Whither Mervyn’s?

Whither Mervyn’s?

Mervin Morris on toasters, “soft-wear” and corporate greed.

When California’s answer to J.C. Penney’s, Mervyn’s, bit the dust late last year the conventional wisdom of the retail analyst mind trust was that the chain had lost its mojo. That today’s consumers prefer to snap up their bargains at Wal-Mart or Target. Fair enough. But, was there something more sinister going on? According to the company’s founder, an actual guy named Mervin Morris (who spells his name correctly, but prefers Merv), there was more to the demise of his namesake than the mix of merchandise at the stores. Started by Morris in San Lorenzo in 1949, Mervyn’s grew to over 40 stores mostly in California when Morris sold out to Dayton-Hudson, a department store chain that also owned Target, in 1978 for $300 million. Mervyn’s continued to grow to over 300 stores and reached as far as Florida by the 1990s. It was considered such a success—especially in the ’80s—that other stores, like Kohl’s, deliberately copied Mervyn’s big-brands, no-frills format (today, many of the old Mervyn’s will become Kohl’s). Eventually though, Dayton-Hudson, now known as Target, wanting out of the traditional department store business, sold Mervyn’s to three investment groups led by Cerberus (who now own Chrysler) in 2004 and the endgame began. So, what really went down? I called Morris, now an investor in Menlo Park but a longtime follower of his legacy, to find out.

Paul Kilduff: It’s quite amazing for you to open the first store, see it grow and then witness its demise all in your lifetime. I don’t know how many people know that you’re still around and founded the company and that there really is a Mervin behind Mervyn’s. Do you think they ever could have taken advantage of you as a spokesperson?

Mervin Morris: Oh, I don’t know. You know, I told someone this morning who asked me to come to speak to a little luncheon and I said, “It’s interesting, there are more people willing to help me across the street these days than there are people willing to listen to me.”

PK: Yeah, but how many people really knew that you existed? I mean, ever since Lee Iacocca stepped out as the Chrysler spokesperson, the head of the company becomes the spokesperson. Even though people knew you sold it.

MM: It might have given it a little local flavor.

PK: Exactly. Did that ever come up?

MM: You know something. It did a little bit in the end. The last CEO, the first day he took over, he contacted me and asked me to come over and meet. And they had big plans using me for their 60th anniversary, which would be this year. And they were going to have a big deal and they were going to use me for that and I agreed that I’d be a part of it, but other than that, no. Kolberg Kravis did ask me to sit in on negotiations when they were trying to buy Mervyn’s, which I did and we visited a lot of stores together and so on. The truth of the matter is, Paul, when they take the star off your dressing room door, you’re done. I don’t care whether it’s show business or retail or whatever, the next manager doesn’t want it to look like it’s the same thing. I guarantee you Mr. Obama isn’t calling Mr. Bush for advice. When you’re gone, you’re gone. Life moves on and you look ahead and don’t look back. That’s just the way things work.

PK: When the stores finally closed for good last fall I remember a TV guy doing a stand-up in front of the San Francisco store quoting a management professor who said just the name Mervyn’s was a turnoff—too hokey for today’s hip consumer. Was it?

MM: No, no. The name wasn’t a problem. Let me tell you what happened. My name of course is Mervin Morris and it’s spelled with an “i.” And when I was a kid growing up in a little country town of 2,500 people, Delano, which you probably never heard of, down near Bakersfield, my parents had a store called Morris Department Store. It was a little 5,000-foot momma-poppa store. And I decided I wanted to go into the shoe business and one way I could extricate myself from the town was to open a chain of shoe stores and move out of town to a larger city because my parents wanted me to stay there and work in the family store. So we designed a shoe store in Delano and the architect designed it spelling Mervyn’s with a “y.” I wanted it to be my first name. I didn’t want it to be called Morris’ because that was my father’s store. And everyone in town knew me so they’d know what Mervyn’s was. So, when he designed it he designed with a “y” instead of an “i.” It was a mistake. So I said, “You made a mistake. It’s supposed to be with an ‘i.’” “Oh,” he said, “It looks so much better on a sign with a ‘y.’” What the hell. I was a kid just out of the service, just out of World War II. I didn’t know anything about business so I said, “Okay, make it with a ‘y.’” I never opened the store and I moved to Northern California for a lot of other reasons and decided to open this little department store. I should have called it Morris’. And if I was going to call it Mervin’s I should have spelled it correctly. So people to this day call me Mr. Mervin. My own barber I’ve gone to for over 30 years he always calls me Mr. Mervin. It never should have been called Mervyn’s in the first place, but on the other hand, when the business started to grow and we started to get bigger I was going to change the name. We were going to call it the Mervin Morris Company and then were going to ultimately drop the Mervin and just leave it Morris’. But there was an expense in signs and stationery and everything; we didn’t have any money so I said to hell with it and it grew. It became a very successful company. I grant you the name looks more like a discount store or more like a specialty store or something, it didn’t look like a department store. Morris would have been a better name. Anything would have been a better name. If I had had a focus group or if I’d had a marketing firm doing research, it wouldn’t have been called Mervyn’s. But it was and that was due to my lack of experience.

PK: But, the name aside, where is the place for the mid-priced, family department store in today’s world? Where does Mervyn’s fit in between Wal-Mart and Target?

MM: When I went into business there were basically three categories of retailers that meant anything. There was the traditional department store. There was the Emporium in San Francisco. There was Capwell’s in Oakland (I don’t know if you remember that).

PK: Oh, yes, the bargain basement.

MM: The traditional stores. Then there was what I call the unbranded chain stores. There was Penney’s. Sears Roebuck. Montgomery Ward. Those were the big competitors when I went into business. And I decided that I wanted that market—what I call that mid-market where Penney’s and Sears and Montgomery Ward were. But, we were unique in as much as we had everything that they had but we also had branded lines like Arrow shirts and Cooper Jockey shorts and so forth. So we carved a very unique niche for ourselves. Now the world has changed. You can’t break it down into categories like that. Everybody’s in everybody else’s business. There are now category killers. There are huge specialty stores like the Gap and the Limited. And the lines are not clearly defined. My own wife who would never go into a discount store now finds herself shopping at Target because they’re upgrading. The whole retail world is squeezed. When we decided where to open a store one of the criteria would be, how many square feet of competitive retail space is there in the community we’re looking at? And we’d say if there’s more than x amount per capita we wouldn’t go in, if there’s less than x amount we will. Today, there isn’t a community that isn’t over-stored. You gotta say, they don’t need us anywhere. And so from that standpoint, yes, they got squeezed. But on the other hand, if Penney’s can make it and Kohl’s can make it, Mervyn’s could have made it because we were here first.

PK: I saw you on one of these cable news channels saying that Wall Street greed shut down Mervyn’s.

MM: No, no, I didn’t say it was Wall Street greed. It was Cerberus greed. Cerberus is the equity company that ran my company and now wants my taxpayer dollars, or is getting my taxpayer dollars, to bail them out because they don’t want to put any more money in because they know it’s a bad investment at Chrysler.

PK: It seemed as though Cerberus and the other two holding companies bought Mervyn’s from Target with the intention of selling off the valuable leases they had, then bleeding the company dry. Is that an accurate statement?

MM: Not really. The intent wasn’t to bleed it dry. It was just that they didn’t give a damn whether they bled it dry or not.

PK: Well, what happened then? I don’t get it.

MM: I tell you what happened. Cerberus Capital, Sun Capital and, I forget the other one, bought Mervyn’s from Target. And when they bought Mervyn’s from Target it was a bidding thing because I was working with Kolbert Kravis who was also bidding on it. And the company was sold to the highest bidder. Now, people bid what they bid because some people saw value in operating as a department store, which is what Kolbert Kravis saw. And they were going to continue to operate it. These people (Cerberus et al.), they saw value that someone else didn’t see. They saw value in the leases, in the real estate. So therefore they said, “Hey, if we can acquire this company and we can peddle the real estate, we can jack up the rents. So if you raise the rent it means you’re going to get more money for the real estate, right? So, we’re going to jack up the rent.” So they just doubled the occupancy costs, they bailed out tens of millions of dollars in selling off the real estate. For example they sold the headquarters building (in downtown Hayward) somewhere north of $50 million, probably closer to $60 million. That real estate today, you know what it’s worth? Zippo. I mean it was an old department store building that was converted into an office building. It’s in a very poor location for either a department store or an office building. And it isn’t even good if they scrapped the building—the land isn’t good. So the point is this: They didn’t care about it. They saw value in the real estate. So they took the money out of the real estate knowing full well that Mervyn’s was having problems and that the economy was not robust, that Mervyn’s may very well go broke. But that didn’t bother them or the fact that several thousand jobs, I mean close to 30,000 jobs, would be lost. They said, “Hey, we’re going to take our money and run,” which is exactly what they did. Now, as I understand it, Sun Capital saw still a possibility of operating it as a retail store even with the increased rents. Well, you know, then they ran into the down economy and it was the perfect storm. There was no chance of Mervyn’s surviving. So, that’s the story.

PK: You’re saying it wasn’t Cerberus’ intent to destroy Mervyn’s, but it sounds very close to that.

MM: It was that they didn’t care whether they did or not. It was their intent to bail out and make as much money as they could and get the hell out.

PK: I don’t understand. How do you own a company, own all of its real estate and then charge the company double rent without severely hampering it?

MM: What you do is this. Supposing that you have a building that’s paying a half a million dollars a year in rent and you want to sell that building. Somebody’s going to buy it based on the value that they have an income stream of a half a million dollars so they’re willing to pay x. We’ll say they buy it at 10 times the cash flow, so that means they pay $5 million dollars for the building, right?

PK: Right.

MM: Now, supposing you raise that rent to a million dollars a year applying the same percentage, that means they sell the building for $10 million instead of $5 million. So, that’s what they did. They raised the rents which meant that they got more money for the real estate, but meanwhile the company that has to pay that rent to operate their business, they can’t afford it. So, they fold.

PK: Seems like we’re quibbling over the word “intent” here.

MM: That was a byproduct of their grand scheme. They didn’t say, “Hey, I got an idea—let’s put Mervyn’s out of business.” They said, “Let’s make some money off the real estate and let the chips fall where they may.” They didn’t say, “Jesus, if we do this, you know, we’re liable to put them out of business.” That wasn’t their concern. Their concern was to take the money and run. And that’s exactly what they’re doing with Chrysler now, the same ownership. They’re taking some $3 billion I think it is from the federal government, they want another $3 billion as a possibility of them merging with Fiat and they don’t give a goddamn about Chrysler. They could care less about Chrysler. They want a bailout now. They know Chrysler’s not a viable company. Go look in the parking lot and see how viable it is and now when they’re on the ropes nobody’s going to buy a Chrysler anyway. So, that’s the deal.

PK: Yeah, just connect the dots. What about the charge that’s made that Mervyn’s had lost touch with consumers after so many years of being mismanaged by its former parent Target. That Mervyn’s didn’t know what it was doing the last 10, 20 years with the failed expansion, etc.

MM: I’ll tell you exactly what that story is. Mervyn’s was owned by Target and when Mervyn’s was first acquired by Target it wasn’t called Target in those days, it was called Dayton-Hudson. And Dayton-Hudson was in the traditional department store business. They owned Dayton’s, they owned Hudson’s, they owned Marshall Fields, they owned Mervyn’s and that was their principal business. As Target grew they became more interested, and I’m not questioning their judgment here, they became more interested in the discount business. They saw an opportunity, they thought, to build a larger, more profitable company which they probably did by getting out of the traditional department store business which is a tough business and going into the discount store business which was Target. So they decided they’re going to sell off Dayton’s, they’re going to sell off Hudson’s, Marshall Fields and Mervyn’s. Now, the traditional large department stores were a good fit for Macy’s, so Macy’s bought them. Mervyn’s was kind of a hybrid. It was too small and it was a more moderately priced operation than a Macy’s so it didn’t fit, so they sold it to the Cerberus group. Now, why was Mervyn’s going downhill? The same reason that their department stores were going downhill. Their focus was on Target. That’s why they got rid of all of them and they’ve done a heck of a good job with Target. So, that became their focus and they lost interest in Mervyn’s and they lost interest in the department stores and they disposed of them. And they went through several changes in management while they were trying to figure out what to do and they went through several changes in policy so there’s no question about it. In 1978 when I sold the company to Dayton-Hudson they were doing great and then after I sold they were even doing better than when I had it. And they expanded from 75 stores to over 300 stores, but then they started losing interest and things started going downhill and they started closing stores. And they closed stores that J.C. Penny took over. Well if Penny’s could operate ‘em certainly Mervyn’s could. I mean we were as good or better merchants than Penny’s, but that’s just exactly what happened.

PK: What about the charge that Target was competing with Mervyn’s? I mean, I went to Target to buy a toaster once and found one that I still have for $20. Then I thought, because Mervyn’s was in the same mall and still owned by Target, let’s go check what a toaster costs there. The same exact toaster was $10 more at Mervyn’s. Who would make that deal?

MM: This was part of the bad management. When I owned Mervyn’s we used to say, “If it bends, we carry it.” We would never be undersold on any light merchandise. Mervyn’s never belonged in the toaster business in the first place. They didn’t have the space in their stores. We were dominant in what we call soft-wear. We used to tell the security analysts, “If it bends, we carry it,” meaning clothing and those sorts of things. They couldn’t be competitive for two reasons. They couldn’t buy in the volume that Target could buy in. They also had a higher expense structure than Target did.

PK: I’m glad to hear you say that because I was a loyal Mervyn’s customer and I could never understand why they sold that stuff.

MM: They didn’t belong in that business. They also didn’t belong in those gadgets, that housewares stuff like you’d find at Cost Plus or Pier One. That wasn’t their business. They didn’t belong in that. They could have used the space for towels, for clothing, for other things that they belonged in and that they really knew their business in. But you know, Mervyn’s did crazy things. They put in ladies’ cosmetics. They’d throw out ladies’ cosmetics. They had ladies’ dresses. They throw ‘em out. Then they’d put ‘em back. The customer didn’t know what the hell Mervyn’s was anymore.

PK: Yeah, really—stick to the Lee jeans. Come on. Do you have any regrets? Do you feel like maybe you should have held on when Dayton-Hudson called you at Mervyn’s world headquarters in downtown Hayward in 1978 and made you an offer you apparently couldn’t refuse?

MM: My wife said to me maybe you shouldn’t have sold the company. I said I’d a been dead years ago of a heart attack if I didn’t sell the company. Oh. no. I have no regrets whatsoever. Life has been good to me. I saw the company operate for 60 years and I have no complaints whatsoever. I’m happy doing other things and enjoying life and in vigorous good health.

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At press time, Morris’s three sons had just bought back the rights to the Mervyn’s name. Right now they have no plans to reopen any stores, says John Morris, but they are “exploring their options.”

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Suggestions? E-mail Paul Kilduff at PKilduff@sbcglobal.net.
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MERVIN MORRIS VITAL STATS

Age: 88   |  Birthplace: San Francisco (on the Fourth of July, 1920)

Astrological sign: Cancer

Favorite extinct species: 
An old girlfriend

Planet you would immigrate to and why: 
Morris has made no plans to emigrate to any planets!

Faces of the East Bay