The enormous growth of suburban shopping centers and discount stores in the past decade is reflected in the dramatic rise of E. J. Korvette, whose stock rose from a 1959 low of l7s to a high of 128d in 1961. Even in 1961 you could have bought the stock for 3l½.

As the discount retail leader, Korvette has benefited from what Eastman, Dillon, Union Securities & Go. called "new consumer spending patterns" by transforming itself from an operator of small discount stores into a regional department-store chain of major outlets to be augmented by a far-reaching expansion program involving the construction of three to four new stores each year. "The company," said Eastman Dillon's S. L. Stirling, "has built an outstanding growth record on the time-tested merchandising concept that everybody loves a bargain."

Korvette's growth can best be attested by its achievement of the highest returns on net worth in the merchandising field. In the July 1960 fiscal year, for instance, it earned approximately $2.8 million on $11.5 million of net worth, which amounted to a whopping 24 per cent, compared with an average return on equity for all large U.S. department stores in 1959 of only 7½ per cent. Its sales and per-share earnings soared 7,750 and 7,500 per cent respectively between 1950 and 1960.

The discount store, characterized by low store overhead, low mark-up and fast turnover of merchandise, once was considered as a renegade form of retailing. It is now being embraced by such old-line retailers as F. W. Woolworth Co., Allied Stores Corp., S. S. Kresge Co., and Federated Department Stores, Inc. It is also being entered by such mail order houses as Montgomery Ward & Co. and Aldens.

Today, the discount retailer is the center of attention in the retail world, with its volume rising from l960's $2.5 billion to an estimated $4 billion in 1961.

The rising popularity of the discount store is due not just to its low mark-up, but also to many other features, including its attractions of self-service, under-one-roof location and longer store hours. While discounters are frequently charged with selling substandard merchandise, actually they have been able to offer lower retail prices on many classes of quality goods, made possible by their substantially lower expense ratios.

This low expense ratio is achieved, according to Goodbody analysts, through "the high volume of sales generated in proportion to workers employed, square feet of store space, and dollar investment in inventory. High traffic flow, achieved without proportionately high advertising costs, has given discounters a leverage which has reduced expenses proportionately to sales." Because of its low initial capital investment, a discount store usually becomes profitable in six months whereas it takes about three to five years for a regular retail store to get into profit.

Particularly low in start-off expenses is the discount store with a large proportion of its operations leased to others. Because of its basically leased operation, such a store needs about only $125,000 to open a 125,000 square foot new store compared with about $1,100,000 for a new store operating its own department. This extremely low starting cost renders its new stores immediately profitable and gets its investment returned in about the first six months o£ operation.

Application of this leasing technique to the extreme is the three-year-old Towers International, Inc., a New York-based chain of eighteen large discount department stores, which expects to be operating thirty-five stores having an annual sales rate of $200 million before the end of 1962.

Despite this phenomenal growth, Towers does not sell a single item of merchandise. It leases out the entire floor space in each store to more than a dozen concessionaires who separately operate various departments. Towers receives a percentage of the concessionaires' sales.

Another leasing specialist is Gem International which is the only public-held company combining three unique growth features: leased department, closed membership and discount retailing.

Indicative of its tremendous growth pace is Gem's 40 per cent increase in membership from 1960's 438,900 to 1961's 618,100, a net increase of 179,200 which, at $2 per membership, amounted to a cash flow of $358,400. According to Blalock k Wells analysts, this amount equals the net profit on turnover in a typical supermarket chain of $35,800,000.

On Gem's invested capital of $3,221,000, reported net profit of $675,410 in 1961 means a return of 30½ per cent. In 1961 return on its invested capital is expected to reach 35 per cent.

Not, of course, all discounters share the enthusiasm for leasing. Critics contend, among other things, that with several operators under one roof it is impossible to present unified "store image" and pricing policy.

Fed-Mart Corporation, for instance, has none of its departments leased. It is, however, similar to Gem in limiting shopping privileges to members, their immediate families and their guests. Groups eligible for membership include homeowners, government employees and companies or employees largely engaged in work for the government. The relative uniformity of the buying habits of members makes it possible to carry minimum stock with maximum capital turnover.

There are two divergent ways of entering the discount field, as exemplified by F. W. Woolworth and Montgomery Ward, respectively.

F. W. Woolworth has decided to enter the discount field by building its own stores. It plans to open eighteen discount stores at the rate of one store per month. Woolworth's stated goal is to build the biggest discount house this country will ever see. In expanding its variety store chain, Woolworth's present policy is to open all new stores on a self-service basis and gradually to convert the maximum possible of the old stores to the same principle.

Montgomery Ward has decided to take a different path—by acquiring fast-moving Interstate Department Stores, which already is operating twenty-one discount units out of its total sixty-three stores. An aggressive company, Interstate itself entered the field only two years ago by buying an existing discount operation. It took this move at a time when its sales were falling off and its earnings "dropping sharply.

The acquisition approach was followed by another mail-order house, Aldens, which got into the discount field through the acquisition of Shoppers World in early 1961. Its discount division may reach $60 million in sales in 1962 against an estimated $30 million in 1961 and $19 million in 1960.

By now, regular department stores are fully aware of the threat from discount stores, and they have decided to become competitive. While not entering the discount field, Sears Roebuck, for instance, has substantially moved into suburban shopping centers —the main domain of discounters.

Also, the truly top-quality department store is able to hold its ground firmly against discount inroads. It stands to benefit from the sharp increase in the  number of middle-income families along with their rising demand for high-quality, high-fashion goods which are beyond the merchandising domain of discount retailers.

Discount operators are also getting tough resistance from mailorder houses with their constantly widened and upgraded catalogues. Designed for shopping convenience, mail-order catalogues invade the housewife's own home and represent an ultimate in self-service.

Growing competition is also coming from such old-established retailers as J. C. Penney Co. and J. J. Newberry Co., which have broadened their scope in recent years to encompass a wide assortment of merchandise.

J. C. Penney., for instance, has been substantially expanding the size of its stores and participating in the development of shopping centers. While not entering the discount field, it has been operating on a price basis competitive with discount stores. Moreover, it has been adopting many of the discounter's techniques including initiation of self-service in many of its stores, preticketing of merchandise, and some manufacturers' prepackaging.

As a group, the retail store industry has a bright prospect in the sixties, based on an expanding population, an upward thrust in family formations, and improving levels of disposable income.

Investing in the rapidly changing retail field should be profitable if you know how to compare investment merits of retailing companies. Among the criteria for judging such issues are, in the opinion of Goodbody analysts, "(1) most importantly, management excellence, which is reflected in a company's sensitivity to shifts in consumer buying habits, imaginative selling, and efficiency of operation; (2) among companies selling popular-priced merchandise, a well-entrenched reputation for offering the customer good value will be of great importance, while higher-priced merchants must offer genuine leadership in quality and fashion; (3) above-average emphasis on branch store development and limited dependence on downtown store locations."

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