DISCOUNT STORES

Discount stores are often defined as retail outlets that sell
brand-name and private-brand merchandise at prices significantly
lower than prices at conventional retailers. To

202 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION
Discount Stores
offset the lower prices, a number of different strategies and
tactics are used, depending on the type of discount
retailer. Some of these strategies and tactics include: maintaining
a high sales volume; keeping expenses down;
negotiating lower wholesale prices; and cutting profit
margins. Other tactics are: using inexpensive fixtures, decorations,
and displays; minimizing free customer services
and maximizing the use of self-service; carrying overstocks
and discontinued products from other retailers and producers;
and stocking off-season merchandise.
In addition, improvement of operational efficiency is
continually sought to control costs. Modern discount
stores may range from specialty shops (such as discount
bookstores) to major discount chains that typically sell a
wide variety of products including hard goods (e.g., major
electronics, automobile supplies, toys, and small appliances),
soft goods (e.g., apparel, bedding, and bath products),
groceries, and other general merchandise.
HISTORY OF DISCOUNT STORES
Discount stores evolved from a series of retailing changes
that began in the United States in the late nineteenth
century. Following the Civil War (1861–1865), the development
of mass-production processes and a massdistribution
system, along with population increases,
paved the way for a new approach to retailing—mass merchandising.
The first type of mass-merchandising operation
was the department store. The second was the chain
store, which included variety stores and “junior department
stores.” The third was the mail-order house. These
patterns for mass merchandising remained relatively constant
through the 1920s. The genesis of discount retailers,
known as “undersellers,” also occurred in the early 1900s.
S. Kline (1912), J. W. May (1924), and Alexander’s
(1928) were the early undersellers of soft goods (e.g.,
apparel).
The Great Depression of the 1930s and the accompanying
economic hardships set the stage for another retailing
change and the further emergences of discount
operations. Grocery supermarkets, the fourth type of
mass-merchandising operation, appeared in 1930s. Early
supermarkets, pioneered by Fred Meyer (1922) and Hendrik
Meijer (1934), were comprehensive grocery stores
that were designed for self-service and consumer accessibility.
Size and low-cost facilities enabled these supermarkets
to operate on low margins and sell below the
competition. The inventories of supermarkets expanded
to include nonprescription drugs during this time. The
starting point for the fifth type of mass merchandising,
discount stores, is often traced to the opening of a radio
and appliance store by the Masters brothers in Manhattan
in 1937.
The development of supermarkets, chain stores, and
the predecessors of the discount stores that caused greater
price competition in the 1930s, and concern, in the midst
of the Depression, for maintaining employment brought
about legislative constraints in several states to protect
small retailers. These resale-price-maintenance, or “fairtrade,”
laws provided that manufacturers could establish
retail prices for products that carried their brand name,
thus legally fixing prices. In 1937 these laws were
strengthened by federal legislation, the Miller-Tydings
Resale Price Maintenance Act. Even though the laws were
difficult to enforce, they would present a major challenge
to discount merchandisers over the years to come.
After World War II (1939–1945), discount merchandising
grew rapidly. This explosion in growth was fueled
by consumer bargain hunting in the face of rising prices,
the pent-up demand for goods created by wartime shortages,
and the establishment of homes and families by
returning GIs. Many consider E. J. Korvette, opened in
1948 by Eugene Ferkauf, as the first discount store. Soon
regional discount stores, such as Zayres, Arlans, Gibson’s
and Two Guys, sprang up across the country to satisfy the
demand for consumer goods, including television sets and
other new products. Many of these new discounters sold
their merchandise out of other existing businesses or set
up in low-cost facilities such as abandoned factories and
lofts. Despite these often makeshift origins, the modern
discount industry was beginning to take shape.
Sparked by increased consumer confidence in discount
stores and increased availability of goods from manufacturers,
discounting continued to grow rapidly during
the 1950s and became an important part of the retail
landscape. New chains were drawn to the field, and established
chains opened new outlets. Variety stores, specialty
retailers, traditional department stores, and supermarkets
were looking into discounting and, in some cases, launching
ventures.
Mid-Twentieth Century. The look of discount stores also
began to change in the 1950s as leading discounters (e.g.,
Masters, Two Guys, Korvette) took on a departmentstore-
like appearance by adding household goods, apparel,
and other soft goods. “Mill store” discount operations further
contributed to this change as they began to surface
with their base of soft goods.
In addition to the national and regional chains that
entered the industry in the 1950s, several others opened
their doors in the early 1960s. Many of the new additions
were inexperienced and underfinanced, but among the
new entries were four that would become the giants of the
industry: Kmart, Woolco, Target, and Wal-Mart. All four
began their operations in 1962.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 203
Discount Stores
Kmart was formed by Kresge, one of the nation’s
leading chain stores, in response to competition from
drugstores, supermarkets, and the new discount stores.
Kresge’s new venture was unique in two respects. First, the
marketing plan was based on the idea of offering quality
merchandise—predominantly national brands—at discounted
prices. Second, the location strategy was to “surround”
cities with their stores.
Woolco was organized by Woolworth, another longtime
leader among variety stores. Faced with the same
problem as Kresge, they also responded by shifting their
efforts to discounting. Their strategy was built around carrying
department store merchandise, auto parts and accessories,
and soft goods, all at discount prices.
Target was a spin-off of the Dayton Corporation, a
Minneapolis-based regional department-store chain. It
was conceived as a chain of regional upscale discount
stores designed to attract affluent suburbanites. The product
lines were higher quality and higher priced, with an
emphasis on furniture and household appliances.
Wal-Mart was started from scratch by Sam Walton,
the owner of a group of Ben Franklin variety stores in the
south-central states. Walton’s strategy was to establish
stores only in small- and medium-size towns so that he
could capture a substantial part of the total local market.
His key policy was to sell at “everyday low prices,” rather
than hold periodic sales.
In addition to their marketing innovations, these four
industry leaders played a major role in setting the pattern
for other aspects of the industry. In particular, they established
large facilities with standardized layouts in or near
shopping centers. Their merchandise lines included both
hard and soft goods and once they were established, they
reduced the number of leased departments to a minimum.
Many discount businesses failed in the early 1960s
because of the fierce competition brought on by the proliferation
of new discounters and the experimentation of
other retailers in discounting. In spite of the failures, the
industry continued to expand in the mid-1960s, both in
terms of number of stores and amount of sales.
The 1970s were a decade of expansion for the successful
chains. Woolco and Kmart focused on national
expansion and by 1974 Kmart had become the first truly
national chain, with stores in each of the forty-eight contiguous
states. Wal-Mart expanded into the Southeast and
Midwest and Target established a strong presence in the
Midwest. Some chains were forced into bankruptcy by the
recessions of the 1970s, but their stores were bought up by
the major chains and others. The decade also witnessed
the end of federal fair-trade laws.
Late Twentieth and Early Twenty-first Centuries. Two
distinct trends were underway as the discount industry
entered the 1990s. One was the bankruptcy of several
remaining discounters. The other was the spectacular
growth of the (now) three major players: Target, Kmart,
and Wal-Mart. Target sales more than doubled between
1987 and 1993. Kmart sales grew by more than $8.3 billion
during the period 1988–1993. Meanwhile, in 1991
Wal-Mart passed Sears to become the nation’s largest
retailer. Their combined sales had increased by more than
$46.7 billion during the period 1988–1993. As a result of
these trends, the industry fragmented into four segments:
the three major chains and a group of regional operators.
The beginning of the twenty-first century finds continued
growth and consolidation as well as new applications
in the discount retail business. Electronic commerce
discount retailing has grown significantly, rapidly changing
the shape of discounting and affecting the current
industry members. Along with the departure of a number
of discounters and the acquisition of others by stronger
chains, new kinds of discounters have emerged.
TYPES OF DISCOUNT STORES
Although the full-line department-discount retailers such
as Wal-Mart and Target are what first come to mind when
discussing discount stores, there are as number of other
types of discount stores. The following are the common
types of discount retailers.
Food-Oriented. Box (limited line) stores: Limited number
of product lines; very limited assortment of brands and
sizes; few national brands; few perishables; products displayed
in boxes with sides and tops cut off; very low
prices; little atmosphere and few services; very little promotion
(e.g., Aldi and Save-a-Lot).
Warehouse stores: Moderate number of product lines
but a low depth of assortments; carry manufacturer’s
brands bought discount wholesale at very low prices; limited
atmosphere; few services; minimal promotion (e.g.,
Cub Foods).
General Merchandise. Full-line discount stores: Extensive
width and depth of assortments; average-to-good-quality
products, often less fashionable; very competitive prices;
average atmosphere and minimal services; significant
advertising (e.g., Wal-Mart, Target, and Kmart).
Off-price chains: Moderate width and very low depth
of assortments; average to good quality; lower continuity;
low prices; little atmosphere and few services; some limited
promotion (e.g., T.J. Maxx and Burlington Coat Factory).

204 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION
Displays
Factory outlets: Owned and operated by the manufacturer;
often located in outlet malls; moderate width but
poor depth of assortment; some irregular merchandise;
lower continuity; very low prices; some atmosphere and
service; some promotion (e.g., Bass, Levi’s, and Totes).
Membership clubs: Often referred to as wholesale
clubs; charge a modest membership fee; broad assortment
of food and nonfood items; lower continuity; low to very
low prices; some atmosphere and service; some promotion
(e.g., Costco, Sam’s, and BJ’s Wholesale).
Closeout retailers: Broad, but inconsistent, assortment
of general merchandise and apparel; low prices; little
atmosphere and service; some limited promotion (e.g.,
Big Lots and Tuesday Morning).
Discount variety store: Sometimes referred to as value
retailers; limited assortment of foods and general merchandise;
caters to the lower-income market; low prices;
little atmosphere and few services; minimal promotion
(e.g., Dollar Tree, Family Dollar Store, and Dollar General).
Internet discount sites: Electronic discount retailing,
also called e-tailing; sells at discount prices over the Internet;
large assortment of merchandise; good service; generally
delivered by mail or parcel service (e.g.,
Amazon.com).
Figure 1 shows the gross revenues of selected major
discount retailers in each of the different types. The ranking
is the rank of the retailer in the Top 100 Retailers
listed in Stores in July 2005.