Service Merchandise: The Death of the Showroom

“Retail” is an incredibly expansive word to describe an ever-expanding industry, however, there was a time when a new concept was popping up every other year. One of these relatively new concepts was a “Catalog Showroom,” and one of the most famous and successful of these was Service Merchandise.

Shainberg and Zimmerman Co.

Harry Zimmerman, a Tennessee native, had a history working for the Ben Franklin five-and-dime variety stores. He and his wife Mary would found ‘Zimmerman’s,’ their own variety store, in Pulaski in 1934. This small store would grow and see the birth of Shainberg and Zimmerman Co., a partnership between Harry and his cousins, which would acquire other five-and-dimes, operating ten throughout rural Tennessee at its height.

Harry and Mary Zimmerman

During World War II, Mary would run the business while Harry went off to the South Pacific with the Navy. When he returned, they would dissolve the partnership as Harry shifted the focus to wholesale instead and founded the Service Wholesale Co., which would sell goods directly to five-and-dimers. Now, much of the world was experiencing a post-war boom, seeing the countries throughout North America and Europe undergo massive economic expansion. Shortly after attending the University of Miami and Memphis State, their son Raymond would join the new company. By the late ’50s, the wholesale ‘jobber’ industry had proven to be a good direction for the Zimmerman’s, but they would truly hit the road for success when Harry heard about the concept of a ‘catalog showroom.’ This arrangement would have a catalog released annually, which listed items stored in a large warehouse building with a front showroom displaying unboxed models in self-service aisles. In this system, customers file an order on-site and the item is delivered on-demand from the back of the unit; a system where there was no need for Salesclerks. [1]

Service Merchandise, Inc.

In 1960, The Zimmerman’s would leave wholesale and open their own showroom. Service Merchandise was opened in downtown Nashville at 305 Broadway St – dealing in several goods from jewelry, watches, clocks, phonographs, and a variety of electric appliances, as well as just about everything else. They would operate out of this unit for ten years while expanding into Tennessee’s other major markets; Chattanooga and Harry’s hometown of Memphis. This period, though limited in external growth (seeing them reach about three units), was strongly characterized by internal growth and organization. During this, they developed their strategy and their main management team as they watched the young market slowly evolve. They were incorporated at a time when most of their competition was private, family-owned local operations. By 1971, they had five outlets (with three in Nashville) and sales of $16.7 million. [2]

The Prosperous 70s and The Growth of a Giant

The 70s would be a time of great growth for the company, the same for many of their new competitors. They would acquire Warco Supply Company, an Indiana company that operated a showroom, thus seeing them enter a market outside of Tennessee. With the 1973-75 Recession on the horizon and so many competitors over-expanding, the catalog showroom industry was now experiencing a shakedown, thinning out and starting to mature with most of its big players doing well, and Service Merchandise was to be at the forefront. Raymond would succeed his father as president and in 1974, in the eye of the ongoing recession, they would acquire seven showrooms in Jackson, Tennessee, as well as Little Rock, Arkansas, and Springfield, Missouri, further expanding into the Midwestern market. They had reached an overall 27 stores in 11 states as the nation’s third-largest company in the industry, behind Virginia-based Best Products and Minnesota’s Modern Merchandising. Although, these “Big Three” didn’t compete in the same regions per the agreement included in a contract where ‘Creative Merchandising and Publishing’ would print their catalogs, and would do so for Modern Merchandising and Best, their parent company, in a mutual cost-saving effort. [1]

This two-year recession was the final blow to the waning post-war boom that catapulted so many companies into prosperity. Now it was dog eat dog, and only the biggest could survive in this new world of commerce. This period would have many companies using new microcomputer technologies to their advantage, with new POS (point-of-sale) checkouts and computers on-site able to track inventory – with national mass marketers and discounters like Wal-Mart, Target, and Kmart exploding to exponential size. Now greater control over company-wide inventory was possible, as well as demographic data – observing what was most popular in which areas, getting a jump on ahead in mom-and-pop led markets, and Service would slim down their prototype store by about 10,000 sq. ft. to be able to better enter these smaller markets. They would further cross-analyze this data with competitive trends to even predict the market. By 1978, they had 51 showrooms and a foothold in New England with the acquisition of 22 ‘Value House’ showrooms.

They would find that jewelry, while only covering about 3% of square footage, accounted for 25% of sales volume – and gold prices would see a major spike, giving merchants the tough decision of either raising prices or sticking to the printed number, and Service honored the latter. They would ultimately become the nation’s largest watch retailer. The next year, they would withdraw from the printing contract with Best and Modern, voiding the isolated market agreement, allowing the catalog Big Three to now expand into mutual markets, with Miami and San Francisco becoming battlegrounds for these increasingly monumental organizations. Not only were the three now able to compete but Service, now printing their own catalogs, could tailor it how they saw fit and could lower output to zip codes with less active customers, saving more money than with the autonomous nature of the partnership printing. [2]

Imposing Growth and New Challengers

In 1981, their sales would pass the $1 billion mark as they continued to grow ambitiously, reaching 116 units. Harry would retire as chairman and take an honorary post as well as company director. Raymond would take his place and led them to diversify operations, with many showrooms expanding services offered to customers, and oversaw a short-lived launch of a toy chain as well as another industry shakeout, leaving many smaller operators to either sell out or go bankrupt.

“Less than one-third of the catalog companies operating in 1971 remained in business just a dozen years later.” – Funding Universe

With showroom chains growing to the size of the average department store, this development left Service and their larger competitors to rethink their business models, getting back to the original concepts that made them so successful to begin with. As well as adjusting to new retail trends. Service realized that to stay competitive they needed to shift the company focus to more upscale merchandise and, with the self-service model aging, getting actual clerks on the floor would be a good step.

In September 1982, Best Products, now the largest catalog retailer in the country, would acquire Modern Merchandising, No. 2, for over $100 million in stock. [3] Not only did this merger secure Best’s lead in the market but made Service Merchandise the new number two.

Raymond would briefly step down as president as the company would begin to move their headquarters about 10 miles south, from Nashville to Brentwood. They would buy-up a diverse crew of companies from “Home-Owners Warehouse,” a Florida-based home improvement chain, to a computer retailer, and opened ‘Zimm’s Jewelers,’ a wholly-owned jewelry subsidiary, also opening a lingerie outlet – using these market entrances to further fuel expansion. When Raymond returned in ’85, the company would celebrate its 50th Anniversary and he would spearhead the buyout of the H.J. Wilson Co., obtaining their 80 showrooms for $200 million, granting them access to an imposing presence in the Sun Belt states. Their sales would hit $2 billion that year. So far, the 80s were shaping up to be the company’s best period, however, the second half of the decade would be riddled with major losses.

Turbulence and Internal Distress

This loss started with the deaths of Harry and Mary Zimmerman, both dying in 1986. The next would be from the new Wilson’s stores, which had inventory issues, with about 60% being incompatible with Service’s established product lines. All of which would be sold off at a fraction of what they paid for it. They would dismantle Home-Owners Warehouse (renamed ‘Mr. How’) with the warehouse model being too turnover heavy to come ahead in profits, and expansion efforts fruitless

The rise of the membership warehouse industry had gained attention, with chains like Wal-Mart’s ‘Sam’s Club’ and Target co-founder John Geisse’s ‘Wholesale Club.’ Originally aimed at business owners who wanted to save money on bulk products like food and appliances, the general public began using these savings for themselves and proved the showroom industry would get a run for its money, starting a mad-dash for supremacy. This store model had everything the catalog model did, save for a periodical, with plenty of big-ticket overstock as well as the self-service mass-market shoppers had become accustomed to. Service was more than willing to try just about anything to stand up to this new threat, leaning on service expansion and diversification yet again, slipping up on stocking several high-demand products, and losing a lot of traffic to competitors. Service reported that on sales of $2.7 billion, they’d lost $47 million, with Best trailing behind at $25 million in losses.

The mass marketers and the discount industry were taking the business, with being afforded more flexibility over prices rather than sticking to a year-long tag set by an annual catalog; as well as quick service and item pickup – and companies like Circuit City taking the superstore model and posing a serious threat to the electronics side of things. Despite this, their customers still believed they were getting good value for their money. Expansion was rampant as well, with many showroom operators filing for bankruptcy, further chipping away at the industry and leaving Service and Best as mortal enemies. They would launch the “Silent Sam” service, which allowed customers access to an on-line terminal to check on the status of their orders and the availability of products. Talks of privatizing and a leveraged buyout would start but was speculated to be a stunt to coax more investors, this would lead to four different lawsuits against Service Merchandise, saying they were failing to “put shareholders’ interests first,” and this stopped talks of a supposed buyout. [2] However, Best would go private in 1988 after accepting a leveraged buyout from a New York firm, avoiding a hostile corporate takeover. Zimmerman, fearing much of the same, would have Service take on about $1 billion in debt to ward off any possible raiders. Service would discontinue apparel lines and focus more on jewelry sales. They would surpass $3.3 billion in sales that same year, although, the dawn of the next decade didn’t quell their prior issues. [5]

IRS Troubles and the 1990 Recession

Service announced that their vice-president Howard Levy, was under investigation by the IRS for alleged violations including improper distribution of money and gifts to community leaders located in their markets, via a secret fund, and possible tax fraud. Zimmerman announced he would start an internal investigation and the two executives implicated would later step down. The investigation was taken on by a federal grand jury as rumors circulated about briberies to judges and politicians. [2] It was that July that the United States would enter the 1990 Recession, which would last through to the next year. This was an incredibly rough period for the retail industry, altogether, with many areas experiencing ongoing slumps, pushing most into bankruptcy and complete dissolution. Mid-recession, Best would file for Chapter 11 bankruptcy protection, keeping them safe from creditors as they reorganized operations. Service would stay moderately static for the most part, continuing to take any measures to streamline the business.

The ten-year period from the early-80s to 90s was like having a door that was slowly shrinking. Most businesses that were in operation by the beginning of this era were too beefy and outdated to squeeze through without staying competitive to slim down and counteract moves made by the slimmer discounters – even if it meant totally altering their business model.

Service would prevail through this recession, however, and would reap the benefits of a leaner market. They started a gift registry service, which would allow customers to track their purchases via their own gift registry at any location. By 1993, the registry service was used by 90,000 customers nationwide, and annual sales would reach $3.8 billion. That year, they would open 27 new stores, reaching 391, one of which was in the new Mall of America, opened in 1992, which would be the largest shopping mall in the world. [2] In ’95, Gary Witkin, the former vice-chairman of Saks Fifth Avenue, would become president and COO of Service Merchandise. Formerly with Dayton-Hudson, he headed up Target for a short period and was with Marshall Fields before that, where he oversaw the most successful period in their history. Witkin would turn company focus to customer service and hired more staff at stores, something they needed desperately. The company would focus on dominance in the Sunbelt, opening more locations in Texas and Florida, bringing them to 406 units.

Service organized a new management team and a slimmer operating model, being able to better focus on stores at the micro-level. In September of ’96, Best would file for Chapter 11 protection a second and final time. They would be liquidated and were delisted from the NASDAQ. Service’s annual report for 1996 showed that despite the franchise now being worth $4 billion, the company’s earnings and stock didn’t match up, with sales steadily dropping. They’d roll out a more efficient television ad campaign, as Zimmerman and Witkin would strive to keep their inventory trendy and brand heavy, as well as remodeling their store’s interiors. They would introduce self-service touch-screen terminals for customers, expanding and updating Silent Sam into “Service Express,” and by late ’96, Service Merchandise went online, with a digital catalog touting a 7,000-item inventory.

Internet terminals in a Service Merchandise store

Witkin would become CEO in Spring 1997, as the company would close underperforming locations and distribution centers throughout the country, enhance in-store displays and customer engagement, and commit themselves to uncompromising success for the close of the 20th Century and into the new millennium. All Best Products locations would be closed by May ’97 and the company would be declared insolvent, meaning they were unable to pay the debts owed in their ordinary course of business and would be liquidated for all they were worth. They would be completely defunct by December of 1998.

Bankruptcy in The New Millennium

Following the franchise purge of the late ’90s, the surviving locations were downsized considerably, with corporate locations being divided into separate parcels, leasing them to other national retailers, which was a decently successful initiative. During this company format change, a group of five vendors filed a petition for court supervision over reorganization under Chapter 11, saying that Service owed them more than $8 million. Service would voluntarily apply under the code to stabilize the company and mend its reputation with its vendors and creditors. The company was shaken when Gary Witkin resigned as CEO shortly after Christmas 1998. With 347 stores left after their mass closings, they announced 134 further closures. [6][9] They discontinued less profitable lines in electronics, toys, and sporting goods and turned the focus on jewelry and home products, although they had no real dominancy in those other categories. Jewelry would take the main stage, covering about a quarter of retail space in each store, with much of the rest of the store occupied by a smattering of the aforementioned lines. [10]

Service Merchandise in Cool Springs Galleria in Brentwood (AP Photo/Michael Clancy)

In November 2000, Zimmerman would resign as chairman as the company would attempt to pull itself out of bankruptcy in mid-2001, cutting about 1,700 full-time workers, with their full-time workforce already down from 25,000, the previous year, to about 7,000. [8] That year would be host to the September 11th Attacks, one of the worst acts of terrorism in American history, resulting in a lengthy economic shutdown. This was a real blow to Service when they were already down, throwing a wrench into the country’s GDP and took out something like 600,000 jobs. [7] Kmart would file for bankruptcy in January 2002, while Service continued to try and get out of their own bankruptcy. The company had only 200 stores left, and their stock was valued at about one cent/per share. With no profitability insight and an accrued debt of $500 million to its creditors, Service Merchandise announced that same month they would cease operations after nearly three years in bankruptcy reorganization and 42 years in the catalog showroom industry, which would die soon after. [10]

Final Words

Service was dealt a bad hand later in life, but their main problem was the dominance of mass marketers and discounters. The only way they could have truly competed with those companies would have been to totally alter their business, perhaps even past the point of recognition – shifting away from the aging catalog model, which was already becoming more and more unpopular amongst shoppers. This could have entailed changing their annual catalog over to a hybrid form with focus on in-store prices and sales, eventually maybe cutting the catalog altogether, focusing on how other stores were using the showroom/warehouse model. Even Sears ended their famous catalog by 1999. Although, it wouldn’t have saved the company from the downward spiral they were in since the recession of the early-90s. Given the financial issues and ongoing bankruptcy at that point, it was already too late, and they didn’t have any cushion to fall back on to support those kinds of alterations. Most of their integral company changes came about a decade too late.

Citations

[1] Binnicker, M. (2018, March 01). Harry (1911-1986) and Mary Krivcher (1911-1986) Zimmerman. Retrieved October 03, 2020, from https://tennesseeencyclopedia.net/entries/harry-1911-1986-and-mary-krivcher-1911-1986-zimmerman/

[2] Service Merchandise Company, Inc. (n.d.). Retrieved October 03, 2020, from http://www.fundinguniverse.com/company-histories/service-merchandise-company-inc-history/

[3] Feyder, S. (1982, August 11). President of Modern Merchandising Quits. Star Tribune, p. 35.

[4] Retrieved October 03, 2020, from https://lab7.fr/js/journal/service-merchandise-catalog-1980-10cd51

[5] Cason, A. (1989, June 25). Service Merchandise chief driven by takeover fears: ‘Forbes’. The Tennessean, p. 43.

[6] Retrieved October 23, 2020, from https://enacademic.com/dic.nsf/enwiki/1305031

[7] Roberts, B.W. (2009, August). The Macroeconomic Impacts of the 9/11 Attack: Evidence from Real-Time Forecasting

[8] (2001, January 11). Service Merchandise to cut work force. Tallahassee Democrat, p. 31.

[9] Aldrich, M.W. (2001, January 11). Service Merchandise to cut work force. Tallahassee Democrat, p. 31.

[10] Nolan, M. (2002, Jan 31). Goodbye sale packs house at Service Merchandise. Southtown Star, p. 27.

[11] Papadakis, M. (2000, March 31) Complex Picture of Computer Use in the Home Emerges. Retrieved from https://www.nsf.gov/statistics/issuebrf/sib00314.html

Alex Nuelle, 2020

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APA: Nuelle, A. (2020, November 29). Service Merchandise: The Death of the Showroom. Post-Mortar. https://postmortar.org/2020/11/29/service-merchandise/

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