Montgomery Ward & Co., Incorporated

views updated May 18 2018

Montgomery Ward & Co., Incorporated

Montgomery Ward Plaza
Chicago, Illinois 60671
U.S.A.
(312) 467-2000
Fax: (312) 467-3975
Web site: http://www.mward.com

Private Company
Incorporated: 1889
Employees: 60,000
Sales: $6.62 billion (1996)
SICs: 5311 Department Stores; 5722 Household Appliance Stores

Montgomery Ward & Co., Incorporated is a national retailer with more than 400 stores in 43 states. It is the ninth-largest U.S. retailer and the largest privately held retailer in the country. The company operates a number of retailing concepts, including the flagship Montgomery Ward stores, which contain up to five specialty departments: Electric Ave., major appliances and electronics; Rooms & More, home furnishings and accessories; Auto Express, tires, batteries, parts, and service; The Apparel Store, men’s, women’s, and children’s apparel and accessories; and Gold ’N Gems, fine jewelry. Other concepts under the Montgomery Ward umbrella include Lechmere, a retailer of home products; Electric Ave. & More, which sells electronics, major appliances, and furniture; and Homelmage by Lechmere, touted as the first store in America to combine the areas of electronics, appliances, bed, bath, and housewares under one roof. The Signature Group subsidiary provides financial services and operates one of the largest auto clubs in the United States.

Early History

Montgomery Ward had its origins in the 1860s when young Chicagoan Aaron Montgomery Ward saw that he could undercut rural retailers by selling directly to farmers via mail-order without intermediaries and by delivering by rail. After a false start in October 1871—when the Great Chicago Fire destroyed his inventory—Ward and two minority partners sent out their first mailing in the spring of 1872.

Orders trickled in, and soon he bought out his partners, who were discouraged by the slow pace of business. Late in 1872 he got a break. The Illinois Grange, a farmers’ organization, named Ward its purchasing agent. He began subtitling Montgomery Ward price lists with the phrase Original Grange Supply House. This gave Ward access to Grange mailing lists and meetings.

As the business grew, Ward needed more capital and more help. Late in 1873, his brother-in-law, George Thome, put $500 into the firm and became an equal partner. While Ward had the inspiration for the business, George Thorne was a practical day-to-day manager.

Postal rates fell and Ward stepped up advertising in newly popular magazines. Through publications such as the Prairie Farmer he told farmers to query him for catalogs with penny postcards. His spring catalog for 1874 had 32 pages. That fall he expanded to 100 pages. By the end of 1874, sales topped $100,000.

Ward’s primary customer was the farmer. City orders were a nuisance. His bestseller was the sewing machine, and the catalog was filled with pumps, feed cutters, cane mills, corn shellers, threshers, saws, grinders, and engines. Ward used buying power to cut prices, sometimes halving retail, but manufacturers formed trusts to keep prices high. Ward, in turn, found bargains in foreign markets and searched out small manufacturers willing to sell for less.

Increased sales—$300,000 in 1875—allowed Ward to increase service. He instituted a satisfaction-guaranteed-or-your-money-back policy; he carried three grades of merchandise, good, better, and best; and he counseled customers to band together and split fixed freight costs.

During the 1880s, competition in the form of major department stores began to enter the catalog field. Jordan Marsh & Co., John Wanamaker, Sears, and Carson, Pirie, Scott & Co. all began or resumed mail order operations. Still the biggest and most popular, Ward’s 240-page 1883 catalog listed 10,000 items. In 1884 Ward bought the Farmer’s Voice weekly newspaper to use as an advertising vehicle. In 1886 William C. Thorne, George Thome’s eldest son, increased the size and circulation of the catalog, leading to a boom in orders. By 1888 Ward’s sales had reached $1.8 million. To cap off the decade, Ward and George Thorne turned their partnership into a corporation in 1889.

Heightened Competition with Sears Began in 1890s

In 1891 a depression hit. Aaron Ward and George Thorne responded by emphasizing value and quality. Their prices were low but not low enough for the poorest. Into that breach Richard Sears, founder of Sears, Roebuck & Co., walked with the slogan “we always undersell.” By 1892, the Ward catalog contained 568 pages and 8,000 illustrations. Management had sold the Farmer’s Voice, but kept advertising in it, and worked hard to beat trusts in twine, agricultural implements, sugar, and barbed wire. In 1893 Aaron Ward and George Thorne turned managing control over to Thome’s four sons. In the deal, the Thornes gained majority control of stock, but Ward remained president.

Thome’s sons believed that Montgomery Ward represented quality and Sears merchandise was inferior. Unwilling to compete for the bottom, they tried to convince the public that cheaply made goods were no bargain. As Sears grew, however, the Thornes began making exaggerated claims for Ward. Even with competition, Ward’s sales were growing, and profits were good. In 1900 Ward built a new headquarters at Michigan Boulevard and Madison Street in Chicago. Sales that year, however, were $8.7 million, trailing Sears’s $10 million. The Thornes’s marketing approach was mixed. They did not emulate Richard Sears’s outrageous copy writing, but they did compete on price. Like Sears they offered premiums as incentives for customers to buy more, and in 1906 they mailed out three million free catalogs, after having charged 150 per catalog for many years. Sales for 1906 were $18 million.

The Thornes wanted to increase profit margins by increasing quality and price. To sell higher-priced goods, James Thorne used advertising that compared Ward’s and competing goods, and point for point explained why Ward’s merchandise was better.

The business situation began to change. The U.S. Postal Service’s initiation of a parcel post system in 1913 gave mailorder business a boost. Both Ward and Sears benefited, but the Thornes had trouble keeping profit levels high. In 1912 Ward made a 6.7 percent profit, and the following year it made 4.1 percent, while Sears made 9.1 percent. Ward, with fewer customers, spent proportionately more on advertising, was building branch warehouses, and made few of its own goods. Both Ward and Sears had become public companies but remained family-controlled.

Montgomery Ward made $3.4 million on 1915 sales of $49 million, as a boom period began. Already ahead in exports, it created a Spanish-language catalog for Latin America the following year. However, even with record profits—$6.4 million on 1918 sales of $76.2 million—the Thornes could see Montgomery Ward had fallen behind Sears. With the death of cofounder George Thorne in September—Aaron Ward had died in 1913—they sought new capital and new thinking. They sold a majority stake to a group fronted by United Cigar Stores’s George Whelan and tobacco magnate James B. Duke and backed by financier J. P. Morgan. The Thorne brothers continued to run the business.

Post-World War I inflation pushed 1919 sales to $99.33 million, but profits were just $4.1 million. Former Quartermaster General of the Army Robert E. Wood was recruited to increase margins. In obtaining materials for the Panama Canal, Wood had instituted a bottom-up plan of buying. Bottom-up buying entailed working with manufacturers to lower prices while ensuring profits for both parties.

In September 1920 a financial panic hit, and prices began to fall. Caught with a high-priced inventory and a high-priced catalog, Ward sent out new circulars. Sales dropped to two-thirds of their 1919 level. Whelan and Duke sold their stock to J. P. Morgan and the First National Bank of New York. Losses for 1920 totaled $10 million.

To unload inventory, the Thornes set up retail outlets in big cities. As conditions worsened, Robert Thorne resigned from the presidency, and Silas Strawn became interim president. Ward’s bankers then brought in their own president, Theodore Merseles, an engineer who had been vice president of the National Cloak and Suit Company.

In 1922 the economy rebounded. Merseles got back into contact with farmers and found a demand for medium-priced, quality goods. Wood used bottom-up pricing to acquire raw materials and get good deals on automotive supplies and radio kits, and Merseles, who had a feel for fashion, got bargains from cash-starved European manufacturers.

Even though 1922 marked a return to profitability, Wood sensed that the automobile would eventually render mail order obsolete. He pushed Merseles to get into retailing but Merseles refused. Ironically, car tires and batteries were then two of Ward’s most profitable lines.

Frustrated by his inability to implement retailing, General Wood began negotiating with Sears. In 1924 Merseles heard of the negotiations and fired Wood. Wood soon joined Sears, which embraced his store program.

Retail Stores Opened in the Late 1920s

Through 1925, Merseles stuck with mail order but in 1926 he began to open catalog stores that exhibited merchandise. In the wake of a softening mail-order market, and after these exhibit stores began spontaneously selling merchandise, Merseles announced that Montgomery Ward would open stores in towns with populations of 10,000 to 15,000.

In 1927 Merseles left Montgomery Ward to run Johns-Manville. To replace him, the board picked George Everitt, Merseles’s assistant. Everitt announced a crash plan for 1,500 rural stores by the end of 1929. Ward issued new stock in November 1928 and opened 208 stores that year. By early 1929 the economy and competition were heating up. Ward’s sales for the first eight months of the year were up 31 percent. Sears began prepaying shipping. After many customers switched, Ward reluctantly followed suit in July.

The stock market crash came in October, but overall 1929 was not a bad year. Profits reached $13 million, and Ward had 531 stores operating. As the Great Depression began to set in, things disintegrated. The retailing business, which had expanded too fast, became unprofitable and disorganized. Executives resigned, catalog sales fell, and profits for 1930 were less than $500,000. Ward receiyed a merger proposal from Sears.

Ward’s situation worsened in 1931 with losses of $8.7 million on $198 million in sales. To save Ward, J.P. Morgan & Company representative Harry P. Davison recruited Sewell A very. A very was known for leading United States Gypsum (USG) to Depression-era profits.

Avery found cash-starved manufacturers to sell him goods cheaper than Sears could make them. He paid employees less than Sears was paying those it had hired before the crash. He recruited dissatisfied Sears people, who felt blocked from promotions, and talented executives who had lost their jobs with other retailers. Avery and Edwin G. Booz from USG evaluated Ward managers, promoted the good ones, and fired the bad ones. After closing 147 poorly performing stores, Montgomery Ward lost $5.7 million on 1932 sales of $176.4 million.

U.S. President Franklin D. Roosevelt’s interventionist policy helped jump-start the economy and gave Ward and Sears an unintended benefit. Through the National Industrial Recovery Act he propped up prices, but Ward and Sears refused to cooperate and kept their prices low. Montgomery Ward returned to the black in 1933, making $2.9 million from store sales, but losing $630,000 on the catalog operation.

Avery continued to expand. Ward initiated telephone orders in 1934. Profits topped $13.5 million in 1935 and broke the $20 million mark in 1936. Credit terms became more generous, and stores were divided into classes ranging from department stores in cities to hard-goods stores in rural areas.

By 1937 Ward’s sales were 76 percent of Sears’s and well ahead of J.C. Penney’s, but there were also problems. The federal Robinson-Patman Act, passed in 1936, prevented big stores like Wards from getting better deals than small stores. Fair trade laws stated that manufacturers could name retail prices. Ward tried to get around this by selling house brands.

The company made a public relations coup in 1939, when an in-house copywriter wrote a booklet about a little red-nosed reindeer named Rudolph, which became a Christmas classic. The booklet was included in millions of catalogs.

Avery’s Mismanagement Led to Decline in 1940s and 1950s

With talk of war, Sewell Avery, who was not convinced that the Great Depression of the 1930s had run its course, was pessimistic. Profits for 1940 were a disappointing 4.5 percent of sales. As the United States entered World War II, imports from Europe virtually stopped. Shortages and substitutions became the rule. The government took even closer control of industry.

Avery, who detested interference, fought the government and the unions. In November 1942 he argued with President Roosevelt and the National War Labor Board over a closed shop for the United Mail Order, Warehouse, and Retail Employees’ Union. Early in 1944, he refused to sign contracts with store employees. The War Labor Board ordered Avery to extend old contracts. Avery refused. On April 24 Roosevelt sent the National Guard to Montgomery Ward. They removed Avery bodily, got rid of several other top executives, and ran the company.

On May 9, 1944, the government returned Montgomery Ward to the management, but in December, labor problems struck again. The Congress of Industrial Organization (CIO) won an election in Ward’s Chicago plant. Avery again refused a union shop. On December 28, 1944, the army seized Ward’s Chicago catalog operations. The situation caused orders to pile up at the rate of 10,000 a day.

By 1944 Montgomery Ward’s sales were just 62 percent of Sears’s. As the war drew to a close Avery conserved cash for what he saw as an upcoming depression. The postwar boom— profits were $52 million in 1946—did little to change his mind as Sears and others expanded.

Three years later, Avery seemed increasingly out of touch. Disgruntled executives resigned, and others were fired in moments of pique. In 1950 Avery came down with pneumonia, but even on his sickbed he insisted on making decisions.

In 1954 dissident stockholder Louis E. Wolfson began a proxy fight to unseat Avery and take over Ward. The 42-year-old Florida financier had made a fortune during the war, first by selling odd lots to the army and then through moviehouses and real estate. The proxy fight culminated at the April meeting, during which the 81-year-old Avery gave disjointed answers to Wolfson and his group. Although Wolfson’s bid failed, days after the meeting Avery resigned as chairman, and Edmund Krider, who led the counterattack against Wolfson, resigned as president. Three weeks later the board named John Barr president and chairman.

The Montgomery Ward that Avery left had fallen behind the times. Its 600 stores were smaller and located in less populous areas than Sears’s 702 stores. It had 250 catalog offices compared to Sears’s 605. Sales were one-third of Sears’s $3 billion, and profits were just $35.4 million. Inflation had eroded Ward’s cash position. J.C. Penney was moving up fast. Discount chains were undercutting traditional retailers.

Barr tried to reinfuse a positive spirit. He brought back Ward alumni, closed unsuccessful stores, and concentrated on modernizing existing ones. His program was basically the one Wolf-son had originally proposed.

In 1957 Barr established a store research and development department that used demographic information to locate the first new stores since before the war. The following year, Barr began opening clusters of stores in key cities. He upgraded packaging, increased private brands, and announced an expansion plan. Ward opened 30 new full-line stores between 1958 and 1960.

Continuing Struggle for Profitability in 1960s and 1970s

The new stores did well, but by 1960, the old ones were doing poorly. Mail order was just a shadow of its former self. Sales for 1960 reached $1.2 billion, but profits were just $15 million, a trend that continued into 1961. Poor results at old downtown and rural stores were balanced to some degree by shiny new suburban and mall outlets. Strapped for cash, Barr stopped building new stores.

In his search for new management, Barr consulted Ward and Sears alumnus Theodore Houser, who recommended two other former Sears executives, Robert E. Brooker, president of Whirlpool Corporation, and Ed Gudeman, undersecretary of commerce in U.S. President John F. Kennedy’s administration.

Brooker became president in November 1961 and by 1962 had brought in nearly 200 new executives. He conceived a strategy of encircling growing metropolitan areas, thereby cutting down on per-store costs for advertising. The strategy worked in such growing cities as San Diego and Dallas-Fort Worth, but was limited because of high start-up costs.

Working on the Sears model, Brooker cut the number of suppliers and increased private brands. He centralized management for procurement and promotion but decentralized it for retail operations. Like Wood, he established relationships with suppliers. He also increased loyal and profitable credit customers.

Throughout the 1960s Brooker and Gudeman—who became a director in 1963—pushed Montgomery Ward to greater sales and more efficient procurement. By 1966 long-term contracts with suppliers had increased to 75 percent from 30 percent in 1960. Profits still did not catch up to Sears’s, however. In 1965 Barr retired and Brooker became chairman.

Ed Donnell, who became president in 1966, continued the expansion plans. Montgomery Ward, however, often had too few trained people to run the new stores properly. Profits for 1966 were just $16.5 million on sales of $1.7 billion.

In the late 1960s Brooker began to worry about hostile takeovers. To avoid this, Ward found a friendly acquirer, Container Corporation of America. To its advantage, Container Corporation could defer taxes on its profits because of Ward’s tax-advantaged credit sales. The merger was announced in July 1968. Ward stockholders owned two-thirds of Marcor, the new holding company, but Container Corporation president Leo Schoenhofen was the largest stockholder and became chief executive officer of Marcor.

The joined companies retained separate offices. In May 1970 Robert Brooker retired. Leo Schoenhofen became chairman, and Ed Donnell was renamed president and CEO of Montgomery Ward. New stores continued to open at the rate of 25 a year, while old ones closed one by one. By 1972, Ward’s 100th anniversary, the big retailer was adding a million square feet of store space a year, primarily in shopping centers.

While Montgomery Ward had been concentrating on its stores and catalogs, Ward executive Dick Cremer had been building a profitable direct-mail business within the company’s billing operation, The Signature Group. In the late 1960s he began by inserting merchandise offers within bills sent to customers. In 1973 he began offering credit insurance through the mail, and in 1974 he started the hugely successful Montgomery Ward Auto Club, which became a Signature Group subsidiary.

Mobil Corporation secretly bought 4.5 percent of Marcor in 1973. Although Ward’s profits remained low—just 20 on the dollar—the following summer Mobil paid $35 a share for 51 percent of Marcor. In 1975 Mobil bought the rest of Marcor and separated Ward and Container Corporation.

Montgomery Ward’s new president under the Mobil regime, Sidney A. McKnight, continued to face disappointing profit levels. In an effort to cut catalog losses Ward began selling advertising space in the company’s catalog in 1976.

McKnight’s efforts and Mobil’s money seemed to pay off at first. In 1978 sales reached $5.47 billion, and pretax profits hit $224 million. The following year was a disaster, however; Ward lost $133 million from operations and $30 million from closing old stores. Mobil, whose hopes had been high, lent the retailer $350 million interest-free and was trying to keep from lending more.

Since the end of the Avery regime Ward had been trying to remake itself. According to some analysts it was simultaneously bleeding cash and becoming extremely competitive with its new, modern stores. As losses mounted, Mobil lent Ward another $100 million. By the end of 1980, Montgomery Ward had lost $233 million on sales of $5.92 billion. On the bright side, both the Signature Group and the new Jefferson Ward discount chain made money.

Stores-Within-a-Store Concept Launched in 1980s

Searching for another savior, Mobil recruited Stephen Pistner, who had turned around Dayton Hudson’s B. Dalton and Target chains. Pistner took another $50 million loan from Mobil and offered early retirement to hundreds of executives. He also squelched a plan to convert more than 100 Montgomery Wards to Jefferson Ward stores. He convinced Ward to accept more name brands, closed unprofitable stores, and eliminated unprofitable lines. Further, he experimented with the stores-within-a-store concept. Yet the losses continued. In 1981 Montgomery Ward lost $217 million on sales of $5.64 billion. The catalog was losing more than the stores.

Ward had another bad year in 1982, but in 1983 finally hit the black again with profits of $56 million. That same year Pistner centralized advertising and buying authority in Chicago and absorbed the fast-growing but sometimes chaotic Signature Group into the catalog and insurance division.

In 1984, after three years of experimentation, Pistner unveiled his seven-stores-within-a-store concept. In Pistner’s vision, large stores might contain several smaller specialty stores. Those specialty stores also might stand alone. Before Pistner could implement his plans, however, he had a falling out with Mobil and left the company. Richard F. Tucker, president of Mobil Diversified Business, acted as president of Ward. In January 1985, Ward closed 300 catalog stores. What remained were 322 Montgomery Ward Stores, 44 Jefferson Ward stores, the catalog, and the Signature Group. A few months later the company sold 18 Jefferson Ward stores. Montgomery Ward was the sixth-largest retailer and the third-largest catalog house in the United States.

By then Mobil definitely wanted to sell Montgomery Ward. It also considered spinning Ward off as a dividend to stockholders. To make Ward more attractive it forgave $500 million in loans to Ward.

In June 1985 Mobil persuaded former Ward executive Bernard Brennan (who had previously worked as assistant national manager for furniture at Sears) to return as president and chief executive officer. Brennan had been coarchitect of the stores-within-a-store concept. Brennan closed the unprofitable catalog business and shuttered Jefferson Ward. He refined the seven-stores-within-a-store plan to four types of stores-within-a-store: apparel; home furnishings and accessories; electronics and appliances; and automotive goods. He experimented with stores with all four departments and some with fewer and leased store space to Toys “R” Us, Inc. and small specialty retailers. In another key move he bought 52 percent of the Clayton Bank and Trust of Clayton, Delaware. Through Clayton, which was later sold, Signature began offering credit cards, loans, and other financial services.

After another year of improved profits in 1987, Brennan oversaw what was then the largest management-led leveraged buyout in U.S. history, with the management group in partnership with General Electric Co.’s GE Capital Corp. paying $3.8 billion for Ward in 1988. Subsequently, GE Capital owned 49 percent of Ward, Brennan 35 percent, and other company managers the remaining 16 percent. Ward became the tenth-largest privately held company in the United States.

1990s Marked by Declining Profitability

The 1990s started on a promising note for Montgomery Ward as the company posted record earnings of $153 million in 1990. It appeared that the stores-within-a-store concept was working. In October 1991 Ward continued to expand in specialty markets by forming a 50-50 joint venture with Fingerhut Companies, Inc., the fourth-largest U.S. catalog marketing company. Known as Montgomery Ward Direct, the partnership was to pursue the same specialty marketing strategy in its catalogs that Montgomery Ward employed in its stores. This partnership proved to be less than a rousing success and Ward in June 1996 sold its interest in it to Value Vision International Inc.

Meanwhile the promise of 1990 quickly faded as profits fell in 1991 and 1992, remained level in 1993, rebounded slightly in 1994, then fell precipitously in 1995. Following 1990, the company’s stores were adversely affected by a number of factors: increasing competition in the consumer electronics and appliances sectors, fueled by such category-killers as Circuit City and Best Buy, had a big impact on Ward’s leading sector, Electric Ave.; the lack of brand name apparel became an even greater liability once Sears began to emphasize its “softer side’’ and Kmart added brand names to its racks; and the severe early 1990s recession in California hit Ward particularly hard, since the company had about 16 percent of its stores there. Compounding the situation was turmoil in the management ranks, brought about—according to many observers—by tough boss Brennan, who ran through president after president; from 1992 to 1994, three people held the revolving door post of Ward president.

In the mid-1990s Montgomery Ward attempted to turn around its fortunes through expansion. In March the company acquired Lechmere, Inc., a Boston-based retailer of consumer electronics, appliances, and housewares with 28 stores in New England and $800 million in annual revenues. Lechmere originated as a Cambridge, Massachusetts, harness-making business in 1915, eventually emerging in 1948 as a retailer selling automobile tires, appliances, radios, and televisions, called Lechmere Tire and Sales Co. Lechmere became famous in New England for its low prices and was considered by many to be the first American discounter. Additional consumer items were added over the years, but by the late 1960s there were but two Lechmere stores. In 1969 the Dayton Company (soon called Dayton Hudson) bought Lechmere and quickly expanded it into a regional chain. In 1989 Berkshire Partners in conjunction with senior Lechmere managers purchased the company in a leveraged buyout. In 1994, Ward bought Lechmere from Berkshire for $113 million in cash and the assumption of $91 million of Lechmere debt. In order to improve Lechmere’s profitability, Brennan decided to cut staff, a move that ran counter to the chain’s emphasis on customer service. As a result, Lechmere lost customers. Although Brennan had expanded the chain soon after the acquisition, by early 1997 store closings had brought the number of Lechmere units down to 27.

Another 1994 expansion move was the launching of the Electric Ave. & More stores. Targeted at midsize markets, these Ward spinoffs carried electronics goods, major appliances, and furniture, sectors that remained the company’s strongest. By early 1997 Ward had opened 11 Electric Ave. & More stores.

By mid-1996 any further growth of Lechmere or Electric Ave. & More was at least temporarily halted so that the company could concentrate on a new launch, Homelmage by Lechmere; six Homelmage stores opened in August 1996. These home superstores carried a full line of brand name, value-priced goods for the home, including home entertainment, home office, home wares (kitchen appliances, furniture, and cookware), and home comfort (tableware, bed and bath, and mattresses).

By mid-1997 it was too early to tell whether these expansion moves would bring Montgomery Ward back from the brink. After profits fell 90 percent in 1995, the company posted a $237 million loss in 1996. Results for 1997 were expected to be even more dismal. To make matters worse, 1996 sales of $6.62 billion represented a drop of 6 percent over the 1995 mark, after sales had increased each year since 1990. Same-store sales fell 11 percent in 1996.

In January 1997 GE Capital Services forced Brennan aside to allow an outsider to take over day-to-day responsibility for Montgomery Ward (Brennan did, however, retain his stake in the company). Roger Goddu, who had been president of U.S. merchandising for Toys “R’’ Us, was named the new chairman and CEO. Goddu began his attempt to turn around the beleaguered company by announcing a plan to shift focus to higher-margin merchandise, and to have Montgomery Ward occupy a narrow niche between discounters and department stores. Such a strategy would be similar to successful moves already made by Sears and Kmart.

In the first half of 1997 Goddu liquidated $500 million in unproductive inventory, leading to a first quarter loss of $144 million. Meanwhile, GE Capital Services provided a much needed infusion when it invested another $200 million in Montgomery Ward in May 1997. Then in June Goddu eliminated 400 of Ward’s 1,800 corporate jobs. The company was also trying to sell The Signature Group to raise additional cash, hoping to realize more than $1 billion from the sale; in mid-1997 Ward was in negotiations with HFS Corp. about Signature. But before a deal could be consummated, Ward on July 1 went into default on $1.4 billion in loans, and after failing to reach an agreement with its lenders, filed for Chapter 11 bankruptcy protection from its creditors on July 7, 1997. Although GE Capital immediately provided Ward with $1 billion in financing to keep the company’s stores stocked while it attempted to reorganize, the future of Montgomery Ward was very much in doubt.

Principal Subsidiaries

Lechmere, Inc.; The Signature Group.

Montgomery Ward & Co., Incorporated

views updated May 21 2018

Montgomery Ward & Co., Incorporated

Montgomery Ward Plaza
Chicago, Illinois 60671
U.S.A.
(312) 467-2000
Fax: (312) 467-3975

Private Company
Incorporated: 1889
Employees: 67,200
Sales: $5.40 billion

Montgomery Ward is a national retailer with more than 350 stores in 39 states. Each Montgomery Ward Store contains up to four specialty departments: Electric Avenue, major appliances and electronics; Home Ideas, home furnishings and accessories; Auto Express, tires, batteries, parts and service; and The Apparel Store, which includes The Kids Store and Gold ’N Gems fine jewelry. Ward’s subsidiary, The Signature Group, provides financial services and operates one of the largest auto clubs in the United States.

Montgomery Ward had its origins in the 1860s when young Chicagoan Aaron Montgomery Ward saw that he could undercut rural retailers by selling directly to farmers via mail order without intermediaries and by delivering via the railroad. After a false start in October 1871—when the Great Chicago Fire destroyed his inventory—Ward and two minority partners sent out their first mailing in the spring of 1872.

As the business grew, Ward needed more capital and more help. Late in 1873, his brother-in-law, George Thorne, put $500 into the firm and became an equal partner. While Ward had the inspiration for the business, George Thorne was a practical day-to-day manager.

Ward used buying power to cut prices, sometimes halving retail, but manufacturers formed trusts to keep prices high. Ward, in turn, found bargains in foreign markets and searched out small manufacturers willing to sell for less.

Increased sales—$300,000 in 1875—allowed Ward to increase service. He instituted a satisfaction-guaranteed-or-your-money-back policy; he carried three grades of merchandise, good, better and best; and he counseled customers to band together and split fixed freight costs.

Still the biggest and most popular, Ward’s 240-page 1883 catalog listed 10,000 items. In 1884 Ward bought the Farmer’s Voice weekly newspaper to use as an advertising vehicle. In 1886 William C. Thorne, George Thome’s eldest son, increased the size and circulation of the catalog, leading to a boom in orders. By 1888 Ward’s sales had reached $1.8 million. To cap off the decade, Ward and George Thorne turned their partnership into a corporation in 1889.

By 1892, the Ward catalog contained 568 pages and 8,000 illustrations. Management had sold the Farmer’s Voice, but kept advertising in it, and worked hard to beat trusts in twine, agricultural implements, sugar, and barbed wire.

In 1893 Aaron Ward and George Thorne turned managing control over to Thome’s four sons. In the deal, the Thornes gained majority control of stock, but Ward remained president.

Even with competition, Ward’s sales were growing, and profits were good. In 1900 Ward built a new headquarters at Michigan Boulevard and Madison Street in Chicago. Sales that year, however, were $8.7 million, trailing Sears’s $10 million.

The Thornes’s marketing approach was mixed. They did not copy Richard Sears’s outrageous copywriting, but they did compete on price. Like Sears they offered premiums as incentives for customers to buy more, and in 1906 they mailed out three million free catalogs, after having charged 15C per catalog for many years. Sales for 1906 were $18 million.

The Thornes wanted to increase profit margins by increasing quality and price. To sell higher-priced goods, James Thome used advertising that compared Ward’s and competing goods, and point for point explained why Ward’s merchandise was better.

The business situation began to change. The U.S. Postal Service’s initiation of a parcel post system in 1913 gave mailorder business a boost. Both Ward and Sears benefited, but the Thornes had trouble keeping profit levels high. In 1912 Ward made a 6.7% profit, and the following year it made 4.1%, while Sears made 9.1%. Ward, with fewer customers, spent proportionately more on advertising, was building branch warehouses, and made few of its own goods. Both Ward and Sears had become public companies but remained family-controlled.

Montgomery Ward made $3.4 million on 1915 sales of $49 million, as a boom period began. Already ahead in exports, the following year, it created a Spanish-language catalog for Latin America. However, even with record profits—$6.4 million on 1918 sales of $76.2 million—the Thornes could see Montgomery Ward had fallen behind Sears. With the death of co-founder George Thorne in September—Aaron Ward had died in 1913—they sought new capital and new thinking. They sold a majority stake to a group fronted by United Cigar Stores’s George Whelan and tobacco magnate James B. Duke and backed by financier J.P. Morgan. The Thorne brothers continued to run the business.

In September of 1920 a financial panic hit, and prices began to fall. Caught with a high-priced inventory and a high-priced catalog, Ward sent out new circulars. Sales dropped to two-thirds of their 1919 level. Whelan and Duke sold their stock to J.P. Morgan and the First National Bank of New York. Losses for 1920 totaled $10 million.

In 1927 Merseles left Montgomery Ward to run Johns-Manville. To replace him, the board picked George Everitt, Merceles’s assistant. Everitt announced a crash plan for 1,500 rural stores by the end of 1929. Ward issued new stock in November of 1928 and opened 208 stores that year. By early 1929 the economy and competition were heating up. Ward’s sales for the first eight months of the year were up 31%. Sears began prepaying shipping. After many customers switched, Ward reluctantly followed suit in July.

Ward’s situation worsened in 1931 with losses of $8.7 million on $198 million in sales. To save Ward, J.P. Morgan & Company representative Harry P. Davison recruited Sewell Avery. Avery was known for leading United States Gypsum (USG) to Depression-era profits.

By 1937 Ward’s sales were 76% of Sears’s and well ahead of J.C. Penney’s, but there were also problems. The federal Robinson-Patman Act, passed in 1936, prevented big stores like Wards from getting better deals than small stores. Fair trade laws stated that manufacturers could name retail prices. Ward tried to get around this by selling house brands.

Ward made a public relations coup in 1939, when a Ward copywriter wrote a booklet about a little red-nosed reindeer named Rudolph, which became a Christmas classic. The booklet was included in millions of catalogs.

With talk of war, Sewell Avery, who was not convinced that the Great Depression of the 1930s had run its course, was pessimistic. Profits for 1940 were a disappointing 4.5% of sales. As the United States entered World War II, imports from Europe virtually stopped. Shortages and substitutions became the rule. The government took even closer control of industry.

By 1944 Montgomery Ward’s sales were just 62% of Sears’s. As the war drew to a close Avery conserved cash for what he saw as an upcoming depression. The postwar boom— profits were $52 million in 1946—did little to change his mind as Sears and others expanded.

In 1954 dissident stockholder Louis E. Wolfson began a proxy fight to unseat Avery and take over Ward. The 42-year-old Florida financier had made a fortune during the war, first by selling odd lots to the army and then in movie houses and real estate. The proxy fight culminated at the April meeting, during which the 81-year-old Avery gave disjointed answers to Wolfson and his group. Although Wolfson’s bid failed, days after the meeting Avery resigned as chairman, and Edmund Krider, who led the counterattack against Wolfson, resigned as president. Three weeks later the board named John Barr president and chairman.

Barr tried to re-infuse a positive spirit. He brought back Ward alumni, closed unsuccessful stores, and concentrated on modernizing existing ones. His program was basically the one Wolfson had originally proposed.

Brooker became president in November 1961 and by 1962 had brought in nearly 200 new executives. He conceived a strategy of encircling growing metropolitan areas, thereby cutting down on per-store costs for advertising. The strategy worked in growing cities like San Diego and Dallas-Fort Worth, but was limited because of high start-up costs.

Throughout the 1960s Brooker and Gudeman—who became a director in 1963—pushed Montgomery Ward to greater sales and more efficient procurement. By 1966 long-term contracts with suppliers had increased to 75% from 30% in 1960. Profits still did not catch up to Sears’s, however. In 1965 Barr retired and Brooker became chairman.

In the late 1960s Brooker began to worry about hostile takeovers. To avoid this, Ward found a friendly acquirer, Container Corporation of America. To its advantage, Container Corporation could defer taxes on its profits because of Ward’s tax-advantaged credit sales. The merger was announced in July 1968. Ward stockholders owned two-thirds of Marcor, the new holding company, but Container Corporation President Leo Schoenhofen was the largest stockholder and became chief executive officer of Marcor.

While Montgomery Ward had been concentrating on its stores and catalogs, Ward executive Dick Cremer had been building a profitable direct-mail business within the company’s billing operation. In the late 1960s he began by inserting merchandise offers within bills sent to customers. In 1973 he began offering credit insurance through the mail, and in 1974 he started the hugely successful Montgomery Ward Auto Club, which became a Signature Group subsidiary.

Mobil Corporation secretly bought 4.5% of Marcor in 1973. Although Ward’s profits remained low—just 2C on the dollar—the following summer Mobil paid $35 a share for 51% of Marcor. In 1975 Mobil bought the rest of Marcor and separated Ward and Container Corporation.

McKnight’s efforts and Mobil’s money seemed to pay off at first. In 1978 sales reached $5.47 billion, and pre-tax profits hit $224 million. The following year was a disaster, however; Ward lost $133 million from operations and $30 million from closing old stores. Mobil, whose hopes had been high, lent the retailer $350 million interest-free and was trying to keep from lending more.

Searching for another savior, Mobil recruited Stephen Pistner, who had turned around Dayton Hudson’s B. Dalton and Target chains. Pistner took another $50 million loan from Mobil and offered early retirement to hundreds of executives. He also squelched a plan to convert more than 100 Montgomery Wards to Jefferson Ward stores. He convinced Ward to accept more name brands, closed unprofitable stores, and eliminated unprofitable lines. Further, he experimented with the stores-within-a-store concepts. Yet the losses continued. In 1981 Montgomery Ward lost $217 million on sales of $5.64 billion. The catalog was losing more than the stores.

Ward had another bad year in 1982, but in 1983 finally hit the black again with profits of $56 million. The same year Pistner centralized advertising and buying authority in Chicago and absorbed the fast-growing but sometimes chaotic Signature Group into the catalog and insurance division.

By then Mobil definitely wanted to sell Montgomery Ward. It also considered spinning Ward off as a dividend to stockholders. To make Ward more attractive it forgave $500 million in loans to Ward.

In June 1985 Mobil persuaded former Ward executive Bernard Brennan to return as president and chief executive officer. Brennan had been co-architect of the stores-within-a-store concept. Brennan closed the unprofitable catalog business and shuttered Jefferson Ward. He refined the seven-stores-within-a-store plan to four types of stores-within-a-store: apparel; home furnishings and accessories; electronics and appliances; and automotive goods. He experimented with stores with all four departments and some with fewer and leased store space to Toys “R” Us, Inc. and small specialty retailers. In another key move he bought 52% of the Clayton Bank and Trust of Clayton, Delaware. Through Clayton, which was later sold, Signature began offering credit cards, loans, and other financial services.

After another year of improved profits in 1987, Brennan oversaw the largest management-led leveraged buyout in U.S. history, paying $1.5 billion for Ward in 1988. Ward became the tenth-largest privately held company in the United States. The ninth-largest U.S. retailer in the early 1990s, Ward continued to expand on its specialty formats, opening some stores with a single specialty. A total of 53 new stores were scheduled to open in 1990 and 1991. Continuing to expand in specialty markets, Montgomery Ward formed a 50-50 joint venture in October 1991 with Fingerhut Companies, Inc., the fourth-largest U.S. catalog marketing company. To be known as Montgomery Ward Direct, the partnership was to pursue the same specialty marketing strategy in its catalogs that Montgomery Ward employed in its stores.