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Discount Store News, Sept 25, 1989

Building Ames With Careful Shopping

Gilman: Acquisition Was the Key To Creating a Discounting Giant

"Discounting wasn't in its embryonic stages when we got into it," said former Ames chairman Herb Gilman, DSN's latest hall of famer. "But we were there at the birth of mass merchandising in discounting."

Gilman's older brothers, Milton and Irving, had opened the first store in an abandoned Ames textile mill in Southbridge, Mass., in early January 1958. Shortly thereafter, younger brother Herb resigned as a Hewlett-Packard engineer to join the fledgling company.

"I sensed that this was a growth industry, and it appealed to my entrepreneurial side," Gilman remembered 30 years later. "I came in just as the industry entered its first period of explosive growth."

At that time, Arlans and Korvettes were the biggest names, but newcomers like Zayre were opening stores throughout the Northeast. The concept spread quickly. In Michigan, the Kresge company opened its first K mart; in New Jersey, Jamesway did likewise; and in the small Arkansas town of Rogers, a former JCPenney employee named Sam Walton converted a Ben Franklin variety store into a new-style discount store.

"It was a time of explosive growth for the industry," Gilman recalled. "It quickly split into two almost separate industries; one that saturated metropolitan areas, like Zayre and K mart, and one that concentrated on rural markets, like Wal-Mart, Jamesway and us."

The explosive growth continued, for the industry as a whole and for Ames in particular, for some 30 years. From a 6,000-square-foot corner of a failed factory selling heavily discounted apparel, home goods and some H&BA items, Ames has grown into one of the largest retailers in the world, with projected fiscal 1990 sales of over $5 billion.

Along the way, the chain has not only outlasted most of its contemporaries; it has bought many of them.

The Acquisition Years

"If Herb is remembered for any one thing, it will be his genius at acquiring real estate," said present Ames chairman James Harmon. And although Gilman is too modest to publicly remember it that way, he is clearly pleased at the memory of key acquisitions like King's, elements of W.T. Grant, Neisner's, and G.C. Murphy.

Until the early '70s, Ames expanded slowly, at first renting old factory buildings, then erecting its own free-standing stores. Gilman had battled his brothers on the new buildings, but the first, which opened in 1962, was an immediate success, so Ames continued to build stores through the '60s.

It was, Gilman remembered, a slow but sure process. By 1970, store count stood at 23 with annual sales of about $50 million. In its first 13 years of existence, the discounter had added about 1.5 stores and a little under $4 million in sales per year.

Over the next 17 years, the chain would expand geometrically, opening some 300 more stores that would account for over $2 billion in sales.

And much of that growth came as a result of Gilman's timely acquisitions.

"The King's acquisition was brilliant," Harmon, now chairman and a member of the Ames board of directors since 1969, remembered, "and Herb did an excellent job in acquisitions as a whole. They brought Ames to a whole new level, to a level where we could borrow significant sums of money and become a national force in retailing."

To Gilman, the purchases of failing competitors was "evolutionary--we saw an opportunity and took it."

But 10 years of opportunities have added up to a company strong enough to swallow two companies as large as itself. In 1985, the then $800 million Ames bought out G.C. Murphy, a $900 million company. After a lengthy (and problematical) period of digestion, the $2.1 billion Ames then purchased Zayre, which in the previous year had reported sales of $2.6 billion.

While Ames has struggled with the latest bite, Gilman feels that the management team he hand-picked before his retirement a year and a half ago is equal to the task.

"If anyone can turn around those Zayre stores, these guys can," Gilman said in a recent interview. "They are a very strong management group, and I don't say that just because I picked them. They make a great team, and they're committed and professional merchants. I'm proud I set this team up--they're young, aggressive and very entrepreneurial."

"We hear a lot about everyday low price today," Gilman said. "But that has always been the concept. In the early days, we went after cheap rents and fixtures, self-service and central checkout." That combination allowed discounters to sell at about 35 percent below department stores every day, and the '60s saw an almost unbroken chain of success stories among discount stores.

Price and Advertising Wars

But in the '70s, the discount market had matured, Gilman remembers. That led to price wars, and more important, advertising wars.

"You can't both advertise and have an everyday lower price," Gilman believes today. "It's one or the other." Giants like Korvettes and Arlans crashed to the ground in the '70s, victims of a more crowded marketplace and skyrocketing advertising costs.