What went wrong at Ames? - Ames Department Stores Inc. bankruptcy; discount store chain

Discount Store News, May 7, 1990 by Pete Hisey

What Went Wrong at Ames

ROCKY HILL, Conn. -- It will be a long, bitter road back for Ames Department Stores. Its Chapter 11 filing on April 25th is the largest bankruptcy in the history of discounting, comparable only to the dissolution of W.T. Grant and, if you stretch it, to Arlen's and King's in the 1970s.

But what brought it on, where will it end, and what will the consequences be for the discount industry? Specifically, can Ames survive and who will benefit most from its troubles?

From this vantage point, the bankruptcy was brought on not only by the obvious culprit, the October 1988 acquisition of the tottering Zayre chain, but by Ames' subsequent inability to decide what it was going to do with the 388 stores it purchased.

At first, Ames planned to run most of them as a Zayre business unit after pruning away some 79 unsalvageable sites. Then, Ames decided to keep the Zayre name only in urban markets, but to spruce up these inner-city stores while converting the rest to the latest Ames prototype. Then, without even waiting for customers to adjust, the chain jettisoned the Zayre name altogether, and shortly thereafter folded its "urban" buying operations into Ames corporate merchandising staff.

In a series of perhaps ill-timed moves, the chain effectively alienated whatever customers had hung on with Zayre by eliminating the loss leaders that they loved so much, then the name itself, and finally most of the urban consumer specific goods with which the revamped Zayre buying staff had stocked the shelves. And, Ames offered very little to attract new shoppers.

(Vice chairman Peter Hollis resigned on April 30 and was replaced by former Target, Ward, and McCrory executive Stephen L. Pistner. Pistner is known as an aggressive turn-around artist, and is generally credited with re-establishing Target in the 1970s. He joined Montgomery Ward in 1981 and McCrory in 1985.)

Historically, Ames has been primarily a rural chain, often called (until recently) the Northeastern Wal-Mart. Under the Gilman brothers, who founded the chain in 1958, Ames invaded isolated communities in New England and New York state, operating for over 20 years without serious competition (and often buying up competitors).

Its customers' tastes were clearly defined, and the sudden reorientation towad urban markets may have caught merchandisers unaware.

A cadre of Zayre buyers and merchandisers remained after the acquisition, and following a period of adjustment, that group was put in charge of the remaining 61 big-city Zayre stores in Chicago, Miami, Washington, D.C., and Baltimore. A new prototype aimed at attracting fashion-conscious, dollar wise shoppers (particularly blacks and Hispanics), debuted in Silver Springs, Md., in November 1989. However, less than two weeks later, Ames pulled the plug on the separate division, laying off the buying staff and merging Zayre into Ames.

Less than a month later, Ames dumped the Zayre name entirely. And a month after that, rumors floated that Ames was not paying bills and had canceled several major orders from key vendors.

Ames spokesman and chief financial officer Duane Wolter defended the abandonment of the Zayre name, saying that customers still thought the remodeled stores were "too much Zayre and not enough Ames." However, most urban consumers had never heard of Ames, and very possibly felt that the small town look of the stores was not suited to their needs. Ames, even before the filing, had been looking for ways to get rid of at least some of those urban stores.

According to industry observers, Ames will probably emerge from Chapter 11, "but it will be a very different Ames," said Jack Siebald, analyst with Salomon Brothers. He estimated that the company will have to close and/or sell at least 100 stores--and maybe many more--to bring the chain back under control.

The short-term prospects are bleak, he added. "Ames was overbudgeted in the fourth quarter [to make up for disappointing results in earlier quarters] and underperformed," he said. This leaves Ames saddled with a huge inventory of old merchandise which can only be sold at significant markdowns. Ames will not show a profit in the near term, he said.

Vendor relations had deteriorated sharply in the past month. Until February, Ames had kept suppliers abreast of developments, promising to get current with past-due bills in the near future. Then, early in March, some vendors claim, the company stopped returning telephone calls.

Unlike previous Chapter 11 filings in the discount industry, no one is likely to benefit greatly in the short run from the Ames bankruptcy. Ames itself, according to former chairman Herb Gilman, had grown as a direct result of previous bankruptcies (Grant, Arlen's and King's), but no head-to-head competitors are likely to find much to their liking if Ames puts a 100 or so stores on the market.

The Zayre stores will be perceived as poison, with disgruntled customers looking at a third name in two years as a particularly unpromising omen. Any Ames stores put on the block will probably be the chain's weakest locations. Perhaps Wal-Mart, sensing a bargain, might find these locations desirable, and K mart will probably have a certain amount of interest.