1984: Retail Business | As they saw it

Recovery.

At the end of 1983, long lines of shoppers had huddled in the early morning cold in hopes of being among the lucky few to snare a Cabbage Patch Kid doll in time for holiday gift giving. The Cabbage Patch craze symbolized a general consumer buying spree in the United States that seemed to know no bounds and that continued well into the first half of 1984. Midway through the year, however, the buying fever seemed to cool; retail sales dropped 1.7 percent in July and 0.1 percent in August. September sales were up 1.2 percent, leading to a spurt of optimism that was dampened by a 0.1 percent decline in October. No matter how forecasters read the signs for the economy and for retailing generally, toy sellers at least were riding high on the continuing success of Cabbage Patch dolls (now including Preemies) and Trivial Pursuit, and they anticipated strong sales for the new GoBot robot toys.

Discounters.

Consumer willingness to spend did not come at the expense of hard-won shopping savvy. Shoppers remembered what they learned in the recent recession years, and their determination to squeeze more value out of every purchase has created a whole new tier of discount emporiums, including most notably offprice stores and no-frills warehouses. The emergence of these retailing ventures dovetailed with the diversification plans of many of the largest U.S. retailing conglomerates. K Mart, for example, the second largest retailer in the country, acquired Home Centers of America (a lumber and building materials warehouse chain) and Waldenbooks (the bookstore chain), and it moved into the financial services arena. In 1983, K Mart had launched three off-price chains, Designer Depot and Garment Rack apparel stores and Accents stores, featuring housewares and giftware.

Another type of discount operation, which was taking shape as an industry segment in its own right, was the closeout, surplus, and salvage store, probably best exemplified by Pic ?N? Save. A 30-year-old leader in so-called deep-discount retailing, Pic ?N? Save, with 87 stores and 1983 sales of $227 million, has helped inspire a wave of imitators. These operations buy closeout, overrun, or ?odd-lot? merchandise from a variety of sources, including manufacturers, importers, liquidators, and insurance companies. There is little continuity in merchandise assortments, but the savings possible on goods bought by the retailer for anywhere from 10 to 50 percent of the standard wholesale price are passed along to consumers. According to Discount Store News, a trade newspaper, there were nearly 350 deep-discount stores producing about $700 million in sales at the end of 1983.

For their part, off-price retailers generated nearly $7 billion, or almost 6 percent, of total U.S. apparel and footwear sales in 1983; sales have been growing at an annual rate of 23 percent over the past four years. Current projections see off-price stores generating sales of nearly $27 billion annually by 1990 and accounting for nearly 16 percent of all U.S. apparel and footwear sales. Off-price chains generally feature name-brand, soft goods merchandise at discounts ranging up to 50 percent; the selection is made up largely of manufacturer overruns and end-of-season merchandise.

Many retailing conglomerates have thrown their hats into the offprice ring, but results to date have been mixed. The young industry has already had its share of failures. Plum?s, The Elegant Discounter, a subsidiary of Dayton Hudson (parent of Target, Mervyn?s, and B. Dalton Booksellers) quietly folded late in 1983. Dayton Hudson had earmarked $30 million in capital funds for the venture. Targeted at a more affluent shopper than established off-price leaders like Marshall?s and Loehmann?s, Plum?s failed to find a solid customer base. During 1984, the Stop & Shop supermarket chain (also parent to Bradlees and Medi Mart) sold its off-price venture, Off the Rax, after several years of disappointing results.

As for the no-frills, low-margin, high-volume warehouse operations: whether selling food, lumber and building materials, or general merchandise, whether open to all comers or closed to all but selected ?members,? the cavernous stores were being rolled out across the United States at a rapid rate. By the end of 1983 there were more than 2,500 warehouse food stores, averaging more than $200,000 a week each in sales.

Membership warehouse operations relying on narrow assortments of sharply discounted food or hard goods (such as appliances) to draw customers have been the most successful warehouse stores. These ?club? stores limit shopper access to qualified groups of individuals (credit union or trade union members, for example) and wholesalers (small business owners, people with resale licenses, and restaurateurs), who generally pay a $25 annual membership fee. Prices, which are kept low via razor-thin profit margins and high-volume selling, are 5 percent lower for wholesalers. Taking their lead from the industry pacesetter, the San Diego-based Price Company, whose sales from 12 Price Club stores in 1983 topped $633 million, more than two dozen companies have established beachheads in other markets. In Boston, Zayre Corporation?s new B. J. Wholesale was launched in September. In Anchorage and Seattle, Costco Wholesale and Price Savers, a division of Pay?n Save Corporation, began battling for dominance.

Sales.

According to a survey by the publisher of Discount Store News, total retail sales for the six months ending July 31 (the first half of the industry?s fiscal year) were up 9.5 percent compared to the same period in 1983, hitting $317.5 billion. Retail stores? earnings were up 15 percent in the second quarter of the year. Other figures showed general merchandise, drug, specialty, and home improvement stores outpacing 1983 sales.

Sales and profit gains in the supermarket industry have been harder won. In 1983 the industry posted ?real? sales gains (after taking account of inflation). However, many of those gains were made at the expense of profits, as food retailers turned to price cutting to lure shoppers. In September 1984, the New York Times reported that the food industry, which had been hoping for a stronger year, instead was finding profits flat, thanks in part to price wars and start-up costs for new-format warehouse and combo stores (the latter carry more nonfood lines than is customary). ?Food stores will see inflation-adjusted growth limp along during both 1984 and 1985 at rates close to 1.5 percent each year,? according to a report by Management Horizons, a research and consulting firm.

Still, there were bright spots for food sellers during the year, mostly the result of improved operating efficiencies, including greater use of sophisticated price scanning equipment at supermarket checkout counters, the closing of unprofitable stores, and the enlarging of stronger stores to increase volume.

For general merchandise retailers, the six months ending July 31 showed sales increases, over the same period a year before, ranging from 6.8 percent for F. W. Woolworth all the way up to 40 percent for Arkansas-based Wal-Mart Stores. Other gains posted during the period included Sears, Roebuck Merchandise Group, up 5.9 percent; K Mart, 7.1 percent; J. C. Penney, 18 percent; Montgomery Ward, 12 percent; and Federated Department Stores, 12 percent.

Expansion Plans.

Retailers are facing the future with ambitious expansion plans. Sears? Merchandise Group continued the first phase of a record $1.7 billion capital investment program aimed at expanding its new ?store of the future? concept. This plan called for the remodeling of more than 600 stores and the construction of 62 additional units. J. C. Penney planned to modernize many of its largest and most productive stores this year and also planned to open 12 department stores and 20 drugstores before year?s end. K Mart planned to spend approximately $400 million during the year on capital improvement, about two-thirds of it for modernization; $2.2 billion has been earmarked for capital improvements over five years.

Real estate developers, who, during the high inflation years of the late 1970?s and early 1980?s, channeled their investments into office buildings with short leases and regular rent increases and away from shopping centers and malls, now have begun looking again at retail locations.

ADVERTISING

U.S. advertising industry growth outpaced the gross national product during the first nine months of 1984, as the economic recovery reached most regions of the United States. Ad Week predicted that total advertising expenditures would rise from $75.9 billion in 1983 to $87.1 billion in 1984, a jump of 15 percent. Expenditures for advertising in the United States continued to exceed expenditures for the rest of the world combined. All sectors of the industry prospered, with retail and cable advertising revenues leading the surge.

Regulation.

The Bureau of Alcohol, Tobacco, and Firearms, the Federal Communications Commission, and the Federal Trade Commission were all involved with new proposals and regulations in 1984. The BATF completed a review of alcoholic beverage advertising that it had begun in 1978. After studying the use of taste tests by advertisers with an eye toward establishing strict criteria for these tests, the BATF backed off and accepted the use of tests employing ?any scientifically accepted procedure.? The BATF surprised alcoholic beverage advertisers by banning the use of subliminal advertising. The advertising industry, which generally denied using subliminal techniques, said that it saw no need for such a regulation.

The FCC lifted its 16-minutes-per-hour ceiling on television advertising. The current industry average was 12 minutes per hour. Industry experts did not expect this ruling to have as much effect on commercial clutter as the new ?split 30? spot ? two 15-second spots for products sold by the same advertiser. If this format should become popular, the number of spots per hour would increase dramatically and the number of total minutes of advertising probably would grow slowly.

A new FTC policy on ?deception? in advertising stirred debate in 1984. The definition states that deception exists if there is a claim or failure to give information, concerning a material feature of the product or service advertised, that is likely to create a wrong impression in the minds of reasonable consumers. The term ?reasonable consumer? is open to FTC interpretation on a case-by-case basis. The words ?material feature? would clearly apply to such concrete product characteristics as the mileage of a tire, but probably not to more subjective attributes such as ?luxury? or ?comfort.? Critics said the ambiguities in the regulation would weaken enforcement, as would a requirement that consumers show they suffered actual damage because of the deception.

Media.

Advertising revenues in all media categories were expected to grow substantially during 1984. Predictions ranged from a high of 20 percent growth for cable television to a low of 10 percent growth for newspapers.

The big media news of the year had to be the summer Olympics. From an advertising standpoint, ABC was the real winner, as an estimated 180 million Americans watched that network?s 180 hours of coverage, making the 1984 summer Olympics the most-watched televised event in the history of the medium. Ratings for the entire coverage by ABC exceeded the ratings over the same period for CBS and NBC combined. ABC expected to make $45-$55 million in pretax profits on an investment of $325 million in the games.

ABC was also set to broadcast the January 1985 Super Bowl, at rates to advertisers of $1 million per commercial minute. Advertisers did not balk, however; Anheuser-Busch, Stroh?s, IBM, and Nissan signed up promptly as soon as commercial time became available.

The September issue of Vogue magazine weighed in at 3.25 pounds while breaking various records previously set by Vogue in September 1983. For one thing, the September 1984 issue, with 601.8 pages of ads and 804 pages in all, was the largest mass-market consumer magazine in U.S. publishing history.

A study by A. C. Nielsen Company found that more than 12 percent of all homes with television sets also owned videocassette recorders. More than 7 million VCRs were expected to be sold in the United States in 1984, with penetration reaching 40 percent or more of the homes by 1990. Advertisers are concerned because the Nielsen study showed that more than half of those who record shows either edit commercials out of the program or speed past them when viewing the shows.

Advertisers.

Coleco Industries of Hartford, Conn., stopped advertising its Cabbage Patch Kids late in 1983. Demand had outstripped supply to the extent that scalpers got as much as $200 for dolls with a suggested retail price of $35. Parents who wanted to make sure that their children got their Christmas requests stood in long lines, bribed clerks, and even rioted at some retail outlets.

Advertising Age reported that the most frequently remembered advertisements for 1983 were television spots for Coca-Cola, Pepsi-Cola, Miller Lite, McDonald?s, Ford, Burger King, Budweiser and Budweiser Light, Stroh?s, Tide, and Tylenol. Miller Lite?s camping trip spot starring Rodney Dangerfield as ?The Creature? was a good bet to make the list in 1984. Another candidate was Stroh?s ?Alex the Dog? spot, in which a dog retrieves Stroh?s from the refrigerator for a group of men playing cards. (The spot ends with Alex drinking something in the kitchen. The Stroh?s?) Perhaps the most famous of all was the series of clever ?Where?s the beef?? commercials for Wendy?s hamburger restaurants.

A new series of television spots for Pepsi created a furor before they were even broadcast when the star, entertainer Michael Jackson, was injured in an explosion during the taping. The Jackson spots marked Pepsi?s move away from the baby boom generation and toward teenagers.

Procter & Gamble again topped Advertising Age?s annual list of leading advertisers with expenditures of well over $700 million. P&G has held first place since 1964.

Agencies.

Young & Rubicam continued to be the largest agency in the United States, according to Advertising Age. In 1983, Y&R reported gross income of $274.4 million in the United States and $414 million worldwide. The U.S. advertising agency industry posted a 10.7 percent increase in gross income in 1983 over 1982. Worldwide income for the entire industry was $6.51 billion in 1983. The five agencies ranked after Y&R were: Ted Bates & Company, J. Walter Thompson Company, Ogilvy & Mather, McCann-Erickson Inc., and Batten, Barton, Durstine & Osborn.

A. C. Nielsen Company, the world?s largest marketing/advertising research company, was sold to Dun & Bradstreet Corporation in May for $1.08 billion of D&B stock. Later in the year, Arbitron Ratings Company, the fourth-largest U.S. research company, and Burke Marketing Services, the fifth-largest research firm, agreed to the biggest merger in the history of the marketing/advertising research industry. The merger created a research firm second in size only to Nielsen.

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