Service Merchandise Company, Inc. Business Information, Profile, and History

Company Perspectives:

"We are refocusing with the goal of strengthening our appeal to customers and adding shareholder value. Simply put, our goal is to renew Service Merchandise as a vital force in the retail industry."

History of Service Merchandise Company, Inc.

Service Merchandise Company, Inc. is one of the largest general merchandise chains in the United States. It operates over 400 stores in 37 states, selling jewelry, housewares, small appliances, giftware, silverware, cameras, luggage, radios, televisions and other home electronics, accessories for the patio, lawn, and garden, as well as sporting goods and toys. While most of the company's sales are generated through in-store purchases, Service Merchandise does publish several catalogs. In fact, the company focuses promotion efforts on the annual jewelry, gift, and home catalog, which is distributed to over 16 million households during the fall season. Over 600 pages, the catalog features mores than 8,500 items.

Company Origins

Founded in 1960, the company's beginnings can be traced to the variety store that Harry and Mary Zimmerman opened in 1934 in Pulaski, Tennessee. That enterprise grew into a chain of dime stores located in small Tennessee towns. Harry and Mary's son, Raymond Zimmerman, virtually grew up in the stores and began to work in one of them after attending the University of Miami and Memphis State University. After the family sold most of the stores to Kuhn's, a variety store chain, the Zimmermans became variety store jobbers, a business in which they were still involved when they opened their catalog business in 1960. Their warehouse in downtown Nashville, Tennessee, became their first store. For ten years, the Zimmermans operated this single outlet before entering two additional markets: Memphis and Chattanooga, Tennessee. During those years of limited growth, the company developed its business strategy and management team.

Incorporation and Expansion in the 1970s

The company incorporated in Tennessee in 1970. Prior to that year, most catalog showroom businesses were privately held and were often family-owned companies operating locally. In 1971 Service Merchandise began to keep its stock in a warehouse connected to each store and to sell merchandise from samples only. By January 1972 the company was operating six showrooms. Later that year, it acquired Warco Supply Company in Indianapolis, Indiana, which operated a showroom, and it assumed the lease of an 80,000-square-foot discount store that it converted into a showroom.

In all, Service Merchandise opened eight new showrooms in 1972 and an additional nine the following year, expanding into 12 new markets. In April 1974 the company acquired seven showrooms from Malone & Hyde Inc., gaining access to that company's markets in Jackson, Tennessee; Little Rock, Arkansas; and Springfield, Missouri. By mid-1974, Service Merchandise had 27 showrooms in 11 states in the South and Midwest and was the nation's third-largest catalog showroom company. With most of its marketing dollars sunk into its catalog, the company distributed 1.9 million copies of the "annual book" catalog in 1974.

The early 1970s saw a shakeout in the catalog industry, with many operators, especially those new to the industry, expanding too quickly and finding themselves unable to pay their debts. The recession of 1973 and 1974 aggravated the situation, but the major catalog operators continued to fare well. In 1973 Raymond Zimmerman became Service Merchandise's president, while his father Harry assumed the post of chairman. Most company showrooms converted to point-of-sale electronic cash registers in the summer of 1973. The information recorded on each showroom's mini-computer could be transmitted via telephone wires to headquarters. Greater inventory control was the most important benefit of the new system.

With each expansion, Service Merchandise sought to achieve maximum visibility by locating in high traffic locations, often near regional shopping centers. In 1974 the company gained entry as an anchor tenant in two shopping malls. Each showroom's layout was similar, reflecting Service Merchandise's experience with the most profitable floor plan.

In 1975 Raymond Zimmerman told Discount Merchandiser that in Service Merchandise showrooms, while jewelry accounted for only three percent of the total square footage, it represented 25 percent of the sales volume. By that year the company had reduced the size of its prototype store from 60,000 to 50,000 square feet, which allowed it to enter smaller markets. By mid-1975 Service Merchandise had 38 catalog showrooms, and by 1978 it had 51. The company acquired 22 Value House showrooms in 1978, giving it a foothold in several New England markets.

The tremendous increase in gold prices in 1978 and 1979 wreaked havoc on the catalog showroom business. Since catalogs were printed as much as a year in advance, merchants were left with the dilemma of whether to raise prices or honor an advertised price and lose money. In one instance in 1978, Service Merchandise had printed flyers for the important months of November and December and chose to honor the stated prices rather than raise them.

Service Merchandise Publishes Its Own Catalog

The catalog showroom industry began to mature in the late 1970s. The three largest operators, Best Products Company, Modern Merchandising Inc., and Service Merchandise, had always avoided any direct competition in a single market, but this began to change in 1979 in major markets such as Miami and San Francisco.

Part of what precipitated this change was Service Merchandise's 1980 withdrawal from Creative Merchandising and Publishing, a Modern Merchandising subsidiary that published the catalogs for the three largest chains and for several smaller houses. By this time the largest of the three chains, Service Merchandise had sought the flexibility of being able to tailor its catalog to its own special needs. The move also saved money. From 1979 to 1982, the number of catalogs that the company mailed to customers remained constant at 6.5 million, thanks to Service Merchandise's tracking of its customers by zip code and by telling those customers in the least productive zip codes that if they wished to receive the catalog, they would have to inform the company. By 1982 sales per catalog were $150, compared to $80 just a few years earlier.

Merchandising in the 1980s

Service Merchandise continued seeking new merchandising ideas. In 1980 and 1981 it was one of five retailers to experiment with allowing customers to order their wares via specially equipped color television sets. In 1981 the company developed a new computer program using information about demographics and an outlet's competitive characteristics to predict the market. Originally set up in 23 existing stores and in three new units, the program proved very accurate. By 1982 Service Merchandise had begun to experiment with "Silent Sam," an on-line cash register placed in the middle of the sales floor that allowed customers to check on product availability and to order their merchandise.

In the early 1980s the company made efforts at diversifying its operations, introducing a new retail establishment: The Toy Store. A total of six such stores were introduced, but when they proved unprofitable all were closed just a few years later.

Despite a recession, Service Merchandise managed to top the $1 billion mark in revenues in 1981. That year also marked the retirement of Harry Zimmerman as company chairman. He continued as honorary chairman and a company director, and son Raymond then began to serve as both chairman and president. By that time, Service Merchandise had 116 outlets.

Service Merchandise purchased the bankrupt Sam Solomon Company in 1982, adding the company's seven additional outlets in Charlotte, North Carolina, to its 118 units. The company also installed a computer system that allowed for checking current stock levels and making suggestions about alternatives for out-of-stock items.

Response to Changing Catalog Showroom Industry

As the catalog showroom industry matured, industry analysts criticized operators for getting away from the original concept that had made them so successful. Showrooms were often the size of more traditional mass marketers such as Kmart and J. C. Penney, and the leading catalog showroom operators had begun advertising on television. Industry analysts' prediction of a shakeout in the industry proved on target. Many of the smaller operators sold out or declared bankruptcy, and the larger showroom companies were forced to rethink their merchandising approach by making their stores more attractive, offering more upscale and trendy goods, and providing more customer service. The buying power of the large catalog showroom companies allowed them to operate on a lower margin than the smaller companies. Less than one-third of the catalog companies operating in 1971 remained in business just a dozen years later.

Service Merchandise's response to the changing market was aggressive. In 1981 it opened an upscale prototype unit in Novi, Michigan, and a jewelry store in Nashville, while also beginning to plan mini-showrooms of 30,000 square feet.

Attempting to diversify in 1983, Service Merchandise purchased Home-Owners Warehouse Inc., a company with a retail store in southern Florida that sold construction and home improvement products. Changing the company's name to Mr. How, the concept was used in establishing more such outlets as well. That same year, Service Merchandise also acquired a small chain called The Computer Shoppe.

Although he retained his position as chairman and chief executive officer, Raymond Zimmerman relinquished the company's presidency in late 1983 to James E. Poole, a career cement executive. Poole's tenure was short-lived, however, as he resigned suddenly just seven months later, with Zimmerman assuming the post again.

Service Merchandise began to move its corporate headquarters in 1983 from four main facilities in metropolitan Nashville to Brentwood, Tennessee, just outside of Nashville. However, it was not until 1990 that all corporate headquarters employees were under one roof in Brentwood.

Service Merchandise added 25 new units in 1984, with Chicago receiving its 17th outlet. At year's end, the company maintained 183 showrooms in 35 states. That year it remained the second-largest catalog showroom operator, behind Best Products Company, although it was far more profitable than the leader.

Two 1985 acquisitions added significant markets to the Service Merchandise fold, making it the industry leader in store units. The company acquired H. J. Wilson Company, which included apparel in its product mix in many of its 80 showrooms in 12 states, and Ellman's Inc., which offered jewelry and giftware in its seven units in two states. "We never wanted to be the largest, we just wanted to be the most profitable," Zimmerman told the Atlanta Journal/Constitution (August 18, 1985), "but of course, we don't mind having the most number of stores in operation, either."

By the mid-1980s catalog showroom operators were faced with increased price competition from department stores, mass merchants, and warehouse clubs. Service Merchandise experimented with new approaches and concepts to meet the competition. The company used in-store video promotions, a drive-through pick-up window, and a gift-wrapping department. "We'll try anything," Zimmerman told Business Week in 1985.

During this time, Service Merchandise had expanded The Computer Shoppe to ten units, had opened two jewelry stores under the Zimm's name, and had opened a single outlet called The Lingerie Store. The most expansion activity had to do with the Mr. How stores, with seven planned for 1985 and 18 for the following year.

In 1985 Service Merchandise installed a computerized inventory replenishment system that was designed to help reduce inventory costs, react immediately to marketplace demands, and avoid out-of-stock items. Company sales hit the $2 billion mark that year. In line with the firm's efforts to operate smarter was the 1986 opening of an automated, 752,000-square-foot warehouse in Montgomery, New York.

Mid-1980s Losses and Conflicts

The mid-1980s were difficult years for Service Merchandise. Both Harry and Mary Zimmerman died in 1986. The Mr. How stores proved to be a drain on the company, and after attempts to build the chain at a rapid pace failed, the line of stores was dismantled. Service Merchandise had discovered that the hardware business was tricky, with the warehouse format needing to turn over its inventory five or six times a year to maximize the profit margin. Such a turnover was approximately twice that of the average small hardware store. Moreover, the product mix that had worked in Florida was a failure in Chicago, one of the markets in which Service Merchandise had opened five Mr. How stores. Finally, the acquisition of H. J. Wilson and Ellman's had also been troublesome, with 60 percent of Wilson's inventory incompatible with that of Service Merchandise. The inventory had to be sold at a substantial loss.

These two problem areas seemed to divert management's attention from its main business. Sales per store had stopped growing and operating expenses began eating away at the company's narrow profit margin. Maximizing the number of in-stock items had always been one of Service Merchandise's foremost priorities, but the company found itself with a growing number of out-of-stock items, which sent customers shopping elsewhere.

Service Merchandise lost $47 million on sales of $2.5 billion in 1986, a rude dose of reality for a company accustomed to turning a respectable profit, no matter what the economic climate. That same year, Best Products Inc., the second-largest catalog showroom chain, lost $25 million. Industry analysts credited the discount store chains with offering customers wider selection of goods at the same low prices as the catalog showrooms and more amenities such as having to wait in line only to pay for goods, not to pick them up. The discounters also had more price flexibility, since they were not locked in on prices for an entire year, as are the catalog showrooms that publish annual catalogs.

Service Merchandise responded successfully by discontinuing some apparel lines, moving into selling more jewelry, and improving its inventory techniques. Efforts were also made to entice each customer to buy more, thus making each sales transaction more profitable.

However, many catalog showroom operators were unable to adjust to the changes in the market. McDade & Company filed for bankruptcy in late 1987, and Allied Wholesale Distributors and Wilkor Jewelry & Showroom closed in mid-1988.

In September 1988 several members of the company's senior management, headed by Raymond Zimmerman, who held the posts of chairman, president, and chief executive officer, announced they were considering taking the company private through a leveraged buyout. There was speculation that the move was announced simply to put the company into play, with the hope that other bidders would materialize. Four lawsuits, however, were brought by shareholders who felt Service Merchandise's management was failing to put shareholders' interests first, and this action stopped talk of a management buyout.

Also in September 1988 an unidentified party made an offer to buy Best Products Company. Securities analysts speculated that the offer, which Best rejected, might have been made by Service Merchandise, since there would have been only minimal duplication of the two stores' territories. This speculation was never confirmed.

Weathering the Late 1980s

Service Merchandise's 1988 sales surpassed the $3 billion mark. The company sold The Computer Shoppe chain in mid-1989. That same year, following two years of impressive growth and profits, it announced a $975 million recapitalization plan. Although the company denied it feared a takeover, such fears would not have been unwarranted, since three firms were said to have been interested. To avoid a hostile takeover, Best Products had gone private in 1988 after accepting a leveraged buyout led by New York-based investment firm Adler & Shaykin. The recapitalization plan provided for one-time cash dividend of $10 per share and a discontinuation of quarterly dividends.

Troubles ensued as in early 1990 Service Merchandise announced that two of its senior officers were targets of an Internal Revenue Service investigation. The two executives soon stepped aside. Less than a month later, a federal grand jury began to investigate the company for improper or illegal use of funds. Zimmerman appointed four of the company's five outside directors to conduct their own internal investigation. Unidentified sources told Business Week in 1990 that the investigation centered around whether improper payments had been made to judges and politicians.

The late 1980s and early 1990s were very difficult years for all retailers. In January 1991 Best Products sought protection from its creditors under Chapter 11 of the federal bankruptcy code. Service Merchandise seemed better equipped to weather the recession of the early 1990s. The company had consistently demonstrated an almost exuberant willingness to try any concept or technology that might further streamline its operation and maximize sales and customer satisfaction.

In 1990 Service Merchandise introduced a national gift registry, to which customers in all stores had access and which instantly updated all registries whenever purchases were made; by 1993, 90,000 engaged couples had used the service. Moreover, the company opened a store in the Mall of America, the world's largest shopping complex, in 1992. The company acquired two Dahlkemper's stores in Buffalo, New York during this time, and, having survived the worst of the economic recession, new Service Merchandise store openings proceed. In 1993, the company opened 27 new stores, bringing the company's store total to 391, with annual sales exceeding $3.8 billion.

New Management and Goals for a New Century

Gary M. Witkin, former vice-chairman and member of the board of directors at Saks Fifth Avenue, became president and chief operating officer of the company in 1994. Under his leadership, Service Merchandise focused on customer service and hired more sales staff at all stores. To provide better service and enhance efficiency, the company introduced an automated scheduling and productivity standards project. The Silent Sam computer service (a user-friendly computer allowing customers to inspect and order merchandise) was upgraded and renamed Service Express. In addition, the company focused on southern Florida and Texas markets, bringing the total number of stores to 406.

A new senior management team was organized in 1995. The store/field management group was reorganized as well, from 22 districts to 40, allowing more leadership and attention at the store level. Sales that year exceeded $4 billion.

In 1996 Raymond Zimmerman and Garry Witkin in the company's annual report noted that while the company had kept its $4 billion franchise and had turned a profit, the company's earnings and stock price were ultimately disappointing. In response, the company strove for improvements and set about upgrading merchandise quality with trendier and more branded products in stores and catalogs; implementing an efficient advertising strategy, including a television ad campaign financed at a savings; enhancing store interiors and merchandise arrangements, hoping to spur impulse purchasing; and gaining enhanced liquidity and long-term capital structure through the completion of a 15-year, $73.6 million mortgage financing.

In another move toward hands-on technology, Service Merchandise introduced a PC-based gift registry touch screen. The system allowed customers to register at a touch screen and, using radio frequency scanning guns, scan the UPC codes of their selected gifts. In late 1996, the store went on-line, offering a 7,000-item catalog at its web site.

In the spring of 1997 Gary Witkin became CEO, with Raymond Zimmerman remaining on as chairman. Change--at an accelerated pace--became a watchword. The year before the company had begun analyzing individual store performance. In early 1997 Service Merchandise announced plans to close about 60 underperforming stores as well as its Las Vegas distribution center. In addition, the company restructured management, getting rid of 1,200 to 1,500 positions at the assistant manager and "lead floor" levels. In the shopping environment Service Merchandise initiated an effort to physically enhance presentation. There was an effort to include thematic lifestyle displays. To reach even more customers, the company focused on expanded and targeted print advertising. The company also announced it would exit the personal computer business. The store anticipated implementing its new private label credit card program and testing a new co-branded credit card. Given its constant assessment of store performance, its openness to change, and its willingness to embrace new technology, Service Merchandise committed itself to succeed in the next century.