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Wall Street History
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12/07/2001
E.J. Korvette
Why do some retailers make it and others fail? More
specifically, why do some ''discounters'' succeed, while
competitors don''t? Maybe there is a lesson in the story of E.J.
Korvette, a leading discounter in the New York area, which went
out of business on Christmas Eve 1980.
Born in Brooklyn, Eugene (Gene) Ferkauf learned the retailing
business from his father, who owned two luggage stores in
Manhattan. Gene worked for his dad at every opportunity
growing up and then after serving in World War II, he decided to
go off on his own. But first, a brief background on retailing in
the America of the 1930s, 40s and 50s.
As part of Franklin Roosevelt''s New Deal program, the National
Recovery Act (NRA) drew up codes of conduct for businesses,
including retailers, for the purposes of encouraging fair
competition, including guidelines for hours worked, wages and
trade practices. Prices were to be fixed, with the feeling being
that, otherwise, the large retailers would force the small ones out
of business at a time when unemployment was over 20%. Also,
if prices were slashed too much, wages and profits would fall,
and more businesses would be forced into bankruptcy, thus
exacerbating the labor situation. But the NRA was deemed
unconstitutional in 1935.
Along came different congressional legislation, however, in the
form of the 1937 Robinson-Patman Act, another attempt at "fair
trade," which obliged retailers to charge prices fixed by the
manufacturers. So it was designed, like previous efforts, to
prevent the powerful from swallowing up the weak. [The Robinson-
Patman Act did not extend to clothing because it was too hard to
police different styles, quality, etc.]
In June 1948 Gene Ferkauf made his move by opening up his
first E.J. Korvette store on 46th street in Manhattan. [The name
came from ''E'' for Eugene, ''J'' for friend Joe Zwillenberg, while
''Korvette'' was a take on the Canadian WWII fighting ship, the
Corvette. Ferkauf thought it was classy.] Gene knew all about
Robinson-Patman, but he thought he could get away with
offering discounted merchandise (the first stores specialized in
appliances and standard items like pens) by calling his operation
a "membership store," and thus not open to the general public.
Where did Ferkauf get this idea? Well, back when he was
working with his father, he remembered a luggage wholesaler by
the name of Charles Wolf, who sold luggage to the retailers at
the usual markup, while distributing his business card. Invited
customers could then come to his storage depot, where Wolf
offered the goods at a discount. Since he wasn''t a retailer, he
didn''t fall under the provisions of Robinson-Patman. Yes,
Charles Wolf was really the first discounter.
So with Wolf as a role model, Ferkauf had his hawkers outside
E.J. Korvette''s doors, passing out membership cards, thus he was
exempt from the regulations governing retailers. Once inside,
the salesmen offered discounts of up to 33% on razors,
televisions, refrigerators, everything but clothing it seemed.
Now you can imagine that the competition, like Macy''s and
Gimbel''s, was none too pleased, so they filed about 35 fair trade
suits by 1956, though most were simply dismissed. And the
actions taken against Ferkauf were actually a godsend. Since the
newspapers covered all of the filings, it was free publicity for his
stores and customers flocked to check out the low prices.
By 1956, Korvette''s had 6 locations, 4 in Manhattan and 2 in the
New York City suburbs. Then by 1958 there were 12 stores,
now generating over $100 million in revenue.
Ferkauf had started out by staffing his early operations with
friends from the Brooklyn neighborhood where he grew up, as
well as army buddies. Korvette''s was run like a fraternity, or so
outsiders would say. Everyone worked 6 days a week (as
opposed to the competition''s 5-day schedule) and employees did
everything from hawk cards outside, to sales, to sweeping and
locking up at the end of the day. For this they were paid $80 a
week, considerably more than at Macy''s (but they worked
harder) and Ferkauf awarded generous Christmas bonuses as
well.
1955 was a big year for the operation, with the arrival of
Korvette''s first full department store on Carle Place, Long
Island. Despite a rush to get it open before the Christmas season
(and thus taking shortcuts on construction), as well as financing
problems, the store was a huge early success. Also in ''55,
Korvette''s floated its first initial stock offering, at $10 a share. A
year later it was $22.
But by 1956, expansion was taking its toll. Of course it was
impossible to have only friends run each location and Ferkauf
wasn''t very good at hiring help. He also wasn''t in the least bit
organized, operating without an office, a secretary, or often
records of his transactions. As Korvette''s grew, so grew the
problems. [Though in 1962, the stock hit $170 on a split-
adjusted basis.]
Ferkauf recognized the issues and sought a merger partner in the
late 50s / early 60s, but none came forward. It was then that he
brought in Jack Schwadron from Alexander''s to run the show
and oversee Korvette''s move into apparel, which they had been
dabbling in. But the plan wasn''t focused (if they could sell jeans
at a discount, why not fur coats at a reduced price?) and profits
were drying up.
Korvette''s stores always had that bare-bones look, but by 1965
the appearance was increasingly shoddy, with stained carpets,
fading paint, and cracks in the walls (due in no small part to the
hurried construction practices).
Then in May 1966, Schwadron was replaced at the top by
Hilliard Coan, who came over in Korvette''s acquisition of Hill''s
Supermarkets. Coan immediately had the board try to oust
Ferkauf, who really wanted nothing to do with this gigantic
operation he had created. Ferkauf yearned for the days when he
had just one or two small discount stores.
Coan didn''t last long, just months, when Korvette''s was folded
into Spartan-Atlantic discount stores. The new CEO was Charles
Bassine, whose son married Ferkauf''s daughter. Bassine then
really screwed up, by basically abandoning the discount model in
favor of attempting to compete head-on with Macy''s and
Gimbel''s. What this meant, of course, was that there was no real
reason to shop at Korvette''s anymore.
By the early 70s, Ferkauf was totally out of the picture,
Korvette''s had more management changes, departments such as
furniture and carpets were eliminated and sales stagnated. Then
in 1977 the chain had a loss of $4 million on $590 million in
revenue. The losses quickly mounted from there. Outside
consultants were brought in to figure out how to turn it around
and as part of the process discovered that there was no typical
Korvette''s customer. It was a little of this and a little of that. It
was only a matter of time and on Christmas Eve 1980, after a
dismal holiday season, Korvette''s ceased operations. What was
once a 58-store operation was now nothing more than a bunch of
ugly brick and mortar.
Wall Street historian Robert Sobel writes: "The reason for
Korvette''s failure certainly wasn''t Ferkauf''s lack of vision, but
rather his inability to integrate all of his ideas into a cohesive
strategy. Other reasons were mismanagement, weak personnel
and financial policies, haphazard expansion and an inability to
control costs. None of these had been a problem when
Korvette''s was a discount chain. The company hadn''t been able
to make the switch to department store status because its leaders,
from Ferkauf on, could not decide what it wanted to be."
Eugene Ferkauf is but one in a long line of retailers who were
once viewed as legends, only to fall on their face; men like
Rowland Macy, A.T. Stewart, Bernard Gimbel, Frank
Woolworth and Aaron Montgomery Ward, great merchants who
took their eye off the ball.
Sources:
"When Giants Stumble," Robert Sobel
""The Pursuit of Wealth," Robert Sobel
Brian Trumbore
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