If you look at a list of the largest retailers
in the United States today, you see, you know,
the usual Titans, Walmart, Amazon, Costco. The
scale of these companies is so immense that they
feel permanent, like geological features of the
economy. Right. They feel like they've always
been there and always will be. Exactly. But if
you rewind the clock just two decades. The landscape
looked, well, significantly different, and there
is one specific mountain on that map that has
completely eroded away. And I mean, completely.
It's a disappearance that I think a lot of people
still haven't fully processed. Yeah. We aren't
talking about a niche boutique or some flash
in the pan fad. We are talking about a company
that, based on 2005 revenue, was the 83rd largest
retailer in the entire United States. That is
the stat that just blew my mind when we started
researching this. The 83rd largest. Yeah. That
puts it ahead of companies that are still household
names today. We are, of course, talking about
Mervyn's. Mervyn's. For anyone who grew up in
the West, or Southwest between, say, the 1970s
and the 2000s, that name triggers a very specific
set of memories. Oh, absolutely. The brown and
rust -colored signage. The back -to -school rushes,
the sheer... ubiquity of the place. At its peak,
Mervyn's operated 189 stores across 10 states.
It was a multi -billion dollar heavy hitter.
And yet, in the span of roughly four years, it
went from being a cornerstone of the Target Corporation's
portfolio to complete liquidation. It's one of
the most rapid and I would say controversial
collapses in retail history. It really is. And
that's why we are doing this deep dive today.
This isn't just a nostalgia trip. Although there
will be some of that. Oh, for sure. We'll definitely
talk about the specific vibe of a Mervin store.
But this is a forensic accounting of how a retail
giant dies. It's a story about the changing psychology
of the American middle class, the brutal realities
of real estate valuation versus retail operations,
and the very sharp edge of private equity engineering.
We have a massive stack of documents here. Court
filings from the bankruptcy, internal memos on
corporate culture, architectural histories of
suburban sprawl, and financial analyses of the
2008 crash. Our mission is to trace the arc of
this company from its very humble, almost accidental
beginnings in 1949, through its aggressive and
somewhat confused expansion under Target, and
finally, to dissect the mechanics of its downfall.
And we have to be clear about that mission because
the ending is complex. Mervin's didn't just fail
because people stopped buying pants. No. It failed
because the ground beneath the stores became
more valuable than the stores themselves. That
distinction, the business versus the building,
that is going to be so crucial later on. It's
everything. But let's start at the beginning
because before Mervin's was a pawn in a private
equity game, it was just a guy named Mervin.
Mervin G. Morris. Born in 1920, passed away fairly
recently in 2021. Wow. He was a quintessential
mid -century entrepreneur. And the founding of
the store is tied entirely to a specific date
in a specific place. July 29th, 1949 in San Lorenzo,
California. I want to pause on San Lorenzo for
a moment because the context here is everything.
In 1949, San Lorenzo wasn't just a town. It was.
It was a phenomenon. Exactly. Yeah. San Lorenzo
Village was one of the nation's first planned
communities, very similar to Levad Town in New
York. Right. It was located between Hayward and
San Leandro. And these weren't custom built estates.
They were tract homes. Thousands of them. Two
and three bedroom houses built rapidly between
1944 and the 1950s to house workers from the
nearby shipyards and, of course, the returning
GIs. So we are literally talking about. The birth
of the baby boom. That's the demographic. Young
families, first -time homeowners, people who
had just survived the Great Depression and World
War II. They had optimism. They had growing families.
But they did not have unlimited budgets. Right.
They were incredibly price sensitive. They needed
to outfit these new homes and clothe their kids.
They weren't going to drive up to San Francisco
to shop at the high -end department stores like
iMagnon or Emporium. Because those places were
priced for, what, the established elite, not
the young mechanic. with a mortgage. Exactly.
So Mervyn Morris sees this gap. He knows he can't
compete on luxury, so he competes on price. But
his initial strategy wasn't just cheap goods.
It was a very specific arbitrage model that I
think is fascinating. The factory seconds. The
factory seconds. This is a term we've largely
lost in modern retail because supply chains have
become so precise. But in 1949, manufacturing
was, well, it's a bit more variable. A factory
second was a garment or a textile that had a
flaw. We aren't talking about giant holes or
missing sleeves, right? This isn't junk. No,
and that was the genius of Morris's eye. He hunted
for grade B merchandise where the flaws were,
as the company history puts it, minor and undetectable
by most. So, like, what kind of flaw are we talking
about? Maybe the stitching on the inside hem
was a millimeter off? Or maybe the dye lot for
a batch of towels was 2 % lighter than the standard.
So technically it's flawed, but functionally
it's perfect. Precisely. And because of that
technical flaw, The manufacturers couldn't sell
it to the premium department stores at full price.
Morse would swoop in, buy these lots for pennies
on the dollar. And sell them to the families
in San Lorenzo at a massive discount compared
to the perfect version sold in the city. It's
a value proposition that perfectly matched the
psychology of his customer. These were people
who wanted quality. They wanted the brand names,
but they were pragmatic. If a towel dries you
off just as well, who cares if the blue is a
slightly different shade of blue? Exactly right.
It allowed Mervin's to carve out a niche that
was totally distinct from the luxury stores and
distinct from the five -and -dime variety stores.
It was the smart shopper niche. Now, before we
move past the founding, we have to address the
name. Mervin Morris, M -E -R -V -I -N. But the
sign on the building said M -E -R -V -Y -N -S.
This is one of my favorite details because it
shows just how arbitrary branding can be. It's
amazing. Morris was all set to call it Mervyn's
with an I. It makes sense. It's his name. But
he was working with a graphic designer on the
original storefront signage. And the designer
intervenes. The designer looked at the sketch
and basically said the I is too thin. It doesn't
anchor the word. A Y has a tail. It occupies
more space. It looks more visually appealing
and balanced. Get out of here. So he changed
the spelling of his company solely because a
graphic designer thought the letter Y looked
cooler. That's it. That's the whole story. And
that decision stuck for 60 years. Wow. It's a
testament to the fact that sometimes aesthetics
drive strategy from day one. So the store in
San Lorenzo is a hit. It resonates with the tractome
generation. But Morris didn't sit still. No,
the modder worked, so he decided to scale it.
The first big leap happened in 1962. Mervyn's
opened its second store, and this was a really
strategic shift. Where did they go? They moved
about 15 miles south to Fremont, California,
into the Fremont Hub Shopping Center. And this
is where they transitioned from a local shop
to a real chain. Yes, and notice the terminology
change. In San Lorenzo, they were a standalone
entity. In Fremont, they were an anchor tenant.
Which means they were the main draw. They were
the reason people went to the hub. Correct. And
with this move, that factory seconds model, it
began to fade. You just can't sustain a chain
of large department stores solely on hunting
for manufacturing errors. You need consistent
inventory. You do. So they evolved into a general
lower -priced alternative to the national chains.
They kept the value pricing, but they started
carrying standard merchandise. And this evolution
from... quirky discounter to department store
powerhouse caught the eye of the big fish. Oh,
yeah. By 1978, Mervyn's had over 50 stores in
three states. And that's when Dayton Hudson comes
knocking. Dayton Hudson, which we now know as
Target Corporation. Right. This acquisition in
1978 is pivotal. Usually when a conglomerate
buys a chain, they absorb it, they change the
sign out front and integrate it into the board.
But they didn't do that with Mervyn's. No. Mervyn's
was so successful and its brand loyalty was so
strong in the West that Dayton Hudson kept it
as a separate subsidiary. It had its own headquarters
in Hayward, its own buying teams, its own culture.
Speaking of culture, I want to dig into something
that kept coming up in the listener forums and
the employee archives we looked at. The credit
goal. Ah, yes. If you talk to anyone who worked
at Mervyn's from the 80s through the 2000s, they
will mention... The credit cards. It seems like
it was more than just a metric. It was like a
way of life. It was the engine of their profitability.
You have to understand that retail margins on
clothes are thin. Razor thin. But the interest
rates on store credit cards, that is pure profit.
And Mervyn's was incredibly aggressive about
this. I was looking at the employee handbooks.
This wasn't just for the sales floor managers
or something. No, it was everyone. If you were
a cashier, you had a quota. If you were stocking
shelves but helped a customer, you had a quota.
What was the quota? The expectation was that
a part -time employee would generate one credit
application for every eight hours. Worked. Full
-time leadership had even stricter goals. That
creates a really high -pressure environment.
I can just imagine the friction at the register.
Oh, absolutely. You just want to buy a pair of
socks, and the cashier is pleading with you to
open an account because their job depends on
it. It does create friction, but it also creates
a massive database. Mervyn's knew exactly who
was buying what, when, and how often. That data
allowed them to tailor their inventory and their
marketing, especially those Sunday circulars
that arrived in the newspaper, with incredible
precision. So fueled by Dayton Hudson's deep
pockets and this aggressive credit strategy,
Mervyn's enters its empire phase. The 1980s and
90s saw them pushing hard beyond the West Coast.
This is where we see the ambition, but also...
Maybe the cracks in the foundation. I think so.
They moved into Arizona, Colorado, Texas, Michigan,
Minnesota. And then they tried to conquer the
South. The Atlanta and Miami campaigns. This
is a classic case study in retail hubris. In
the late 80s and early 90s, Mervis decided they
could just parachute into markets like Atlanta
and Miami and replicate their California success.
But they didn't just build new stores. They took
over existing real estate, right? Right. And
this is where the mismatch happened. In Miami,
for instance. They took over five locations that
had previously been Lord & Taylor stores. Lord
& Taylor. That is a very, very different vibe
from Mervyn's. It's night and day. Lord & Taylor's
upscale, East Coast, aspirational. Mervyn's is
sensible. Exactly. Imagine the customer psychology.
You're used to walking into that building and
seeing high -end fashion, perfume counters, a
certain quiet luxury. Mm -hmm. Then Mervin's
moves in. They keep the shell of the building,
but fill it with mid -range basics and aggressive
signage about smart saving. It's a total culture
clash. The building is promising one thing, and
the merchandise is delivering something completely
different. It confused the customer. And frankly,
the California cool vibe didn't translate well
to the specific cultural nuances of the Deep
South or the Miami metro area. So the sales just
weren't there. Mervin's invested heavily. Millions
of dollars, but the sales per square foot never
materialized. And the retreat was pretty swift.
By 1997, they pulled out of both Atlanta and
Miami completely. They sold 10 of the Florida
stores to Dillard's. It was a humiliating pullback.
So it proved that Mervyn's was a regional power,
but perhaps not a national one. I think that's
fair to say. So they retreat to their stronghold,
the West, the Southwest parts of the Midwest.
But even there, they started feeling the heat.
By the mid -90s, the retail landscape is changing.
You have Kohl's rising up. You have Target itself
becoming Tarzay, making cheap look chic. And
Mervyn's was stuck in the middle. The dreaded
middle. Not the cheapest, not the coolest, not
the most luxurious, just there. So in 1995, they
attempt a massive rebrand to find an identity.
Virgin's California. They legally changed the
name. They updated the signage. They wanted to
bottle the sunshine and optimism of the West
Coast and sell it to the rest of the country.
And they hired the ultimate Californian to sell
it. Joe Montana. You couldn't pick a better avatar
for 1990s California excellence than the 49ers
quarterback. They put him in everything. TV spots,
catalogs, billboards. The message was, Mervin's
isn't just a store. It's a lifestyle. But did
it work? I mean, specifically, did it work in
places that weren't California? Data says no.
In fact, it kind of backfired. Really? The records
show that store managers in Texas, places like
Lubbock, Midland, Odessa, were baffled by this.
Texans have a very strong state identity. They
did not want to shop at Mervyn's California.
I can absolutely see that. Putting California
on the sign in West Texas is basically inviting
people to drive past you. It was a fundamental
misunderstanding of their customer base in those
regions. The rebrand had little to no effect
on revenue. And by 2001, the California suffix
was quietly dropped. Just gone. They went back
to just Mervyn's. So we enter the 2000s. The
rebrand failed. The expansion to the South failed.
But the store is still massive. It's still generating
billions. However, the corporate parent, Target,
is looking at its portfolio and making some hard
choices. This is the beginning of the end, though
nobody knew it at the time. In March 2004, Target
Corporation announced it was putting Mervyn's
and the legendary Marshall Fields chain up for
sale. Target wanted to be pure Target. They wanted
to shed the baggage. Target's own growth was
exploding, and Mervyn's was seen as a drag on
their margins. But selling Mervyn's was tricky
because of what we mentioned earlier. The real
estate. The real estate. Mervyn's owned a lot
of its own buildings. It wasn't just leasing
space in malls. It held the deeds. And in 2004,
the real estate market was. It was heating up
big time. So potential buyers looked at Mervin's
and didn't see a retailer. They saw a portfolio
of land assets that happened to sell shirts.
But Target actually tried to do the right thing
here, didn't they, initially? They did. The sources
indicate that Target refused to sell to liquidation
groups that just wanted to shut it down immediately
to sell the land. They wanted to protect the
30 ,000 employees. They wanted a buyer who would
commit to running the retail operation. But there
were sharks circling. We have to talk about what
happened in Minnesota with the May Department
Stores Company. This was a prelude to the chaos.
What happened there? This was a brutal strategic
maneuver. In June 2004, as part of the Marshall
Fields deal, the May Company also bought nine
Mervyn's locations in the Twin Cities area. Okay,
so did they open them as May Stores? No. They
bought them and immediately closed them. Wow.
Just to kill the competition. Exactly. Analysts
at the time saw it as a defensive blocking move.
They didn't want a competitor taking those spots,
so they bought them and shuttered them. It showed
that the store part of Mervyn's was becoming
secondary to the location part. So enter the
private equity consortium. July 2004, Target
finds a buyer. A group. Sun Capital Partners,
Cerberus Capital Management, and Lubert Adler
Management. These are heavy hitters in the world
of distressed assets and private equity. Now,
we need to slow down here and explain exactly
what these firms did, because on the surface,
they bought a retail company. But in reality,
they performed a very specific type of financial
engineering that is. Let's call it controversial.
It's the opco -propco split. This is critical
to understanding why Mervyn's died. Okay, break
that down for us. Opco and propco. Okay. So traditionally,
Mervyn's was one company. It sold clothes, that's
operations, and it owned buildings. That's property.
Right. Simple enough. When the private equity
group took over, they effectively sliced the
company in two. They created a property company,
or PropCo, to hold the valuable real estate assets.
And an operating company, OpCo, to run the store.
Exactly. So far, that just sounds like paperwork.
Yeah. But it becomes predatory through a sale
-leaseback mechanism. The new owners, the private
equity firms, essentially had the PropCo charge
the OpCo rent. So Mervyn's, the store, suddenly
had to pay rent on buildings it used to own.
Yes. And not just token rent. The allegations
in the later lawsuits claimed that the rent was
set at market rates or higher. But here is the
kicker. Okay. The private equity firms used the
future stream of those rent payments to secure
the loans they used to buy the company in the
first place. Wait, wait. Let me get this straight.
They bought the company using debt and then forced
the company to pay the rent that would then pay
off that debt. That's exactly it. It's a leveraged
buyout where the target company pays for its
own acquisition. Mervyn's, the retail operation,
was suddenly saddled with massive new expenses.
Rent without any change in its revenue. They
were bleeding cash to pay their own landlords
who happened to be their owners. It's like selling
your kidneys and then renting them back from
the guy who bought them. That's a vivid way to
put it. But yes, it stripped the company of its
most valuable safety net. its real estate, and
massively increased its monthly costs. So under
this new structure, the clock starts ticking.
The new owners bring in Rick Leto as president
in 2005 to try and turn the retail side around.
But the financial headwinds are enormous. And
their solution to the cash crunch was to shrink.
In September 2005, just a year after the takeover,
they announced 62 store closures. 62? That's
a huge percentage of the fleet. It was a bloodbath.
They pulled out of 28 locations in Texas alone.
They wiped out 15 stores in Michigan. They retreated
from Oklahoma. And the rationale was that these
stores were underperforming, right? They claimed
these stores represented only 17 % of sales,
but were a drag on profitability. Right. But
if you look at it through the lens of the PropCupCo
split, you have to wonder. Right. Were they closing
them because the stores were bad or because the
real estate was worth more if they sold it off?
That's the enviable real estate portfolio line
we saw in the document. Exactly. The investors
knew that even if they couldn't sell jeans, they
could sell the dirt under the store. So 2005
is a disaster. 2006 and 2007, see more contraction.
They leave Oregon and Washington completely.
They close the last Colorado store. The footprint
is just getting smaller and smaller. And then
the perfect storm hits 2008, the Great Recession.
Mervyn's was already fragile because of the financial
engineering. Now the consumer economy just collapses.
It was a death spiral. It was. By July 2008,
the situation was critical. On July 21, reports
surfaced that Mervyn's had stopped updating its
financial status to its lenders. That's the corporate
equivalent of going radio silent. And the market
reacted immediately. Vendors. The companies that
make the jeans, the shoes, the frying pans, they
stop shipping. And consider the timing. July.
This is the lead up to back to school. The second
most important season in retail. If you don't
have inventory in August, you are dead. Mervyn's
shelves started to look bare. Lenders denied
requests for working capital. They were suffocating.
And this is where Mervyn's, the company, does
something extraordinary. They sue their owner.
This is so rare. And it highlights just how contentious
this buyout was. In September 2008, the debtor,
Mervyn's, filed a lawsuit against the private
equity firms, Cerberus, Sun Capital, all of them.
We need to be specific about what they alleged.
They didn't just say you did a bad job. No, they
alleged fraudulent transfer. The lawsuit claimed
that the 2004 deal had stripped the retailer
of its real estate assets, leaving it insolvent.
So they were essentially saying, You set us up
to fail so you could loot the real estate. That
was the core of the argument. They claimed the
structure was designed to benefit the shareholders
at the expense of the company's long -term viability.
Now, the private equity firms denied this, of
course. They argued they tried to save the company
and that the recession was the real culprit.
But the fact that the lawsuit was filed at all
shows the level of internal toxicity. Oh, absolutely.
And while the lawyers were fighting, the stores
were dying. On July 29, 2008, Mervyn's filed
for Chapter 11 bankruptcy. Chapter 11 is usually
an attempt to reorganize. Right. You hold off
the creditors. You restructure the debt. You
try to emerge as a leaner company. Mervyn's vowed
to keep stores open. But the reality on the ground
was chaotic. I read about the grand openings
that happened during this time. It's just tragic.
There were three stores that had held their grand
openings just a few months prior to the bankruptcy
filing. Imagine hiring staff, training them.
Cutting the ribbon and then telling them 90 days
later that the company's insolvent. It shows
a complete disconnect between the operational
plans and the financial reality. So they're in
Chapter 11. They close 26 more stores. They pull
out of Idaho. They exit San Antonio. They're
desperately trying to find a buyer to save the
remaining core. And there was a glimmer of hope.
Forever 21. Right. Forever 21 was on a rocket
ship ride at this point. They were expanding
massively. They were. And they made a bid. They
offered to purchase 149 of the remaining Mervyn
store. That would have saved thousands of jobs.
It would have kept the storefronts active, even
if the name changed. It would have. But the negotiations
fell apart. The details are sealed in the bankruptcy
dealings, but usually these things fail over
price or over the rejection of certain leases.
Forever 21 walked away. And that was the final
mail. On October 17, 2008, the bankruptcy court
converted the case from Chapter 11 to Chapter
7. And for listeners who aren't bankruptcy lawyers,
the difference between 11 and 7 is it's the difference
between the hospital and the morgue. That's a
good way to put it. Chapter 7 is liquidation.
It means the entity is effectively dead. The
goal is no longer to save the company. It is
to sell off every stapler, every mannequin, and
every light fixture to pay back the creditors.
The going out of business signs went up. And
by the holiday season of 2008, Mervyn's was gone.
The aftermath was a feeding frenzy for the surviving
retailers. Coles and Forever 21 eventually came
back to the table, but not to buy the company,
just to pick the carcass. Right. They won a joint
bid to take over the leases of 46 stores. Coles
took 31. Forever 21 took 15. It's interesting
that Kohl's took so many. In a lot of ways, Kohl's
is the spiritual successor to Mervin's. The store
layout, the pricing, the racetrack aisle design,
it feels very similar. It does. Kohl's effectively
absorbed that middle -class mom demographic that
Mervin's abandoned. So the stores are converted
or demolished. The headquarters in Hayward is
knocked down with the name Mervin's. It didn't
completely vanish. This brings us to the zombie
phase of our deep dive. First, the physical ghosts.
If you drive around California today, you can
still find Mervyn's on the map. Literally on
the map. There is a Mervyn's Drive in Fullerton,
California. What's on Mervyn's Drive now? A floor
and decor. But the street sign remains. It's
a municipal tombstone. And there's a Mervyn's
Place in Bakersfield and a Mervyn's Way in San
Jose. These streets were named when Mervyn's
was the anchor that developed the area. The anchor
is gone, but the city infrastructure remembers.
But the brand itself, the intellectual property...
had a stranger journey. In 2009, the Morris family
stepped back in. Jeff Morris, the son of the
founder, Mervyn Morris, bought the rights to
the Mervyn's name and the customer list out of
bankruptcy. There is something poetic about that.
The son buying back the father's name from the
ruins. It is poetic. And his intention was to
relaunch it. He wanted to bring Mervyn's back
as an internet -based enterprise. But for a long
time, nothing happened. Years. There was a website
that just said, coming soon. Or ask for an email
address. It just seemed like the project had
stalled. But if you go to Mervins .com right
now, in 2024, it is active. It is. But it's not
the Mervins you remember. You won't find the
High Sierra brand shirts or the specific private
labels they used to carry. What is it then? It's
essentially a closeout retailer. They sell overstock
merchandise from other brands. It's an online
discount bin wearing the skin of Mervins. A zombie
brand. Exactly. It leverages the trust and nostalgia
people have for the name to sell goods that have
no actual connection to the original company's
lineage. So let's try to synthesize all of this.
We started with a guy in 1949 looking for crooked
stitches and shirts to sell to GIs. We ended
with a private equity collapse and a website
selling leftovers. What is the big takeaway here?
I think the Mervyn story is the perfect illustration
of the financialization of the American economy.
How so? In the beginning, the value of Mervyn's
was its ability to serve its customers. It made
money because it sold good stuff at good prices.
But by the end, the value of Mervyn's wasn't
its relationship with the customer. It was its
real estate portfolio and its capacity to hold
debt. The product became secondary to the financial
engineering. Exactly. The company was consumed
by the very capital markets that were supposed
to support it. And when the recession hit, it
had no resilience left because it had been hollowed
out from the inside. It's a cautionary tale.
Just because a company is huge, 83rd largest
in the country, doesn't mean it's safe. If the
land is worth more than the business, the business
is living on borrowed time. And in the case of
Mervyn's, that time ran out in 2008. Well, next
time I drive past a Kohl's that looks suspiciously
like a Mervyn's or I see that street sign in
Fullerton, I'm going to think about the I that
became a Y and the empire that just disappeared.
It's a landscape full of ghosts if you know where
to look. Thanks for joining us on this deep dive.
It's a complex story but one that explains so
much about how our retail world got to where
it is today. We'll catch you on the next one.