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Marketing Strategy of Dart Group Corporation -
December 16th, 2010
Sales: $655.3 million (1995)
Stock Exchanges: NASDAQ
SICs: 5531 Automobile & Home Supply Stores; 5942 Book Stores; 5411 Grocery Stores; 6512 Nonresidential Building Operators
Dart Group Corporation, a pioneer in discount marketing and in the concept of "superstores," is a holding company for three chains of discount retail stores, a real estate company, and a financial business. At the beginning of 1996, Trak Auto, its discount auto parts chain, operated 276 stores in the metropolitan areas of Washington, D.C., Richmond, Virginia, Chicago, Pittsburgh, and Los Angeles. Crown Books, its discount book store chain, had 172 stores in California, Houston, Chicago, Seattle, and Washington, D.C. Total Beverage operated four discount beverage superstores in suburban Washington, D.C.
Dart Group also has three wholly owned subsidiaries. Cabot-Morgan owns shopping centers and other real estate. Dart Group Financial provides financing for inventory purchases by commercial businesses. Dart/SFW Corporation holds the company's 50 percent interest in Shoppers Food Warehouse, a 34-store discount grocery chain in the Washington, D.C., area. The Haft family of Washington, D.C., owns 100 percent of the company's voting stock.
Early History: Discount Drug Stores
Dart Group was founded by Herbert Haft, who, with his wife, Gloria, opened his first drug store in the early 1950s, in the Cleveland Park area of Washington, D.C. The Hafts' store was a typical corner drug store of its time, offering prescriptions and drug-related merchandise at retail prices. In 1954, Herbert and Gloria opened the first Dart Drug store, in the Adams Morgan section of the city. With Dart Drug, Herbert Haft started a practice that eventually had a tremendous impact on merchandising--selling almost every product in his store below suggested retail prices.
Discount pricing was unheard of in Washington at that time and was illegal for items covered by "fair trade" laws, which required retailers to use the manufacturers' suggested prices. The low prices made Dart Drug popular with customers, but Haft faced over a hundred lawsuits from major pharmaceutical and supply companies trying to stop the practice.
Haft lost several rounds in the costly legal battle but took his case all the way to the Supreme Court, where the Justice Department sided with him. In 1960, the Court ruled against fixing wholesale prices, a decision critical to the growth of the discounting business.
The company was incorporated that year and grew as the Washington suburbs mushroomed during the decade. As a large discounter, the Dart Drug chain forced other drugstores in the area to lower prices in order to compete.
The 1970s: Super Drugstores, Books, and Auto Parts
In the 1970s, Dart Drug took another marked departure from traditional drugstore operations, instituting "super" drugstores. The company began building outlets of up to 20,000 square feet, four times the size of corner drug stores. Haft filled the huge space with anything he could make a deal on. Soon his Super Darts were selling hardware, lumber, lawn chairs, coolers, and beer in addition to the usual health and beauty aids and drugs. Prescriptions, which accounted for 30 percent of sales in conventional drugstores, were only 15 percent of sales at Super Dart.
In 1977, elder son Robert joined his father's company and started Crown Books Corporation. The idea behind Crown Books was the subject of Robert's Harvard Business School thesis: books could be sold in discount format.
With the slogan, "You'll never have to pay full-price again," Robert discounted hardcover best-sellers 35 percent and paperback best-sellers 25 percent. The stores also offered remaindered books, paperbacks, magazines, and tapes at ten to 40 percent below publishers' suggested retail prices. Robert's approach initially alienated many publishers and competitors but proved to be only the first of several chains of discount booksellers. Robert, chairman and president of Crown Books Corporation, became president of Dart Group. Herbert remained as CEO of Dart Group, which owned 51 percent of the new company.
Robert followed his father's marketing strategies. Crown Books stores were clustered in certain metropolitan areas, which allowed the company to concentrate advertising and distribution costs. They were usually in strip shopping centers or downtown storefronts, saving rental costs over the mall locations favored by competitors. The layouts were identical--science fiction, travel, and cook books, for instance, were found in the same locations at each store. Store managers made local marketing decisions, concentrating on stocking books that moved. According to a 1987 Fortune article, Crown Books returned only 10 percent of its stock to publishers. Its competitors normally returned 30 to 60 percent.
In 1979, Herbert and Robert started Trak Auto Corporation, selling auto parts and accessories such as mufflers, batteries, pressure gauges, and seat cushions for 35 to 51 percent below suggested retail prices. The idea for Trak grew out of Robert's buying trips for Dart Drugs. "We would go to the Orient and buy tremendous amounts of automotive supplies for Dart Drug," Robert Haft told Fortune. Interested in the auto parts market because of the large volume, the Hafts discovered that mom-and-pop operations sold 80 percent of those types of products. National retailers such as Sears and Pep Boys--Manny, Moe & Jack, controlled most of the rest of the market, and the Hafts saw the opportunity for a national chain of discount stores for the car fanatic. Robert became president of Trak, and Herbert was chairman and CEO. Dart Group owned 68 percent of Trak.
The development of Trak followed the successful Haft formula. Stores were concentrated in the suburbs around major cities and located in strip shopping malls. These shopping centers often housed Crown Books and/or Dart Drug stores as well. Many of these malls in the Washington, D.C., area were owned by the Haft family's Combined Properties, Inc.
The 1980s: Dart Drug Sale, Takeover Bids
In 1981, the Hafts began cutting costs at Dart Drug. One of their tactics was to delay paying bills so long that suppliers would offer a discount just to get paid. They also reduced the types of merchandise offered at the stores by 33 percent, downsized some stores, cut deliveries from the warehouse to once a week, and stopped giving cash refunds.
In 1984, after reducing costs by about $12 million a year, Dart Group sold the Dart Drug chain for $160 million to the stores' operating managers. That year, Dart Drugs, with 70 stores and assets of about $100 million, had sales of $283 million, and an after-tax return of 5.4 percent--twice the industry average. However, those profits had come about because of cost-cutting. The stores were in such bad shape, the new owners took out advertisements in the Washington Post announcing that Dart Drugs is "no longer owned by the Haft family." Dart Group later paid $2.7 million to settle a Labor Department case alleging that the Hafts had failed to monitor the chain's pension fund, used as collateral in the sale.
The timing of the sale appeared good for Dart Group, as many major drugstore chains were soon reporting lower earnings. Major supermarkets had begun operating in-house pharmacies and they and mass retailers were stocking drugstore items. The Dart Drug chain, burdened by debt after the buy out, was later sold. It operated briefly as Fantle's Drug Stores, and went out of business in 1990.
With the profits from the sale of Dart Drug, plus $250 million raised later by selling bonds, the Hafts and Dart Group had the money to mount numerous takeover bids. In 1985 alone, they made bids for three companies. In its attempt to take over May Department Stores, Dart Group earned $1.4 million from selling back the more than $15 million worth of stock it had purchased. In its bid for Jack Eckerd Corp. of Florida, the second largest drugstore chain in the country, Dart Group earned $9 million by reselling a five percent stake it had purchased. Dart Group also bid $5.9 billion for Beatrice Cos. In 1986, the Hafts went after Stop & Shop and Safeway. In the Safeway attempt, Dart Group made a $97 million profit on its shares. The following year the company made a hostile takeover bid for Supermarkets General and gained $40 million when it sold its stock in the chain. To handle its investments, the company set up a new subsidiary, Dart Group Financial.
The takeover bids made the Hafts national business celebrities. While many retail specialists and Wall Street executives saw them as seeking quick windfall profits, they and their supporters pointed to their success with Dart Drug, Crown Books, and Trak Auto. No matter what the Hafts' objective was, the financial benefits of this strategy to Dart Group were obvious. The price of its stock went from $10.75 a share in 1982 to $152 in 1987.
The impact on the target companies was less positive. Safeway, with a $4.2 billion debt, had to sell off overseas divisions and close or sell 251 stores in the United States. After a $1.3 billion leveraged buy out, Stop & Shop had to sell 70 stores and cut 450 jobs, and in 1996 was sold to a Dutch company.
In 1983, Crown Books went public. In its six years of existence, it had grown into a chain with a market value of over $210 million. During the decade, however, the discount bookselling market was becoming more crowded. In 1985, Crown Books had an earnings high of 5.7 percent after taxes. The following year, Crown earned about $5.5 million on sales of $154, or about 3.6 percent after taxes, and was ranked fourth behind Waldenbooks Co., B. Dalton Bookseller, and Barnes & Noble. Trak Auto was having an even bumpier time. In 1986, it earned just $1.3 million on sales of $184 million.
The Early 1990s: Beverages, Food, anda Family Feud
In March 1990, the company reached an agreement with the Securities and Exchange Commission (SEC), which had been investigating Dart Group since at least 1988, charging the company with operating more like an investment company than a corporation. Dart Group consented to the charges but did not admit or deny guilt. Under the settlement, the company agreed to open its books to more stringent SEC review for three years and not to violate investment company rules.
Dart Group continued to grow, expanding into the discount grocery business with Shoppers Food Warehouse Corporation, of which it owned 51 percent of the stock. The company also began applying the "superstore" concept to Crown Books and Trak Auto. By the end of 1992, Crown Books operated 250 stores. Generally, the stores were between 2,000 to 3,000 square feet, but 19 were in the new Super Crown format, ranging in size from 6,500 to 35,000 square feet.
The first Super Trak opened in 1992, with about three times the staff of a regular Trak store and twice the floor space. In October 1992, Herbert Haft kicked off the newest Dart Group concept, Total Beverage. The 25,000 square foot store in Chantilly, Virginia, was stocked with 4,000 wines, 500 beers, and more than 600 types of soda, juices, and water, all at discount prices.
The expansions resulted in increased sales, but company profits had been dropping for three years. In addition, many Wall Street analysts and investors thought the company's shares, which had hovered around $80 per share, could be worth as much as $150 or $200. "The problem is that investors have had no idea what Herbert Haft was up to. It's an uncertainty that makes it hard for people to get excited about Dart," Robert Robotti of the New York brokerage firm Robotti & Eng told Kara Swisher of The Washington Post.
According to Swisher in her 1993 series on the Haft family, Robert Haft gradually moved away from his father's confrontational and secretive style and began to be more open and accessible to the local business community, Wall Street, and the press. As an example, he included more complete financial information in annual reports and other corporate statements. Robert also believed that Dart Group should acquire more retail chains and was working on deals to buy the Dollar Tree general merchandise stores and the Books A Million book chain. Herbert wanted to concentrate on real estate.
In March 1993, Robert asked Herbert to let him take over the leadership of the company. Although Robert had seemed destined to succeed his father, Herbert appeared to see the move as a grab for power. Herbert's first response was to use his 57 percent of Dart Group's voting stock to oust Gloria, Robert, and three other directors from the boards of Dart Group, Crown Books and Trak Auto. Then he fired Robert from the presidency of the Dart Group, the chairmanship of Crown Books, and other executive positions. He named son Ronald to the boards, made him president of Dart Group, and gave him stock options.
The family fight did not help the company or its subsidiaries. After posting profits since its founding, Crown Books reported a $200,000 loss for 1993, despite a 15 percent revenue rise. At Trak Auto, earnings fell 98 percent, to $81,000 for the year. The Dart Group explained that the losses were partly due to opening costs of superstores, but skeptics in Washington and on Wall Street thought Herbert was choosing to take the hits as a strategy in his divorce suit with Gloria. The court intended to split property 50/50, and, according to a May 16, 1994 Business Week article, some people thought Herbert could buy Gloria out more cheaply by driving down the value of family holdings. In October, Business Week also reported that the stock options granted by Herbert to Ronald were also seen as a way for Herbert to make his assets less attractive in the divorce.
In May 1994, one of the other shareholders of Shoppers Food Warehouse exercised its right to reacquire one share of Shoppers Food Warehouse stock from Dart Group. This reduced Dart Group's ownership to exactly 50 percent.
That same month, Herbert settled with Gloria and Robert for $80 million and an agreement that they would leave Dart Group. By September, Herbert was at odds with younger son Ronald, his last family ally. Ronald accused his father of raiding company resources to pay the family settlement. Herbert said Ronald was trying to gain control of the company. An outside mediator was called in, and Ronald remained president of Dart Group. Meanwhile, Robert Haft sued Dart Group and Crown Books for breach of contract. After winning a jury award of $34 million, he promised never to be involved again with the family's real estate and retailing businesses.
In September, the board of Dart Group established an Executive Committee, made up of outside directors, to manage the company's affairs that related to the dispute between Herbert and Ronald. The boards of Crown Books, Trak Auto, and Total Beverage each established its own Executive Committee, made up of the same outside directors, with parallel authority.
For 1994, the company reported revenues of $967.4 million, down from $1.376 billion the year before. Part of the difference reflected the exclusion of Shoppers Food Warehouse sales as of May 1994, following the shift in ownership. Also contributing to the lower number were a $6.2 million charge related to restructuring and charges to Crown Books reserves related to the $34 million awarded to Robert Haft.
Dart Group's annual report indicated that results for 1994 ranged from dramatic improvements at Trak Auto to modest increases at Crown Books. Both Crown Books and Trak Auto continued to close or convert smaller stores, concentrating on opening larger superstores. During 1994, Trak Auto initiated the Super Trak Warehouse format, with approximately 40,000 square feet offering over 165,000 auto parts, and Crown Books increased its superstore format to 15,000 square feet.
1995: Board Control
During 1995, both Crown Books and Trak Auto continued their transition to larger stores. In October, the dispute between Herbert and Ronald was settled and Ronald received $37.9 million for his Dart holdings. He agreed to resign his presidency and other executive positions and to sell all his stock back to the company, with a trustee to be given voting rights to the stock.
In December, a Delaware judge gave the board of directors the power to manage and control day-to-day operations of Dart Group and its holdings without interference from the Hafts, until litigation involving the company and the family was resolved. Robert Marmon, senior vice-president and chief financial officer of the company told the Washington Post, "Now, however long it takes to settle the Haft-related litigation, it is clear that the executive committee is running the company." Later that month, Richard B. Stone, a former ambassador to Denmark and former chief operating officer of Washington-based Capital Bank N.A., was named voting trustee for Dart Group, to control 67.9 percent of the company's voting stock.
The board's control and Stone's appointment brought stability and direction to the management of Dart Group and its subsidiaries while the litigation among the Hafts continued. For example, in January 1996, Trak Auto moved into a new territory, Pittsburgh, with the acquisition of 14 auto parts stores which will be converted to Super Trak stores or Super Trak Warehouses. The shift in both chains to larger superstores should continue to pay off. Comparable sales for the newer formats increased during 1995.
Principal Subsidiaries: Crown Books Corporation (51%); Trak Auto Corporation (68%); Total Beverage Corporation; Cabot-Morgan Real Estate Co.; Dart Group Financial Corporation; Dart/SFW Corporation.