The_Innovators_Dilemma__Clayton

expansion in the regular variety store operations,” and that no existing stores would be converted to a
discount format. 13 Indeed, as discount retailing hit its most frenzied expansion phase in the 1960s,
Woolworth was opening new variety stores at the pace it had set in the 1950s.
Unfortunately (but predictably), Woolworth proved unable to sustain within a single organization the
two different cultures, and two different models of how to make a profit, that were required to be
successful in variety and discount retailing. By 1967 it had dropped the term “discount” from all
Woolco advertising, adopting the term “promotional department store” instead. Although initially
Woolworth had set up a separate administrative staff for its Woolco operation, by 1971 more rational,
cost-conscious heads had prevailed.
In a move designed to increase sales per square foot in both Woolco and Woolworth divisions, the two
subsidiaries have been consolidated operationally on a regional basis. Company officials say the
consolidation—which involves buying offices, distribution facilities and management personnel at the
regional level—will help both to develop better merchandise and more efficient stores. Woolco will
gain the benefits of Woolworth’s buying resources, distribution facilities and additional expertise in
developing specialty departments. In return, Woolworth will gain Woolco’s knowhow in locating,
designing, promoting and operating large stores over 100,000 sq. ft. 14
What was the impact of this cost-saving consolidation? It provided more evidence that two models for
how to make money cannot peacefully coexist within a single organization. Within a year of this
consolidation, Woolco had increased its markups such that its gross margins were the highest in the
discount industry—about 33 percent. In the process, its inventory turns fell from the 7x it originally had
achieved to 4x. The formula for profit that had long sustained F. W. Woolworth (35 percent margins
for four inventory turns or 140 percent return on inventory investment) was ultimately demanded of
Woolco as well. (See Figure 5.3.) Woolco was no longer a discounter—in name or in fact. Not
surprisingly, Woolworth’s venture into discount retailing failed: It closed its last Woolco store in 1982.
Figure 5.3 Impact of the Integration of Woolco, and F. W. Woolworth on the Way Woolco Attempted
to Make Money
Source: Data are from various annual reports of F. W. Woolworth Company and from various issues of
Discount Merchandiser.
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