The Towers Story
Mass Merchandising Revolution & Evolution (1970)
by Robert Drew-Bear
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Formed in 1962, Allied Towers Merchants, Ltd., is now the biggest discount chain in Canada.
The company was initially organized by a group of merchants holding concessions in a mushrooming chain called Towers Marts International under the presidency of Samuel J. Rosenstein. Some Canadian capital was invested in the company but the chief guidance came from the principals who had started the chain. Every department was leased and in the early days there was little real control; available merchandise was bought in large quantities in the hope that it would sell. For some months the chain prospered, but in the latter part of 1962, trouble developed regarding real estate payments and merchandising policies. As a result the company went into receivership in March, 1963.
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A group of concessionaries, under the company name of Allied Towers Merchants Ltd., stepped in as a protective measure to take over on a contractual basis with the trustees for Towers Marts. The lessees operated jointly as a landlord taking over the collection of cash, advertising, and setting general company policy.
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President Myrle W. Book says. "We were just low, very low, and it was not until late in 1964 that we had the situation well in hand. Since then, our progress has been steady with substantial sales growth. The company produced a sizeable profit for the first time in 1965. We now have 13 units in fast-growing suburban areas and our current level of sales is far in excess of the national average. One of the first things we did was to get into excellent planning.
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"In our first year of operation we reduced our inventory by over $2 million since a lot of it was three years old. Many of our departments had been loaded with unacceptable lines which had been bought for promotion. We got rid of it at any price and dropped many low-end lines. For example, we were selling thousands of dozens of Japanese brassieres at 33 cents. We dumped them and put in 87-cent brassieres with excellent results.
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We applied this principle to hundreds of items and it has brought about better markon, better acceptance, and obviously a greater profit. At the same time we developed goal planning and merchandise management. For a long time we could not attract very many good people so it was almost a one-man band. I am sure that many have gone through the same experience in trying to find executive talent.
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"Although we have traded up, price will always be our predominant customer attraction. But it is price with style, quality, and downright good value. We started as a discounter but we now consider ourselves more of a small promotional department store type of operation. We use comparable pricing fairly extensively.
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In the main our prices range from middle-low to middle-high. Our highest priced women's coat used to be $49.88 and is now $79.88 but we did not reach this price in one jump and we cannot do it in all our stores. We fought our way cautiously. The first area in which we started trading up was in women's wear. We actually considered leasing this department as it was one of our greatest losers, however, as a result of careful merchandising, by 1965 our women's wear department became our greatest profit department.
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"In 1965, on a very low budget, we managed to redecorate and re-fixture our stores. We hired a company to set up a complete program of new signing. We also strengthened our merchandise mix by adding name brands. After a great deal of negotiation with suppliers we introduced several of the leading lines of cosmetics which we agreed not to discount. We have a large furniture and major appliance department including such brands as RCA and Frigidaire.
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"In Canada a whole new upper-middle class has risen in the past 15 years. It consists of educated people in executive, managerial, and professional occupations earning $8,000 to $9,000 a year and up. This segment today accounts for half of the consumer market in Canada.
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The upper economic bracket now represents about 20 per cent of the families in large urban areas contrasted with 5 per cent 15 to 20 years ago. Together, particularly in our Ontario-Quebec market, these two groups represent 70 per cent of the consumer demand.
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How wrong we could have been in our case to have gone to low-end type merchandise. In Canada 37 per cent of the labor force currently is aged 16 to 31 years. By 1970 this group will comprise about 56 per cent of the labor force. In 1951 this was 11 per cent. Today in Canada about 25 out of every 100 married women work outside their home. To satisfy the wants of this dynamic new consumer market presents a tremendous opportunity.
In April, 1961 Samuel J. Rosenstein, president of Towers Marts, lectured it the University of Massachusetts Conference on Discounting. At that time a fierce battle between discount stores for the best locations was in progress. In his talk Rosenstein said, "Now the question of competition is a very difficult problem to analyze, because, as consultant Anthony
"We in Towers take a very clear-cut position on this matter.
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For example, we're going into the Washington area with depth.
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Washington has a population of a little in excess of two million, and after very careful economic studies, the type of which I will exhibit here very shortly, we have decided to put six stores in the metropolitan Washington area.
We think we have located them strategically.
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Now is important for our competition to note that we are going into this area.
For this reason we take great pains in publicizing these things and I think that many of the people who know us now know that when we say we're going into a given area, we go in."
Downs (Real Estate Research Corp., Chicago) pointed out, it's very hard for anyone to know exactly who is going into a given area. We in Towers take a very clear-cut position on this matter. For example, we're going into the Washington area with depth. Washington has a population of a little in excess of two million, and after very careful economic studies, the type of which I will exhibit here very shortly, we have decided to put six stores in the metropolitan Washington area. We think we have located them strategically. Now is important for our competition to note that we are going into this area. For this reason we take great pains in publicizing these things and I think that many of the people who know us now know that when we say we're going into a given area, we go in. And when we specify a time that we're going to be there, we will be there. We will open with four stores in Washington in the latter part of May, and we will have two more this fall so that we will have six stores in the greater Washington area within a very, very limited period of time. This principle of saturation we feel is healthy for the industry because unless one of our competitors wants to really come in and have a knockdown, dragout battle, they will look for another city."
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In the New York Times of June 10, 1961 it was announced that Towers Marts, Inc., of New York and its wholly-owned subsidiary, Towers Marts of Canada, had made a $25 million transaction for eleven shopping centers, seven of which would be in Ontario, two in Montreal, and two in Washington, D.C. The company then operated nine centers in the United States and one in Toronto.
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In May, 1962 Towers Marts filed suit to end its contracts with the Darling Stores Corporation and Grayson-Robinson Stores, Inc., agent for Darling in operating the departments. The suit asked for $1 million damages for breach of contract and the right to terminate agreements with the defendants to operate women's and children's apparel and millinery departments in fifteen Towers stores. Towers charged that the two companies did not cooperate properly in the advertising program and did not maintain a complete line of seasonable and representative merchandise at competitive prices. This situation, according to Towers, jeopardized its customer image. A statement by counsel for Grayson-Robinson as reported in the New York Times of May 5, 1962 called the Towers Mart action "without foundation. It was brought primarily," counsel said, "because the terms of the existing leases are so beneficial to Grayson-Robinson Stores, Inc., that Towers now believes it can secure better terms from others, or by means of this litigation, from Grayson-Robinson. In fact, Towers is in default in the performance of its obligations as landlord in vital respects, and large counter claims are being asserted against Towers by Grayson-Robinson." The matter was settled in June, 1962 when Towers agreed to pay Grayson-Robinson $1,384,936 with the understanding that Grayson-Robinson would give up its right to operate leased departments in present or future Towers stores. Towers made a payment of $703,590 towards the agreed amount.
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In September, 1962 Grayson-Robinson Stores filed suit to collect $681,346 alleged owing to it by Towers Marts International, Inc. It was charged that most of the money had been withheld by Towers from the sales of merchandise in leased departments operated by Grayson-Robinson in Towers stores. The dispute was finally settled by a payment of $500,000 by Towers Marts to Grayson-Robinson.
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In November, 1962 Towers Marts International sold its Canadian subsidiary, operating thirteen stores, to a group of investors. The company also announced that it had withdrawn a proposed public stock issue of 550,000 shares owing to market conditions. The Wall Street Journal of February 12, 1963 carried an article stating that Towers Marts was in temporary financial difficulty owing to expenditures of more than $500,000 in connection with lawsuits against Grayson-Robinson Stores.
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In March, 1963 the Towers Marts and Properties, Ltd., the former Canadian subsidiary, was placed in interim receivership by the Ontario Supreme Court. This company still owed Towers Marts International an unsecured debt of $450,000. It was given six months by its creditors to work out a reorganization.
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On April 5, 1963 Towers Marts International filed under Chapter XI of the Federal Bankruptcy Act listing liabilities of $11,073,146 and assets of $9,796,000. Liabilities included $2,959,000 in accounts payable to concessionaires in its stores, all eighteen of which were closed. The four former Towers Marts in the Washington, D.C. area were acquired by the Zayre Corporation from the individual owners of the properties.
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As it turned out, Towers management was building a house of cards since the company's stability and the expansion of its physical premises depended on a sales-lease-back principle. All Towers stores had commitments in terms of sales-lease-back but nonetheless cash from the business was used initially to construct the stores. When the stock market crashed and the Tower's stock issue, which would have raised $5 million, also collapsed, the company never went public. The individuals who had made the commitments had to renege because their individual house of cards, so to speak, came tumbling down, or they wanted to contract so the commitment was withdrawn. Towers Mart money was tied up and sunk into the real estate and management could not get it out. In order to keep paying the contractors and to keep the business alive, money due to lessees was borrowed. Marrud, Inc., the cosmetics lessee it is said, was "hung up" for approximately a half million dollars; Rockower, another lessee, lost three quarters of a million.
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At any given moment, even in those days, if the principal does not send out a weekly check to his lessee, he is in trouble. Two weeks can go by and "you're sitting on a big chunk of money." Customary procedure with lessees is to settle on Friday for the week ending the previous Saturday. Some have a schedule of payment on the Wednesday of the second following week. Suppose this settlement is not made on the Wednesday but is delayed to the following Monday. You are then talking three weeks of receipts which has already been taken in without the lessee receiving a cent. This can happen very quickly as the days and weeks roll by extremely fast. The check may be a few days late. The lessee controller forgets to tell his boss. If the boss is not informed, the principal may be four, five, or even six weeks into a firm's receipts before management is aware of it. This is exactly what happened with Towers. There was no way out since there was no permanent money coming in to replace the temporary money that was supporting these stores.
The Towers organization was not really a merchandising business since hey merchandised no part of the store — it was merely a real estate venture.
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It is conceivable that the Towers management might have pulled through if they had been able to raise the needed money or if the 1962 crash had not taken place making it possible to honor the long-term commitments. On the other hand, not being basically merchandisers, they might have eventually run into store operational problems. It is a generally-accepted theory that in building the discount industry the major lessees play a very important role in supplying operating capital and know-how but a limited one in terms of time.
Eventually — in a rapidly expanding and successful chain — there comes with few exceptions a time when there is no place for them since they function as an "extra" middleman between the manufacturer and the ultimate consumer. If they are good merchandisers and making good money, then why, reasons the principal, should that money not accrue to the store operator? If they are not good and don't see eye to eye with the principals as to how the store should be run, then they ought not to be there. Negating this point of view is the fact that some lessees have built up such extraordinary expertise in their specialties that they can, in very many instances, provide more profit for their principals for a given department on a lessee rather than on a self-operated basis.
Otherwise why, one might ask, did the Kresge K Mart management lease out their men's and boys' wear departments to Unishops on a long-term basis?