The other shoe dropped last week in Montgomery Ward & Co.`s efforts to transform itself into a financially viable, specialty-store retailer independent of parent Mobil Corp.
In an effort to accelerate its transformation into a specialty-store operation, the Chicago-based mass retailer jettisoned its money-losing catalogue operation, the country`s oldest and third largest. Together with the pending sale of its 44-store Jefferson Ward discount chain, the closing is expected to give Wards nearly $1 billion to invest in specialty stores over the next five years.
”It`s the end of the catalogue business for us but the beginning of a new Montgomery Ward,” said Bernard Brennan, company president. ”It`s the first step in the growth of Montgomery Ward`s retail business in several years.”
Mobil Chairman Rawleigh Warner Jr. called the restructuring ”a bold and important step forward.
”This action eliminates an unprofitable operation, substantially improves Wards` financial picture and enables Wards to accelerate development of its strategy to become a highly competitive, value-driven specialty retailer,” he said in a statement.
What Montgomery Ward, the nation`s sixth-largest retailer and a subsidiary of Mobil since 1976, wants to build over the next five years is a double-pronged specialty-store operation. One prong would consist of specialty-store-within-a-store in most of its 319 largest stores, with the other prong being smaller, more-limited specialty stores designed to fill in existing markets or create some.
”The specialty store is a very viable alternative. Most retail success stories in the last few years have been specialty stores, like Crate and Barrel, Scandinavian Design and The Limited,” said Henry Johnson, chairman of Spiegel Inc., the nation`s fourth-largest catalogue retailer. ”It`s certainly more dynamic and flexible (than what they had).”
Closing the catalogue operation, which had lost as much as $50 million a year since 1980, gives Montgomery Ward the financial muscle to enter this burgeoning and highly profitable arena.
”It will free up assets, reduce costs and allow us to concentrate our attention,” Brennan said in an interview. ”We`ll be able to focus on the growth areas of the company.”
Planning for the specialty-store growth began in 1983, when Wards announced its then little-understood ”Seven Worlds of Wards,” which divided stores into specialty areas in which the company already had or could achieve market dominance–automotive, appliances, apparel, home electronics, home care, home furnishings and recreation and leisure.
”Clearly, our decision wasn`t to emulate the mass merchandisers,” said Brennan of the 1983 scenario. ”Unfortunately, that was our heritage, but our strategy from Day 1 was to go after the specialty store.”
The first single-store test of all seven specialty businesses will debut in Annapolis, Md., on Aug. 15, followed by full prototypes in suburban Lombard and in Torrance, Calif. Next year Montgomery Ward, with 15 stores in metropolitan Chicago, which it calls a ”growth market,” will build a store featuring all seven specialty businesses at Sacramento and Addison Streets in the city.
More limited specialty stores will be tested in Lubbock, Tex.; Chico, Calif. (near Sacramento); and suburban St. Charles beginning this fall, Brennan said. In St. Charles, Wards will test a store offering home furnishings, appliances, electronics and apparel with a separate automotive center, while the Chico store will test a combination of home furnishings, appliances and electronics.
Brennan refused to say how many of these stores Montgomery Ward wants to open, however, saying it would be ”premature” until plans are completed.
The smaller specialty stores, targeted particularly for midsize markets such as Oklahoma City or existing medium-size stores, will feature the Montgomery Ward name on the outside and an additional sign to indicate what type of store it is or what kind of merchandise it carries.
”This is a low-cost opportunity to fill in our markets, to expand our presence,” Brennan said of the specialty-store expansion.
That expansion could be crucial for Wards, which, because of its reluctance to expand into the suburbs after World War II, is cursed with far- flung and often isolated stores. With the exception of California (55 stores), Texas (42), Illinois (20), Michigan and Maryland (15 each), no state has more than 12 stores and many have only one.
Even more crucial could be the opportunity the smaller specialty stores will give Wards to get into shopping centers where competitors Sears, Roebuck and Co. and J.C. Penney Co. Inc. have frozen out the ”Johnny-come-lately”
retailer`s full-size stores, forcing them into freestanding locations nearby or into secondary malls.
”There are a number of malls that we can get into with a 40,000-square-foot specialty store that we can`t in with a full-size store, and we can also adapt our existing real estate in many cases,” Brennan said. ”This gives us tremendous flexibility in expanding.”
The only fly in the ointment, retail observers say, is that the midsize market has been discovered by other mass merchandisers as well, most recently by Sears, which has designed a smaller ”store of the future” for midsize and small markets. As metropolitan markets reach their saturation point and mall construction finally stops, the number of interested retailers is expected to grow.
Wards executives remain undaunted, however: ”With smaller stores, we can move much more quickly–and we`ve got lots of opportunities to do that now,” said William McCarthy, executive vice president of store operations.
Faster growth into a more profitable segment of retailing will also enable Wards, which faces divestiture by Mobil in ”two or three years,” to become a financially viable company capable of either standing on its own or attracting another buyer. To that end, much of the proceeds from closing the catalogue operation will go into reducing its heavy debt load, said chief financial officer Robert Carr, who added that Wards has generated its own operating funds since 1982.
Brennan, along with McCarthy and Marvin Stern, executive vice president of merchandising, also is evaluating all of Montgomery Ward`s stores by market to see which to keep and which to close, although he says almost all are
”cash producers.” A decision will be made by Jan. 1, he said.
Afraid that its customers aren`t seeing the company`s changes–which have produced 44 percent sales increases in isolated tests such as the appliance prototype in Albuquerque–Montgomery Ward has begun a ”Phase 1” program to bring new merchandise and limited remodeling to as many of its stores as possible.
”Phase 1 won`t be as deluxe (as the Seven Worlds), but it will have all the elements,” said Stern, adding that 80 stores will be remodeled by the end of the year, with 70 additional coming in 1986. ”By the end of 1986, more than half our stores will have a good penetration of these strategies.”
Ward`s long-anticipated departure from the catalogue business it started in 1872–a decision finally made only last week, according to Brennan–leaves so-called ”big book retailing” to Sears and Penney.
”I don`t see the catalogue business as changing at all because of this,” said Rodney Birkins, senior vice president and director of catalogue operations for No. 2-ranked Penney. ”Basically, I would think we`ll pick up fashion apparel and home furnishings customers while Sears will pick up appliances, automotives and related merchandise.”
”This move will leave Sears as the only national full-line retailer in both the retail and catalogue business, and we see it as an opportunity to provide more goods and services to more American households than ever before in our 99-year history,” said William Bass, chairman of Sears` merchandise group.
