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Part of Korvette's mounting success consisted in riding a trend. In the early '503, Gene Ferkauf was only one of many brash young discounters onto a good new thing. A retailing upheaval was under way. The nationwide move to the suburbs was undercutting the downtown department stores. Not having their money tied up in huge and costly property, the discounters moved out to where the housewives and buyers were, catered to the car-borne family trade by providing huge parking lots, kept night hours, and sold on Sundays. The typical discount center became part supermarket, part department store, part carnival. (The pretzel vendor who operates in front of Korvette's discount center in Westbury, Long Island, pays Korvette $800 a month rent.) Even when the department stores began opening more and more suburban branches, the discounters continued to prosper.
Capitalizing on the self-service trend set by the food supermarkets, they undercut department-store prices by replacing paid saleswomen with pushcarts.
For a while almost anyone could break into discounting by renting an abandoned mill or warehouse on a highway and borrowing enough money to buy an inventory. And almost anyone did. At first, old-line department stores jeered at the discounters. They pointed out that the discounters' stores were messy, that the goods they sold were often distress merchandise, and that the clerks were few and were usually order takers who did not know their stock. Department stores offered credit, wider selection, home delivery and more amenities. All true; but many department stores, and their help, had become indifferent in service and set in their ways. Besides, it turned out, people would put up with a lot if the price was right.
There was another changing circumstance too. When the pent-up hunger for hard goods created by World War II was finally sated, many U.S. manufacturers found themselves stuck with slackened production lines, and to keep their plants busy abandoned their insistence on Fair Trade pricing of their products in order to get the discounters' fat orders. At that point, the old-line department stores decided that they had to do more than jeer at the discounters. No longer could a discounter send his customers over to a department store for free demonstration of an appliance or to a music store to listen to a phonograph record, confident that they would come back to buy at the discount price. More and more department stores began to match the discounters penny for penny on such competitive items as refrigerators, television sets, transistor radios and toys, using them as loss leaders and making up the difference on other high markup items —notably clothing.
Not by Price Alone. This put Ferkauf in a two-way bind. He had expanded too fast on a small capital base—four big new branches in 1957 alone—and department stores were beginning to win back business from him. His after-tax profits on invested capital plunged from 29% in 1956 to 9% in 1958. (Currently, they stand at 23%.) Fighting back, Ferkauf determined to challenge the department stores in the place where they were strongest. This meant getting into service, style—and soft goods.