By Brian Kilcourse, Managing Partner
7/29/2008
The ad insert in last Sunday’s paper proclaimed, “Mervyns – Open Open Open” in large type, and the only thing missing from the banner page copy was a qualifier, “Hurry- Before It’s Too Late!” Business journals have been buzzing in the last week that the Northern California retailer is on the edge of bankruptcy and rumors are flying that the company has stopped approving merchandise orders. As has become de rigueur in these times, the housing crisis is blamed.
Don’t believe it. Mervyn’s problems began long before Northern California’s foreclosure epidemic. The company that was founded by “Merv” Morris in 1949 thrived in the friendly Northern California retail environment for 30 years. The California retailers of that era didn’t have to contend much with national competition, and customers were fiercely loyal to their brands. But by the beginning of the 1980’s, big national retailers had come west across the Continental Divide and had established large North-and-South distribution networks throughout the West Coast. Those who had operated in the formerly cozy business environment now found themselves fighting take-no-prisoners competition such as Wal-Mart and Target.
Dayton Hudson (Target) bought Mervyns in 1978, and sought to expand the brand to the Southeast U.S., particularly to Georgia and Florida. But by 1998, the parent company threw in the towel and exited those markets. Finally in 2004, Target sold Mervyns to a private equity group. The new owners promptly started closing stores in Minnesota, Texas, Oklahoma, Louisiana, and Utah. By 2006, Mervyns was again basically a regional California retailer.
There’s a lot to be learned from the company’s long descent into Retail Neverland (and their story isn’t even over yet!).
Lesson One: what makes the founder a great entrepreneur and what makes the next-generation management team successful are not the same things. Merv Morris saw an opportunity and exploited it. Like other entrepreneurs, he could see that the post-WWII U.S. West was poised for explosive growth, and that what separated this new market from an overbuilt and competitive environment east of the Mississippi was a vast expanse of unpopulated land and some really high mountains. There was a ready supply of local producers, such as Levi Strauss. California was a petri dish for growth. However, the Mervyns that Target bought operated in a world where the challenges associated with a geographically extended supply chain had been addressed. Low cost products came from around the world. National and even global competition loomed. Unimpeded growth could no longer be assured, but the culture of the company was built around the old reality, which brings us to ….
Lesson Two: cultural issues are the biggest inhibitors to success. This is true whether considering the culture inside the company or the culture that the company wants to compete in. Wal-Mart found this out with their infamous foray into Germany. In Mervyn’s case, the pre-Target company employees were often on a first name basis with “Merv.” When the founder sold out, the “family” feel of the company was challenged and the exodus began. The Mervyn’s “family” culture prevented the acquired company from easily adopting the processes and culture of the new parent company and deriving the benefits that came with it, even though conditions in the market dictated that change was necessary. Issues surrounding people and process also impact a company’s ability to take advantage of what new technology has to offer, which leads to …
Lesson Three: technology speed-of-adoption matters. The pre-Target Mervyns had proprietary merchandising systems that were replaced by Target’s systems after the acquisition. Add technology churn to the cultural issues discussed above, and you’ve got a sustained multi-year quagmire. Much later, when Target sold Mervyn’s to the private equity investors, the company again had to swap technologies, since it was on a timetable to divest itself of Target’s systems. The “new” Mervyns couldn’t move on until Target’s systems were replaced, and that took two years – an eternity in retail, especially in the fierce competitive environment that California had become by 2006. And that in a roundabout way leads to…
Lesson Four: In a world of nearly ubiquitous products and prices, a retailer had better excel at either operational efficiency or customer service. At RSR, we often refer to the Weirsema-Treacy model defined in the book, The Discipline of Market Leaders[1]. The model conveys that there are three market disciplines for any company to pursue, and it must be great at one of them. Those disciplines are Product Leadership, Operational Excellence, and Customer Intimacy. Mervyn’s didn’t exceed the competition in any of the three disciplines, although at one time or another, they aspired to all three. If a company isn’t great at one of the disciplines and at least good in the other two, then it is depending on customers’ “foot memory” to sustain earnings – and that didn’t help Mervyns anywhere outside of Northern California.
Whether trying to grow and mature an entrepreneurial business, considering expanding into new markets, engaging in an M&A action, or implementing new technologies, retailers can learn from stories such as Mervyns’ to avoid pitfalls that are unfortunately all too common. Most importantly, retailers have to be really great at one of the market disciplines. As Weirsema and Treacy stated, “Today’s leaders understand the battle in which they’re engaged. They know they have to redefine value by raising customer expectations in the one component of value they choose to highlight.”[2]
[1] The Discipline of Market Leaders -Choose Your Customers, Narrow Your Focus, Dominate Your Market, Michael Treacy & Fred Wiersema, Addison-Wesley 1995
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