RSR Research: Mervyns – Don’t Blame This One On the Economy!
By Brian Kilcourse, Managing Partner
Through a special arrangement, what follows is an excerpt of a current article from Retail Paradox, RSR Research’s weekly analysis on emerging issues facing retailers, presented here for discussion.
As has become de rigueur in these times, the housing crisis was largely blamed for Mervyns’ bankruptcy last week. Don’t believe it. Mervyns’ 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. Dayton Hudson (Target) bought Mervyns in 1978 and sought to expand the brand to the Southeast U.S. 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:
Lesson One: What makes the founder a great entrepreneur and what makes the next-generation management team successful are not the same things. Like other entrepreneurs, Merv Morris could see that the post-WWII U.S. West was poised for explosive growth with a vast expanse of unpopulated land west of the Mississippi. 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. Unimpeded growth could no longer be assured, but the culture of the company was built around the old reality.
Lesson Two: Cultural issues are the biggest inhibitors to success. In Mervyns’ 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.
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. Much later, when Target sold Mervyns 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 in a fiercely competitive environment in California in 2006.
Lesson Four: The Weirsema-Treacy 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. Mervyns didn’t exceed the competition in any. 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.
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.”
Discussion Question: In hindsight, how should Mervyns’ management have positioned it to compete with the new realities of the marketplace? Today, what turnaround strategy can Mervyns pursue?