foundation Scholarship Fund, which rewarded academic and athletic excellence. At the same time, however, parent Dayton Hudson was growing weary of Mervyn’s poor performance and cut its expense budget dramatically. Its merchandising department was hit hardest, with 127 positions eliminated.

In 1997, Mervyn’s closed its stores in Florida and Georgia in an attempt to lower company costs and improve sales. The company began to see a light at the end of the tunnel as the California economy began to rebound. Bart Butzer, a regional senior vice-president with Target, succeeded Paul Sauser as Mervyn’s president and began an aggressive merchandising campaign. In 1998, financial numbers appeared to be on the rise and Dayton Hudson approved store renovation plans, feeding money into its expense budget that had once been severely cut. Although the parent company had faith that the department store could overcome its tarnished financial past, it warned that if its performance remained inconsistent, it would have to take action to maintain shareholder value.

An Uncertain Future in the New Millennium

In early 2000, Dayton Hudson changed its name to Target Corporation to reflect the fact that the Target stores accounted for more than 75 percent of company business. Under the direction of Butzer, Mervyn’s continued to push its casual and fun image and the company’s merchandise mix continued to change in order to remain competitive. The company also delved into e-commerce under the leadership of Target Direct, a unit created to oversee electronic retailing and direct marketing efforts. Butzer remained focused on securing sales and creating innovative marketing plans. In August 2000, stores in California offered two days of tax-free shopping in an attempt to lure back-to-school shoppers.

By January 2001, however, Mervyn’s attempts to secure consistent financial results were deemed unsuccessful as the company reported a 2.4 percent decrease in sales during the holiday season. The retail industry as a whole began to struggle as consumer confidence faltered and spending started to decline. While some analysts speculated that Target Corporation would eventually rid itself of the department store, others stated that it would hold on to it because Mervyn’s provided cash to fund Target Corporation’s stock re-purchase program. The company introduced a new marketing slogan, “Mervyn’s Begins with Me,” in early 2001 with a goal of attracting female shoppers. Mervyn’s executives remained positive that the company was on the right track but as consumer spending and confidence slipped, the department store’s future remained uncertain.

Principal Competitors

American Retail Group Inc.; J.C. Penney Company Inc.; The TJX Companies Inc.

Key Dates:

1949:: Mervin Morris establishes Mervyn’s in San Lorenzo, California.
1971:: Company goes public.
1978:: Dayton Hudson acquires Mervyn’s.
1984:: Nine stores open in Texas and company revenues exceed $2 billion.
1986:: Profits begin to falter due to increased competition in the industry.
1993:: Mervyn’s continues to post disappointing sales figures.
1995:: Company changes its name to Mervyn’s California.
1996:: More than $100 million in expenses are cut and 127 positions are eliminated.
1997:: Bart Butzer is named president.
1999:: Mervyn’s web site is launched.