What's Next? The Blue-Light, Blue-Plate Special, of Course

History tells us that discount retailers' growth story is probably not over.
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There seems to be no stopping the world's two biggest discount retailers.

Both No. 1

Wal-Mart

(WMT) - Get Report

and No. 2

Kmart

(KM)

have announced strong performances for 1998. For the year ended Jan. 31, Wal-Mart's sales increased by 17% to $137.6 billion, and its net income jumped 26% to $4.4 billion. For the year ended Jan. 27, Kmart's sales rose 5% to $33.7 billion, and its net income doubled to $518 million.

Each company attributes much of its success to its "supercenters." Behemoth emporiums, some as large as 200,000 square feet, employ 250 to 300 people each and offer several dozen general-merchandise departments -- from traditional Wal-Mart lines like clothes, gardening equipment and health products to groceries and related lines like bakeries, delis, fresh produce and meat markets. The strategy behind the huge stores is to attract more "crossover" traffic from food to general merchandise.

It must be working. Each Wal-Mart supercenter rings up on average $55 million to $65 million in annual revenue, almost double what its older stores do. By the end of this year, Wal-Mart plans to have as many as 714 supercenters in the U.S. Kmart, which plans to have as many as 1,831 supercenters by the end of this year, credited its most recent three years of improved performance to its new store formats with their larger, brighter look and wider aisles.

The progress toward the superstore began long before

Sam Walton

and

Harry Cunningham

, the respective founders of Wal-Mart and Kmart, were born. The giant supercenters grew out of several innovations in the U.S. over 140 years -- and there is no reason to believe the growth story is over.

Until the mid-1800s, U.S. grocery stores were more or less the same, regardless of their era or geographical location. For example, a shop in lower Manhattan before the American Revolution would carry about the same inventory of core groceries as would a country store in Red River County, Texas, in 1844 -- that is, basic commodities like sugar, salt, coffee, molasses and flour, according to newspapers from the periods.

The first significant change in the grocery business took place in 1859, when the predecessor to

A&P

(GAP)

opened a New York City shop with an Oriental motif. It specialized in selling tea from the China trade at "cargo prices," which amounted to half the competitors' cost.

This idea of discounting food retailing caught on quickly. A&P was in the lead. By 1930, it was a chain of almost 16,000 retail outfits. Chains differed from the independent stores, whose owners purchased their stock from wholesale distributors and then resold it to consumers, earning a profit on the markup. Stores in a chain, however, were staffed by salaried clerks. Stock was bought directly from producers, eliminating wholesalers and their added costs.

In 1912, A&P introduced another innovation in the food-retailing business. Before then, all stores, independent or chain, were fully staffed, offered credit to shoppers on reasonable terms and delivered the groceries to their homes. Calling them "economy stores," A&P did away with credit and home delivery, again lowering costs and passing on a portion of the savings to its customers in the form of lower prices, according to

American Heritage

. Customers still, however, presented their orders to clerks who filled them.

At first, the effects of A&P's changes were minimal. Credit was necessary for many in agrarian communities who routinely paid their bills when they sold their crops. However, America was changing. Its urban population was growing. The economy after World War I was thriving, and many had jobs that paid weekly salaries. The economy stores attracted this type of shopper, and by 1918 A&P had converted all of its stores to cash-and-carry.

At about this time, on Jefferson Street in Memphis, Tenn., Clarence Saunders had an idea that was to change everything -- self-service food shopping. A single aisle was lined with goods that a shopper could easily reach and bring to the checkout counter to pay for in cash. He called his new store

Piggly Wiggly

, and by the start of the Depression, he had 3,000 of them. Still in business today, Piggly Wiggly has outlets spread out across the South.

These "supermarkets" were 8 to 10 times larger than standard groceries. They dealt in low margins with high volume, and their open shelves were amply stocked with a wide variety of goods and brands. New stores, erected away from crowded downtowns, were clean and well lighted with plenty of parking.

Two other improvements to the art of supermarkets came along during the Depression.

Michael Cullen

opened the first

King Kullen Grocery

(KKGR:OTC BB) in Queens, N.Y., in 1930. It was 6,000 square feet and carried 1,000 items. Cullen made liberal use of full-page, antiestablishment newspaper ads to attract shoppers, and they worked well.

Calling King Kullen "the World's Greatest Price Wrecker," he portrayed himself as the champion of the "poor buying public, who were at the mercy of the Wall Street chain stores."

In 1936, in Oklahoma City, Sylvan Goldman, owner of the

Standard Foods Stores

, observed that his shoppers, who used wicker baskets for their purchases, tended to stop shopping when the basket became either too heavy or full. It dawned on him that, if shoppers had wheeled carts that were larger and easier to handle, they could shop longer and buy more merchandise. Thus the shopping cart was born.

All was now in place. The number and size of supermarkets grew in the 1950s and 1960s, as Americans moved to the suburbs. By the mid-1980s, these stores averaged 30,000 square feet and carried an average of 18,000 items, according to

American Heritage

.

Wal-Mart's first supercenter in 1988 signaled the start of another period of expansion. Today, the new stores are six or seven times larger than the largest supermarkets of the 1980s and carry countless items of every variety.

Will these supercenters stop growing? No way. A decade from now, each one will occupy 400,000 square feet and include theaters, restaurants, child-care centers, bank branches and similar attractions. They will become a familiar place for many to spend a couple of hours -- and a few dollars -- almost every day. After all, it's the direction in which discount retailing has been headed since 1859.

Richard B. Marrin is a senior partner in the Wall Street law firm Ford Marrin Esposito Witmeyer & Gleser. Marrin is also the author of several books on American history of the 18th and 19th centuries. He can be reached at

rbm68@aol.com.