10 The Party’s Over

The closing of Dillard’s downtown store, in 2002, marked the end of a major chapter in the history of Cleveland retailing.  Local department stores, for over 150 years had ruled the roost.  These retailers had something for everyone from inexpensive daily necessities to high-priced luxury goods.  Department stores not only catered to the current needs and wants of their customer-base, but also, attempted to anticipate their future wishes.  Shoppers appreciated their efforts, and bought from them year in and year out.  Brand loyalty and store loyalty became synonymous in the minds of most customers.

Part of the financial success enjoyed by large retailers originated with their competent sales staff.  These friendly salespersons knew a great deal about the items they sold.  In addition, many kept handwritten records on their repeat customers that included such things as clothing size, color preferences and/or specific fashion styles.  Salespersons often contacted preferred shoppers when a desired item arrived.  They wanted to know whether or not they should set it aside for them for pick up later.  In emergency situations, some might even deliver an item to a customer’s home at no additional cost.

Repeat business depended on the ability of local retailers to remain at the “top of their game.”  Innovation revealed itself in many distinctive ways.  It ranged from free home deliveries and supervised playgrounds for children to customized credit services and spectacular annual events.  The Industrial Revolution produced a new mechanized world that prized business efficiency and production standardization.  Savvy retailers, recognizing this vital connection, wasted no time before capitalizing on it.  Traditional large department stores became the conduit between product manufacturers and the buying public.

Cleveland department stores, like other U.S. retailers, achieved their business goal by offering vast supplies of desirable goods and services at reasonable prices.  However, this shopping experience extended far beyond routine daily business transactions.  Local department stores also assumed the responsibility of educating the public about the ins and outs of retailing, and how to take advantage of the many things offered.  As the outspoken New York clothier Sy Syms so often said “an educated consumer is our best customer.”  Truer words were never spoken.  Through informative demonstrations, interaction with salespersons and special advertising, customers over time became discerning shoppers.  They soon recognized the differences between quality products and junk items and between value and unfair pricing.  These lessons proved invaluable as the retail market in the U.S. became more sophisticated.

Like other successful business ventures, traditional department stores admirably responded to specific consumer needs and wants.  Even in New York City, a discounters’ paradise, independently owned and operated large department stores posted sizeable profits into the 1970s.  This being the case, then what happened?  Many of their problems originated with Baby Boomers. This generation was like no other in recent memory.  They demanded an exhilarating retail experience.  Specifically, they insisted upon an informal shopping environment where discount pricing took precedent over all other considerations.  Baby Boomers also sought convenience which meant shopping primarily in the suburbs.  Discount department stores in the 1970s seemed to fulfill their needs.  However, savvy shoppers, beginning in the 1980s, sought out bargains from other previously untried retail sources.  Warehouse clubs, TV shopping networks and discount stores websites became the latest rage.  On-line marketplaces such as EBay and electronic commercial companies like Amazon increasingly cut into traditional retailing’s territory starting in the 1990s.

The department store industry, as a whole, and Cleveland stores, in particular, might have survived this latest on-slot of competition had they discarded some of their outmoded business ideas quickly.  After all everyone in Cleveland knew who Higbee’s and the May Company were, but few had ever heard of store such as Giant Tiger or Uncle Bill’s.  Unfortunately, these large downtown retailers failed to heed the warning signals.  Instead, they continued to practice retailing in the good old fashion way.  Any changes made in the 1960s and 1970s were mostly cosmetic, nothing substantive.  Department store retailers should not be criticized too harshly for their lack of insight.

Who knew, perhaps those discount department stores were little more than a passing fade.  Short–term thinking supported this notion.  However, from a long-term perspective, everything in business was changing at an alarming rate.  It was just a matter of time before traditional downtown retailers would have to face that fact.  Without major changes, they were destined for extinction.  Unable to beat growing competition and beleaguered by profit losses, changing ownership and mounting debt, Cleveland department stores, beginning in the 1960s, closed their doors.

The passage of the Consumer Goods Pricing Act of 1975 (PL 94-145, 89 Stat. 801) made this situation more precarious.[1] This act prohibited U.S. manufacturers from setting up established price lines for items sold by conventional retailers.  Washington lawmakers hoped that this law would stimulate an ailing industry.  Specifically, they wanted to encourage extensive retail competition by eliminating the requirement that all top quality, name brand items must be sold through “reputable retailers.”  Reputable retailers, in this instance, generally meant traditional department stores.  Eliminating that legal restriction opened the floodgates.

Large numbers of discount stores suddenly appeared.  Some department stores responded by closing their doors.  However, most downtown retailers remained calm.  They had survived worse economic crises in the past.  A rebounding national economy in the 1980s provided many of them hope.  Also, the arrival of a dynamic Canadian entrepreneur named Robert Campeau in 1984 added a whole dimension to U.S. retailing.  He not only appeared to understand the needs and wants of retailers, but also, possessed the kind of capital necessary to insure their industry’s survival during these tough economic times.

Through leveraged buyouts, the Campeau Corporation gained control of both Allied and Federated Department Stores.  The accumulated debt resulting from these buyouts was fantastic.  However, Campeau reassured both Allied and Federated stockholders that the only way to make a great deal of money was to invest heavily in retail corporations traditionally known for their high returns.  Speculative investments, of that nature, were not meant for the faint hearted.  However, the bull stock market of the 1980s seemed to encourage this kind of freewheeling investment, and Campeau was willing to chance it.

As mentioned earlier, this kind of large-scale investment came with built-in risks.  Much of it rested on credit.  There was very little hard species behind it.  As long as the stock market remained bullish and inflation levels remained stable then this kind of speculative investment would in all probability pay high dividends.  However, if there was the slightest downturn in the market or a sudden rise in inflation then a selling frenzy would occur.  Only the most nimble investors would survive that financial turmoil.  Even well-healed investors like Campeau often lost a great deal on such speculative ventures.  The Stock Market Crash on October 19, 1987 saw the Dow Jones slip by more than 500-points.  That represented the largest drop in a single day ever.  It definitely affected the future of the Campeau Corporation.  That company, for the next two years, tried to recoup its losses with no success.  Unfortunately, the market had bottomed out, and these national store chains were two of its many casualties.

Unable to meet its $7,500,000,000 debt obligation, Allied and Federated, on January 15, 1990, filed for bankruptcy protection under Chapter 11.[2] That action if approved by the court would allow them to operate through reorganization.  Bankruptcy courts often turn down such requests.  After all, why should they be given special privileges often not afforded to smaller, individually owned businesses?  However, the financial repercussions resulting from the closing of Allied and Federated stores would have been devastating to the U.S. economy.  Therefore, the court ruled in their favor.  Restructuring meant restocking merchandise, establishing a reasonable debt repayment schedule and liquidating unprofitable divisions.  These retailers, in exchange, received $700,000,000 in loans.  Federated Department Stores received from Citibank a 12-month loan of $400,000,000, while the Allied chain got a 15-month loan from Chemical Bank for $300,000,000.   The new Federated stores, with Macy as its banner, represented a leaner version of its former self.[3]

New discount stores, on-line marketplace services and a host of specialty shops soon filled that void.  The question facing the retail industry today is whether the remaining national chains will continue to dominate or will some other business archetype replace it?  It is anyone’s guess.  However, one thing is certain.  Today’s retail success stories are no longer the logical result of individual innovation and intuition.  Like so many other modern-day businesses, large retailers represent an amalgamation of business experiences from many directions.  Historically speaking, large local department stores symbolized a phenomenal business success.  They played crucial roles in the evolution of U.S. business.  They represented an economic phenomenon second to none, well worth emulating in today’s uncertain world.   Having said that, what practical lessons do they offer us?

 


  1. Consumer Goods Pricing Act of 1975, Pub L. No. 94-145, 89 Stat. 801.
  2. Stephen N. Kaplan, “Federated’s Acquisition and Bankruptcy: Lessons and Implications,” Washington University Law Review 73, 3 (1994): 1103-1126.
  3. Isadore Barmash,“Campeau Invokes Bankruptcy Code for its Big Store,” The New York Times, January 16, 1990.

License

Icon for the Creative Commons Attribution 4.0 International License

The Party's Over by Richard Klein, Ph.D is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

Feedback/Errata

Comments are closed.