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?
While I don’t doubt the wisdom of Mr. Kilcourse’s remarks in a general sense, I’m not sure what, if any, relevance they have to Mervyns: the store, after all, was first sold THIRTY years ago…to say the least, that’s a long time to have “new owner” issues linger.
As for the “don’t blame the housing meltdown,” while it’s true that M’s problems are longstanding, who’s to say this isn’t the back-breaking straw (?) it seems to be no less of a factor than the often cited “competition with Walmart and Target,” a comparison of two General Merchandise discounters with a soft-goods junior department store.
Ultimately, I think the most telling remarks are the follow-up comments offered to the (Stockton) Record story linked in today’s Headlines section: sadly–for Mervyns, at least–many people just don’t find it a good place to shop anymore.
Sure the economy peaks and troughs and it is the fittest companies which survive and rise to the top. Mergers and acquisitions are always sited as difficult but, this is just a case of bad management, bad decision making and lack of sharing vision, isn’t it? Employees ended up in fear, kept their heads down or were jettisoned and management was typically only interested in the numbers and not sensitive to the other dynamics of organisations, namely the staff that would make it happen and the customers.
IT systems in the last decade were seen as the panacea to all problems and not as a facilitator to enhance already good practices. Realistically, most large companies change their systems every 5-10 years and this can run smoothly with the right project management, resources and sensitivities.
Great lessons here, especially for retailers but also applicable to so many other industries where there is a strong cultural foundation and a highly transactional model.
Sustaining the culture of an entrepreneur, where the formula is successful, can be a huge competitive advantage. It defines the brand and the proposition for all parties–employees, customers, suppliers and partners.
We have seen this with a number of clients, including a legendary, customer-centric department store and Kimpton Hotels, where Bill Kimpton’s ethos still drives the organization, the brand and, most importantly, what customers experience.
If employees referred to Merv and the family, you can be sure that customers did as well. Steadfast customer relationships can make up for a lot of other deficiencies.
There is a significant difference between a successful founder of a retail company and professional managers. The founder places the consumers first and associates second. Financial results rank third. The founder typically spends time in the stores talking to associates and customers, then spends time visiting competition to see what’s new and different.
The greatest problem with professional/financial managers is they don’t even try to understand the consumer. The top and bottom line rank first. Associates get lost in the shuffle.
Mervyns might not have had these problems if they had just stayed focused on serving and satisfying customers.
Well said, lesson number one: “What makes the founder a great entrepreneur and what makes the next-generation management team successful are not the same things.” In addition, there needs to be a complete and relentless awareness of the moving targets such as changing times, new environments, changes in competition, and changes in customer needs. I don’t think these variables received enough active attention with changing managements at Mervyns.
They first need to focus on research (understanding their customer) and then focus on customer service. Most retailers need to get back to basics. I don’t have a problem with a retailer using this economy as an excuse as long as they fix the real problem.
Target Corporation’s attempts to “Targetize” Mervyns, going back to the 1990s, were really the beginning of the end. The strategy seemed to waver between brands and private label, and between trade-up and trade-down strategies. Target’s focus on turnover caused stock-outs that cost Mervyns a lot of credibility with its core customers as new competitors moved into its backyard. And its branding efforts (see “Mervyns California”) were uninspired at best.
Given these handicaps, the private-equity management team inherited too many problems to fix when you also consider the sorry state of the California economy.
Mervyns got into trouble because there are just too many similar stores. It has nothing to do with being family owned or sold by Target or owned by an investment group or their computer systems. Many retailers have gone through similar journeys. Some do OK and some don’t.
And bankruptcy doesn’t mean the end. Mervyns just received over $400 million in financing, approved by the bankruptcy court. Many retailers (Toys R Us, Macy’s) have gone into Chapter 11, only to emerge healthy. Often, the bad locations and/or excessive debt can be jettisoned.
Mervyns is my current source for Levi’s jeans, my nearly exclusive choice for butt-wear for over fifty years. Please, please, please don’t go away. (I could accept some of my butt going away, but not my Levi’s.)
This is a huge subject (still not about my butt), so this addresses only “Lesson One:” Historically, most successful business-starters can be psychologically characterized as “cold-dominant.” This is based on a personality grid where one axis displays “cold-to-warm” traits while the other axis displays “dominant-to-submissive” traits. Additionally, cold-dominant parents historically tend to produce children who are warm-submissive. Not the best personality profile for running a company. Thus, many, many successful businesses have surprisingly failed after being passed along to second-generation inheritors.
The corollary to this concept is that successful warm-dominant business innovators tend to produce warm-dominant children who can take over their companies and continue their success.
Under Target’s ownership, Mervyns was the red headed stepchild and any hope of recapturing its “Mervyns of California” cool were forever thwarted as Target obsessed on its own store-as-brand premise. Unfortunately this lack of attention allowed Kohl’s to solidify its suburban mid-market dominance and cleared room for Target and Walmart to move further up-market. The result is that the once-airy middle is now filled in. I truly do not see how Mervyns can reclaim its relevance after such a long hibernation period. Acquisition seems to be the best solution.