WEBVTT 00:00:00.000 --> 00:00:01.940 If you look at a list of the largest retailers 00:00:01.940 --> 00:00:04.099 in the United States today, you see, you know, 00:00:04.099 --> 00:00:09.039 the usual Titans, Walmart, Amazon, Costco. The 00:00:09.039 --> 00:00:12.019 scale of these companies is so immense that they 00:00:12.019 --> 00:00:15.400 feel permanent, like geological features of the 00:00:15.400 --> 00:00:17.079 economy. Right. They feel like they've always 00:00:17.079 --> 00:00:19.899 been there and always will be. Exactly. But if 00:00:19.899 --> 00:00:23.640 you rewind the clock just two decades. The landscape 00:00:23.640 --> 00:00:26.320 looked, well, significantly different, and there 00:00:26.320 --> 00:00:28.699 is one specific mountain on that map that has 00:00:28.699 --> 00:00:31.070 completely eroded away. And I mean, completely. 00:00:31.410 --> 00:00:33.990 It's a disappearance that I think a lot of people 00:00:33.990 --> 00:00:36.549 still haven't fully processed. Yeah. We aren't 00:00:36.549 --> 00:00:39.229 talking about a niche boutique or some flash 00:00:39.229 --> 00:00:41.909 in the pan fad. We are talking about a company 00:00:41.909 --> 00:00:45.250 that, based on 2005 revenue, was the 83rd largest 00:00:45.250 --> 00:00:48.170 retailer in the entire United States. That is 00:00:48.170 --> 00:00:50.109 the stat that just blew my mind when we started 00:00:50.109 --> 00:00:52.789 researching this. The 83rd largest. Yeah. That 00:00:52.789 --> 00:00:54.530 puts it ahead of companies that are still household 00:00:54.530 --> 00:00:56.850 names today. We are, of course, talking about 00:00:56.850 --> 00:00:59.369 Mervyn's. Mervyn's. For anyone who grew up in 00:00:59.369 --> 00:01:02.649 the West, or Southwest between, say, the 1970s 00:01:02.649 --> 00:01:06.189 and the 2000s, that name triggers a very specific 00:01:06.189 --> 00:01:09.269 set of memories. Oh, absolutely. The brown and 00:01:09.269 --> 00:01:12.129 rust -colored signage. The back -to -school rushes, 00:01:12.129 --> 00:01:16.030 the sheer... ubiquity of the place. At its peak, 00:01:16.209 --> 00:01:19.689 Mervyn's operated 189 stores across 10 states. 00:01:19.829 --> 00:01:22.150 It was a multi -billion dollar heavy hitter. 00:01:22.189 --> 00:01:25.489 And yet, in the span of roughly four years, it 00:01:25.489 --> 00:01:28.189 went from being a cornerstone of the Target Corporation's 00:01:28.189 --> 00:01:32.180 portfolio to complete liquidation. It's one of 00:01:32.180 --> 00:01:34.579 the most rapid and I would say controversial 00:01:34.579 --> 00:01:37.099 collapses in retail history. It really is. And 00:01:37.099 --> 00:01:38.859 that's why we are doing this deep dive today. 00:01:39.000 --> 00:01:41.079 This isn't just a nostalgia trip. Although there 00:01:41.079 --> 00:01:42.840 will be some of that. Oh, for sure. We'll definitely 00:01:42.840 --> 00:01:45.579 talk about the specific vibe of a Mervin store. 00:01:45.680 --> 00:01:48.540 But this is a forensic accounting of how a retail 00:01:48.540 --> 00:01:50.980 giant dies. It's a story about the changing psychology 00:01:50.980 --> 00:01:54.159 of the American middle class, the brutal realities 00:01:54.159 --> 00:01:56.819 of real estate valuation versus retail operations, 00:01:56.959 --> 00:02:00.239 and the very sharp edge of private equity engineering. 00:02:00.700 --> 00:02:02.879 We have a massive stack of documents here. Court 00:02:02.879 --> 00:02:05.560 filings from the bankruptcy, internal memos on 00:02:05.560 --> 00:02:07.959 corporate culture, architectural histories of 00:02:07.959 --> 00:02:11.439 suburban sprawl, and financial analyses of the 00:02:11.439 --> 00:02:14.960 2008 crash. Our mission is to trace the arc of 00:02:14.960 --> 00:02:17.719 this company from its very humble, almost accidental 00:02:17.719 --> 00:02:21.620 beginnings in 1949, through its aggressive and 00:02:21.620 --> 00:02:24.560 somewhat confused expansion under Target, and 00:02:24.560 --> 00:02:27.300 finally, to dissect the mechanics of its downfall. 00:02:27.819 --> 00:02:29.759 And we have to be clear about that mission because 00:02:29.759 --> 00:02:33.020 the ending is complex. Mervin's didn't just fail 00:02:33.020 --> 00:02:35.699 because people stopped buying pants. No. It failed 00:02:35.699 --> 00:02:37.599 because the ground beneath the stores became 00:02:37.599 --> 00:02:40.060 more valuable than the stores themselves. That 00:02:40.060 --> 00:02:42.039 distinction, the business versus the building, 00:02:42.219 --> 00:02:44.780 that is going to be so crucial later on. It's 00:02:44.780 --> 00:02:46.099 everything. But let's start at the beginning 00:02:46.099 --> 00:02:48.400 because before Mervin's was a pawn in a private 00:02:48.400 --> 00:02:50.840 equity game, it was just a guy named Mervin. 00:02:50.840 --> 00:02:53.979 Mervin G. Morris. Born in 1920, passed away fairly 00:02:53.979 --> 00:02:56.800 recently in 2021. Wow. He was a quintessential 00:02:56.800 --> 00:02:59.800 mid -century entrepreneur. And the founding of 00:02:59.800 --> 00:03:02.219 the store is tied entirely to a specific date 00:03:02.219 --> 00:03:06.900 in a specific place. July 29th, 1949 in San Lorenzo, 00:03:06.939 --> 00:03:09.219 California. I want to pause on San Lorenzo for 00:03:09.219 --> 00:03:11.000 a moment because the context here is everything. 00:03:11.180 --> 00:03:14.780 In 1949, San Lorenzo wasn't just a town. It was. 00:03:14.780 --> 00:03:18.060 It was a phenomenon. Exactly. Yeah. San Lorenzo 00:03:18.060 --> 00:03:20.039 Village was one of the nation's first planned 00:03:20.039 --> 00:03:23.240 communities, very similar to Levad Town in New 00:03:23.240 --> 00:03:25.800 York. Right. It was located between Hayward and 00:03:25.800 --> 00:03:29.060 San Leandro. And these weren't custom built estates. 00:03:29.060 --> 00:03:31.500 They were tract homes. Thousands of them. Two 00:03:31.500 --> 00:03:33.840 and three bedroom houses built rapidly between 00:03:33.840 --> 00:03:37.580 1944 and the 1950s to house workers from the 00:03:37.580 --> 00:03:39.979 nearby shipyards and, of course, the returning 00:03:39.979 --> 00:03:43.189 GIs. So we are literally talking about. The birth 00:03:43.189 --> 00:03:45.509 of the baby boom. That's the demographic. Young 00:03:45.509 --> 00:03:48.689 families, first -time homeowners, people who 00:03:48.689 --> 00:03:50.729 had just survived the Great Depression and World 00:03:50.729 --> 00:03:53.830 War II. They had optimism. They had growing families. 00:03:53.990 --> 00:03:56.389 But they did not have unlimited budgets. Right. 00:03:56.530 --> 00:03:58.909 They were incredibly price sensitive. They needed 00:03:58.909 --> 00:04:00.990 to outfit these new homes and clothe their kids. 00:04:01.250 --> 00:04:03.270 They weren't going to drive up to San Francisco 00:04:03.270 --> 00:04:05.289 to shop at the high -end department stores like 00:04:05.289 --> 00:04:08.650 iMagnon or Emporium. Because those places were 00:04:08.650 --> 00:04:11.289 priced for, what, the established elite, not 00:04:11.289 --> 00:04:13.629 the young mechanic. with a mortgage. Exactly. 00:04:13.830 --> 00:04:16.930 So Mervyn Morris sees this gap. He knows he can't 00:04:16.930 --> 00:04:19.870 compete on luxury, so he competes on price. But 00:04:19.870 --> 00:04:22.029 his initial strategy wasn't just cheap goods. 00:04:22.170 --> 00:04:24.670 It was a very specific arbitrage model that I 00:04:24.670 --> 00:04:26.910 think is fascinating. The factory seconds. The 00:04:26.910 --> 00:04:29.329 factory seconds. This is a term we've largely 00:04:29.329 --> 00:04:31.750 lost in modern retail because supply chains have 00:04:31.750 --> 00:04:35.230 become so precise. But in 1949, manufacturing 00:04:35.230 --> 00:04:38.230 was, well, it's a bit more variable. A factory 00:04:38.230 --> 00:04:40.509 second was a garment or a textile that had a 00:04:40.509 --> 00:04:43.970 flaw. We aren't talking about giant holes or 00:04:43.970 --> 00:04:46.610 missing sleeves, right? This isn't junk. No, 00:04:46.649 --> 00:04:49.629 and that was the genius of Morris's eye. He hunted 00:04:49.629 --> 00:04:51.910 for grade B merchandise where the flaws were, 00:04:52.069 --> 00:04:55.370 as the company history puts it, minor and undetectable 00:04:55.370 --> 00:04:57.769 by most. So, like, what kind of flaw are we talking 00:04:57.769 --> 00:04:59.970 about? Maybe the stitching on the inside hem 00:04:59.970 --> 00:05:03.209 was a millimeter off? Or maybe the dye lot for 00:05:03.209 --> 00:05:05.870 a batch of towels was 2 % lighter than the standard. 00:05:06.089 --> 00:05:08.410 So technically it's flawed, but functionally 00:05:08.410 --> 00:05:10.750 it's perfect. Precisely. And because of that 00:05:10.750 --> 00:05:13.050 technical flaw, The manufacturers couldn't sell 00:05:13.050 --> 00:05:15.089 it to the premium department stores at full price. 00:05:15.329 --> 00:05:17.990 Morse would swoop in, buy these lots for pennies 00:05:17.990 --> 00:05:19.889 on the dollar. And sell them to the families 00:05:19.889 --> 00:05:22.189 in San Lorenzo at a massive discount compared 00:05:22.189 --> 00:05:24.949 to the perfect version sold in the city. It's 00:05:24.949 --> 00:05:27.550 a value proposition that perfectly matched the 00:05:27.550 --> 00:05:29.990 psychology of his customer. These were people 00:05:29.990 --> 00:05:32.379 who wanted quality. They wanted the brand names, 00:05:32.500 --> 00:05:35.120 but they were pragmatic. If a towel dries you 00:05:35.120 --> 00:05:37.560 off just as well, who cares if the blue is a 00:05:37.560 --> 00:05:39.720 slightly different shade of blue? Exactly right. 00:05:39.920 --> 00:05:43.259 It allowed Mervin's to carve out a niche that 00:05:43.259 --> 00:05:46.300 was totally distinct from the luxury stores and 00:05:46.300 --> 00:05:48.720 distinct from the five -and -dime variety stores. 00:05:48.779 --> 00:05:52.300 It was the smart shopper niche. Now, before we 00:05:52.300 --> 00:05:54.439 move past the founding, we have to address the 00:05:54.439 --> 00:05:59.769 name. Mervin Morris, M -E -R -V -I -N. But the 00:05:59.769 --> 00:06:02.310 sign on the building said M -E -R -V -Y -N -S. 00:06:02.529 --> 00:06:04.490 This is one of my favorite details because it 00:06:04.490 --> 00:06:06.649 shows just how arbitrary branding can be. It's 00:06:06.649 --> 00:06:09.050 amazing. Morris was all set to call it Mervyn's 00:06:09.050 --> 00:06:11.410 with an I. It makes sense. It's his name. But 00:06:11.410 --> 00:06:13.230 he was working with a graphic designer on the 00:06:13.230 --> 00:06:15.490 original storefront signage. And the designer 00:06:15.490 --> 00:06:17.689 intervenes. The designer looked at the sketch 00:06:17.689 --> 00:06:21.670 and basically said the I is too thin. It doesn't 00:06:21.670 --> 00:06:24.509 anchor the word. A Y has a tail. It occupies 00:06:24.509 --> 00:06:26.449 more space. It looks more visually appealing 00:06:26.449 --> 00:06:28.870 and balanced. Get out of here. So he changed 00:06:28.870 --> 00:06:30.949 the spelling of his company solely because a 00:06:30.949 --> 00:06:32.970 graphic designer thought the letter Y looked 00:06:32.970 --> 00:06:36.269 cooler. That's it. That's the whole story. And 00:06:36.269 --> 00:06:40.889 that decision stuck for 60 years. Wow. It's a 00:06:40.889 --> 00:06:43.670 testament to the fact that sometimes aesthetics 00:06:43.670 --> 00:06:46.230 drive strategy from day one. So the store in 00:06:46.230 --> 00:06:48.509 San Lorenzo is a hit. It resonates with the tractome 00:06:48.509 --> 00:06:51.540 generation. But Morris didn't sit still. No, 00:06:51.620 --> 00:06:53.519 the modder worked, so he decided to scale it. 00:06:53.600 --> 00:06:57.220 The first big leap happened in 1962. Mervyn's 00:06:57.220 --> 00:06:59.100 opened its second store, and this was a really 00:06:59.100 --> 00:07:01.519 strategic shift. Where did they go? They moved 00:07:01.519 --> 00:07:03.740 about 15 miles south to Fremont, California, 00:07:04.019 --> 00:07:06.459 into the Fremont Hub Shopping Center. And this 00:07:06.459 --> 00:07:08.379 is where they transitioned from a local shop 00:07:08.379 --> 00:07:11.100 to a real chain. Yes, and notice the terminology 00:07:11.100 --> 00:07:13.860 change. In San Lorenzo, they were a standalone 00:07:13.860 --> 00:07:16.600 entity. In Fremont, they were an anchor tenant. 00:07:16.800 --> 00:07:18.500 Which means they were the main draw. They were 00:07:18.500 --> 00:07:20.959 the reason people went to the hub. Correct. And 00:07:20.959 --> 00:07:24.220 with this move, that factory seconds model, it 00:07:24.220 --> 00:07:26.480 began to fade. You just can't sustain a chain 00:07:26.480 --> 00:07:29.339 of large department stores solely on hunting 00:07:29.339 --> 00:07:31.579 for manufacturing errors. You need consistent 00:07:31.579 --> 00:07:35.040 inventory. You do. So they evolved into a general 00:07:35.040 --> 00:07:37.639 lower -priced alternative to the national chains. 00:07:37.740 --> 00:07:39.740 They kept the value pricing, but they started 00:07:39.740 --> 00:07:42.100 carrying standard merchandise. And this evolution 00:07:42.100 --> 00:07:45.500 from... quirky discounter to department store 00:07:45.500 --> 00:07:48.319 powerhouse caught the eye of the big fish. Oh, 00:07:48.339 --> 00:07:52.319 yeah. By 1978, Mervyn's had over 50 stores in 00:07:52.319 --> 00:07:54.839 three states. And that's when Dayton Hudson comes 00:07:54.839 --> 00:07:57.300 knocking. Dayton Hudson, which we now know as 00:07:57.300 --> 00:08:00.120 Target Corporation. Right. This acquisition in 00:08:00.120 --> 00:08:03.100 1978 is pivotal. Usually when a conglomerate 00:08:03.100 --> 00:08:05.019 buys a chain, they absorb it, they change the 00:08:05.019 --> 00:08:06.839 sign out front and integrate it into the board. 00:08:07.019 --> 00:08:09.699 But they didn't do that with Mervyn's. No. Mervyn's 00:08:09.699 --> 00:08:12.319 was so successful and its brand loyalty was so 00:08:12.319 --> 00:08:14.519 strong in the West that Dayton Hudson kept it 00:08:14.519 --> 00:08:17.220 as a separate subsidiary. It had its own headquarters 00:08:17.220 --> 00:08:20.079 in Hayward, its own buying teams, its own culture. 00:08:20.319 --> 00:08:22.540 Speaking of culture, I want to dig into something 00:08:22.540 --> 00:08:24.660 that kept coming up in the listener forums and 00:08:24.660 --> 00:08:27.639 the employee archives we looked at. The credit 00:08:27.639 --> 00:08:31.480 goal. Ah, yes. If you talk to anyone who worked 00:08:31.480 --> 00:08:36.139 at Mervyn's from the 80s through the 2000s, they 00:08:36.139 --> 00:08:38.830 will mention... The credit cards. It seems like 00:08:38.830 --> 00:08:40.549 it was more than just a metric. It was like a 00:08:40.549 --> 00:08:43.070 way of life. It was the engine of their profitability. 00:08:43.409 --> 00:08:45.690 You have to understand that retail margins on 00:08:45.690 --> 00:08:49.210 clothes are thin. Razor thin. But the interest 00:08:49.210 --> 00:08:52.629 rates on store credit cards, that is pure profit. 00:08:53.389 --> 00:08:55.769 And Mervyn's was incredibly aggressive about 00:08:55.769 --> 00:08:57.529 this. I was looking at the employee handbooks. 00:08:57.590 --> 00:08:59.230 This wasn't just for the sales floor managers 00:08:59.230 --> 00:09:01.289 or something. No, it was everyone. If you were 00:09:01.289 --> 00:09:03.929 a cashier, you had a quota. If you were stocking 00:09:03.929 --> 00:09:05.950 shelves but helped a customer, you had a quota. 00:09:06.269 --> 00:09:08.590 What was the quota? The expectation was that 00:09:08.590 --> 00:09:10.950 a part -time employee would generate one credit 00:09:10.950 --> 00:09:14.509 application for every eight hours. Worked. Full 00:09:14.509 --> 00:09:16.990 -time leadership had even stricter goals. That 00:09:16.990 --> 00:09:18.929 creates a really high -pressure environment. 00:09:19.190 --> 00:09:21.129 I can just imagine the friction at the register. 00:09:21.409 --> 00:09:23.509 Oh, absolutely. You just want to buy a pair of 00:09:23.509 --> 00:09:25.970 socks, and the cashier is pleading with you to 00:09:25.970 --> 00:09:28.269 open an account because their job depends on 00:09:28.269 --> 00:09:30.590 it. It does create friction, but it also creates 00:09:30.590 --> 00:09:33.649 a massive database. Mervyn's knew exactly who 00:09:33.649 --> 00:09:36.799 was buying what, when, and how often. That data 00:09:36.799 --> 00:09:39.059 allowed them to tailor their inventory and their 00:09:39.059 --> 00:09:41.299 marketing, especially those Sunday circulars 00:09:41.299 --> 00:09:43.659 that arrived in the newspaper, with incredible 00:09:43.659 --> 00:09:47.200 precision. So fueled by Dayton Hudson's deep 00:09:47.200 --> 00:09:49.559 pockets and this aggressive credit strategy, 00:09:49.980 --> 00:09:54.360 Mervyn's enters its empire phase. The 1980s and 00:09:54.360 --> 00:09:56.580 90s saw them pushing hard beyond the West Coast. 00:09:56.720 --> 00:09:59.340 This is where we see the ambition, but also... 00:09:59.659 --> 00:10:01.980 Maybe the cracks in the foundation. I think so. 00:10:02.220 --> 00:10:05.820 They moved into Arizona, Colorado, Texas, Michigan, 00:10:05.960 --> 00:10:09.019 Minnesota. And then they tried to conquer the 00:10:09.019 --> 00:10:11.879 South. The Atlanta and Miami campaigns. This 00:10:11.879 --> 00:10:14.700 is a classic case study in retail hubris. In 00:10:14.700 --> 00:10:17.120 the late 80s and early 90s, Mervis decided they 00:10:17.120 --> 00:10:18.799 could just parachute into markets like Atlanta 00:10:18.799 --> 00:10:20.740 and Miami and replicate their California success. 00:10:21.159 --> 00:10:22.679 But they didn't just build new stores. They took 00:10:22.679 --> 00:10:25.100 over existing real estate, right? Right. And 00:10:25.100 --> 00:10:27.419 this is where the mismatch happened. In Miami, 00:10:27.519 --> 00:10:30.179 for instance. They took over five locations that 00:10:30.179 --> 00:10:32.679 had previously been Lord & Taylor stores. Lord 00:10:32.679 --> 00:10:35.039 & Taylor. That is a very, very different vibe 00:10:35.039 --> 00:10:37.620 from Mervyn's. It's night and day. Lord & Taylor's 00:10:37.620 --> 00:10:41.340 upscale, East Coast, aspirational. Mervyn's is 00:10:41.340 --> 00:10:44.820 sensible. Exactly. Imagine the customer psychology. 00:10:45.220 --> 00:10:47.000 You're used to walking into that building and 00:10:47.000 --> 00:10:50.419 seeing high -end fashion, perfume counters, a 00:10:50.419 --> 00:10:53.269 certain quiet luxury. Mm -hmm. Then Mervin's 00:10:53.269 --> 00:10:55.350 moves in. They keep the shell of the building, 00:10:55.409 --> 00:10:57.409 but fill it with mid -range basics and aggressive 00:10:57.409 --> 00:11:00.429 signage about smart saving. It's a total culture 00:11:00.429 --> 00:11:03.549 clash. The building is promising one thing, and 00:11:03.549 --> 00:11:05.610 the merchandise is delivering something completely 00:11:05.610 --> 00:11:08.789 different. It confused the customer. And frankly, 00:11:08.889 --> 00:11:11.090 the California cool vibe didn't translate well 00:11:11.090 --> 00:11:13.950 to the specific cultural nuances of the Deep 00:11:13.950 --> 00:11:16.750 South or the Miami metro area. So the sales just 00:11:16.750 --> 00:11:19.720 weren't there. Mervin's invested heavily. Millions 00:11:19.720 --> 00:11:22.039 of dollars, but the sales per square foot never 00:11:22.039 --> 00:11:24.360 materialized. And the retreat was pretty swift. 00:11:24.539 --> 00:11:28.259 By 1997, they pulled out of both Atlanta and 00:11:28.259 --> 00:11:31.019 Miami completely. They sold 10 of the Florida 00:11:31.019 --> 00:11:34.139 stores to Dillard's. It was a humiliating pullback. 00:11:34.299 --> 00:11:36.480 So it proved that Mervyn's was a regional power, 00:11:36.600 --> 00:11:38.879 but perhaps not a national one. I think that's 00:11:38.879 --> 00:11:41.320 fair to say. So they retreat to their stronghold, 00:11:41.419 --> 00:11:43.759 the West, the Southwest parts of the Midwest. 00:11:44.019 --> 00:11:46.620 But even there, they started feeling the heat. 00:11:47.389 --> 00:11:49.750 By the mid -90s, the retail landscape is changing. 00:11:49.990 --> 00:11:52.649 You have Kohl's rising up. You have Target itself 00:11:52.649 --> 00:11:55.850 becoming Tarzay, making cheap look chic. And 00:11:55.850 --> 00:11:57.870 Mervyn's was stuck in the middle. The dreaded 00:11:57.870 --> 00:12:00.110 middle. Not the cheapest, not the coolest, not 00:12:00.110 --> 00:12:03.769 the most luxurious, just there. So in 1995, they 00:12:03.769 --> 00:12:06.750 attempt a massive rebrand to find an identity. 00:12:06.970 --> 00:12:09.370 Virgin's California. They legally changed the 00:12:09.370 --> 00:12:12.190 name. They updated the signage. They wanted to 00:12:12.190 --> 00:12:14.610 bottle the sunshine and optimism of the West 00:12:14.610 --> 00:12:16.629 Coast and sell it to the rest of the country. 00:12:16.860 --> 00:12:19.200 And they hired the ultimate Californian to sell 00:12:19.200 --> 00:12:22.519 it. Joe Montana. You couldn't pick a better avatar 00:12:22.519 --> 00:12:25.419 for 1990s California excellence than the 49ers 00:12:25.419 --> 00:12:27.580 quarterback. They put him in everything. TV spots, 00:12:27.759 --> 00:12:31.500 catalogs, billboards. The message was, Mervin's 00:12:31.500 --> 00:12:34.399 isn't just a store. It's a lifestyle. But did 00:12:34.399 --> 00:12:37.000 it work? I mean, specifically, did it work in 00:12:37.000 --> 00:12:40.590 places that weren't California? Data says no. 00:12:40.750 --> 00:12:43.710 In fact, it kind of backfired. Really? The records 00:12:43.710 --> 00:12:46.250 show that store managers in Texas, places like 00:12:46.250 --> 00:12:49.309 Lubbock, Midland, Odessa, were baffled by this. 00:12:49.809 --> 00:12:52.450 Texans have a very strong state identity. They 00:12:52.450 --> 00:12:54.409 did not want to shop at Mervyn's California. 00:12:54.450 --> 00:12:56.289 I can absolutely see that. Putting California 00:12:56.289 --> 00:12:58.590 on the sign in West Texas is basically inviting 00:12:58.590 --> 00:13:00.870 people to drive past you. It was a fundamental 00:13:00.870 --> 00:13:03.169 misunderstanding of their customer base in those 00:13:03.169 --> 00:13:05.840 regions. The rebrand had little to no effect 00:13:05.840 --> 00:13:09.360 on revenue. And by 2001, the California suffix 00:13:09.360 --> 00:13:11.580 was quietly dropped. Just gone. They went back 00:13:11.580 --> 00:13:14.240 to just Mervyn's. So we enter the 2000s. The 00:13:14.240 --> 00:13:16.940 rebrand failed. The expansion to the South failed. 00:13:17.039 --> 00:13:20.019 But the store is still massive. It's still generating 00:13:20.019 --> 00:13:23.720 billions. However, the corporate parent, Target, 00:13:23.980 --> 00:13:26.279 is looking at its portfolio and making some hard 00:13:26.279 --> 00:13:28.480 choices. This is the beginning of the end, though 00:13:28.480 --> 00:13:33.159 nobody knew it at the time. In March 2004, Target 00:13:33.159 --> 00:13:35.399 Corporation announced it was putting Mervyn's 00:13:35.399 --> 00:13:37.799 and the legendary Marshall Fields chain up for 00:13:37.799 --> 00:13:40.820 sale. Target wanted to be pure Target. They wanted 00:13:40.820 --> 00:13:43.340 to shed the baggage. Target's own growth was 00:13:43.340 --> 00:13:46.700 exploding, and Mervyn's was seen as a drag on 00:13:46.700 --> 00:13:50.120 their margins. But selling Mervyn's was tricky 00:13:50.120 --> 00:13:51.799 because of what we mentioned earlier. The real 00:13:51.799 --> 00:13:53.980 estate. The real estate. Mervyn's owned a lot 00:13:53.980 --> 00:13:56.080 of its own buildings. It wasn't just leasing 00:13:56.080 --> 00:13:59.659 space in malls. It held the deeds. And in 2004, 00:13:59.960 --> 00:14:02.419 the real estate market was. It was heating up 00:14:02.419 --> 00:14:05.519 big time. So potential buyers looked at Mervin's 00:14:05.519 --> 00:14:08.500 and didn't see a retailer. They saw a portfolio 00:14:08.500 --> 00:14:10.740 of land assets that happened to sell shirts. 00:14:11.120 --> 00:14:13.039 But Target actually tried to do the right thing 00:14:13.039 --> 00:14:15.320 here, didn't they, initially? They did. The sources 00:14:15.320 --> 00:14:18.299 indicate that Target refused to sell to liquidation 00:14:18.299 --> 00:14:21.039 groups that just wanted to shut it down immediately 00:14:21.039 --> 00:14:23.120 to sell the land. They wanted to protect the 00:14:23.120 --> 00:14:25.840 30 ,000 employees. They wanted a buyer who would 00:14:25.840 --> 00:14:28.649 commit to running the retail operation. But there 00:14:28.649 --> 00:14:30.730 were sharks circling. We have to talk about what 00:14:30.730 --> 00:14:31.970 happened in Minnesota with the May Department 00:14:31.970 --> 00:14:35.250 Stores Company. This was a prelude to the chaos. 00:14:35.529 --> 00:14:37.950 What happened there? This was a brutal strategic 00:14:37.950 --> 00:14:41.809 maneuver. In June 2004, as part of the Marshall 00:14:41.809 --> 00:14:44.950 Fields deal, the May Company also bought nine 00:14:44.950 --> 00:14:47.750 Mervyn's locations in the Twin Cities area. Okay, 00:14:47.789 --> 00:14:50.549 so did they open them as May Stores? No. They 00:14:50.549 --> 00:14:52.049 bought them and immediately closed them. Wow. 00:14:52.210 --> 00:14:55.750 Just to kill the competition. Exactly. Analysts 00:14:55.750 --> 00:14:57.950 at the time saw it as a defensive blocking move. 00:14:58.210 --> 00:15:00.470 They didn't want a competitor taking those spots, 00:15:00.610 --> 00:15:02.830 so they bought them and shuttered them. It showed 00:15:02.830 --> 00:15:05.490 that the store part of Mervyn's was becoming 00:15:05.490 --> 00:15:08.809 secondary to the location part. So enter the 00:15:08.809 --> 00:15:12.269 private equity consortium. July 2004, Target 00:15:12.269 --> 00:15:15.289 finds a buyer. A group. Sun Capital Partners, 00:15:15.669 --> 00:15:18.350 Cerberus Capital Management, and Lubert Adler 00:15:18.350 --> 00:15:20.549 Management. These are heavy hitters in the world 00:15:20.549 --> 00:15:23.409 of distressed assets and private equity. Now, 00:15:23.570 --> 00:15:25.809 we need to slow down here and explain exactly 00:15:25.809 --> 00:15:28.289 what these firms did, because on the surface, 00:15:28.509 --> 00:15:31.629 they bought a retail company. But in reality, 00:15:31.789 --> 00:15:34.230 they performed a very specific type of financial 00:15:34.230 --> 00:15:37.100 engineering that is. Let's call it controversial. 00:15:37.360 --> 00:15:40.759 It's the opco -propco split. This is critical 00:15:40.759 --> 00:15:43.320 to understanding why Mervyn's died. Okay, break 00:15:43.320 --> 00:15:46.679 that down for us. Opco and propco. Okay. So traditionally, 00:15:46.980 --> 00:15:49.759 Mervyn's was one company. It sold clothes, that's 00:15:49.759 --> 00:15:52.639 operations, and it owned buildings. That's property. 00:15:52.779 --> 00:15:54.779 Right. Simple enough. When the private equity 00:15:54.779 --> 00:15:57.259 group took over, they effectively sliced the 00:15:57.259 --> 00:16:00.120 company in two. They created a property company, 00:16:00.240 --> 00:16:03.259 or PropCo, to hold the valuable real estate assets. 00:16:03.500 --> 00:16:05.539 And an operating company, OpCo, to run the store. 00:16:05.539 --> 00:16:07.340 Exactly. So far, that just sounds like paperwork. 00:16:07.600 --> 00:16:09.980 Yeah. But it becomes predatory through a sale 00:16:09.980 --> 00:16:13.059 -leaseback mechanism. The new owners, the private 00:16:13.059 --> 00:16:15.679 equity firms, essentially had the PropCo charge 00:16:15.679 --> 00:16:18.500 the OpCo rent. So Mervyn's, the store, suddenly 00:16:18.500 --> 00:16:20.559 had to pay rent on buildings it used to own. 00:16:20.700 --> 00:16:23.519 Yes. And not just token rent. The allegations 00:16:23.519 --> 00:16:25.639 in the later lawsuits claimed that the rent was 00:16:25.639 --> 00:16:28.179 set at market rates or higher. But here is the 00:16:28.179 --> 00:16:31.100 kicker. Okay. The private equity firms used the 00:16:31.100 --> 00:16:33.960 future stream of those rent payments to secure 00:16:33.960 --> 00:16:35.919 the loans they used to buy the company in the 00:16:35.919 --> 00:16:37.960 first place. Wait, wait. Let me get this straight. 00:16:38.100 --> 00:16:41.159 They bought the company using debt and then forced 00:16:41.159 --> 00:16:43.840 the company to pay the rent that would then pay 00:16:43.840 --> 00:16:47.120 off that debt. That's exactly it. It's a leveraged 00:16:47.120 --> 00:16:49.620 buyout where the target company pays for its 00:16:49.620 --> 00:16:53.059 own acquisition. Mervyn's, the retail operation, 00:16:53.440 --> 00:16:56.080 was suddenly saddled with massive new expenses. 00:16:56.539 --> 00:16:59.580 Rent without any change in its revenue. They 00:16:59.580 --> 00:17:01.659 were bleeding cash to pay their own landlords 00:17:01.659 --> 00:17:04.000 who happened to be their owners. It's like selling 00:17:04.000 --> 00:17:05.619 your kidneys and then renting them back from 00:17:05.619 --> 00:17:07.319 the guy who bought them. That's a vivid way to 00:17:07.319 --> 00:17:09.720 put it. But yes, it stripped the company of its 00:17:09.720 --> 00:17:12.569 most valuable safety net. its real estate, and 00:17:12.569 --> 00:17:15.390 massively increased its monthly costs. So under 00:17:15.390 --> 00:17:17.250 this new structure, the clock starts ticking. 00:17:17.509 --> 00:17:19.930 The new owners bring in Rick Leto as president 00:17:19.930 --> 00:17:22.549 in 2005 to try and turn the retail side around. 00:17:22.950 --> 00:17:26.049 But the financial headwinds are enormous. And 00:17:26.049 --> 00:17:28.450 their solution to the cash crunch was to shrink. 00:17:28.750 --> 00:17:31.789 In September 2005, just a year after the takeover, 00:17:31.910 --> 00:17:36.420 they announced 62 store closures. 62? That's 00:17:36.420 --> 00:17:39.059 a huge percentage of the fleet. It was a bloodbath. 00:17:39.099 --> 00:17:42.259 They pulled out of 28 locations in Texas alone. 00:17:42.480 --> 00:17:45.700 They wiped out 15 stores in Michigan. They retreated 00:17:45.700 --> 00:17:47.759 from Oklahoma. And the rationale was that these 00:17:47.759 --> 00:17:49.759 stores were underperforming, right? They claimed 00:17:49.759 --> 00:17:52.240 these stores represented only 17 % of sales, 00:17:52.380 --> 00:17:55.599 but were a drag on profitability. Right. But 00:17:55.599 --> 00:17:58.400 if you look at it through the lens of the PropCupCo 00:17:58.400 --> 00:18:01.000 split, you have to wonder. Right. Were they closing 00:18:01.000 --> 00:18:03.640 them because the stores were bad or because the 00:18:03.640 --> 00:18:05.700 real estate was worth more if they sold it off? 00:18:05.880 --> 00:18:08.140 That's the enviable real estate portfolio line 00:18:08.140 --> 00:18:10.299 we saw in the document. Exactly. The investors 00:18:10.299 --> 00:18:12.460 knew that even if they couldn't sell jeans, they 00:18:12.460 --> 00:18:15.319 could sell the dirt under the store. So 2005 00:18:15.319 --> 00:18:19.359 is a disaster. 2006 and 2007, see more contraction. 00:18:19.839 --> 00:18:21.859 They leave Oregon and Washington completely. 00:18:21.980 --> 00:18:25.039 They close the last Colorado store. The footprint 00:18:25.039 --> 00:18:27.279 is just getting smaller and smaller. And then 00:18:27.279 --> 00:18:29.599 the perfect storm hits 2008, the Great Recession. 00:18:30.059 --> 00:18:32.180 Mervyn's was already fragile because of the financial 00:18:32.180 --> 00:18:35.359 engineering. Now the consumer economy just collapses. 00:18:35.519 --> 00:18:38.779 It was a death spiral. It was. By July 2008, 00:18:39.099 --> 00:18:42.579 the situation was critical. On July 21, reports 00:18:42.579 --> 00:18:45.359 surfaced that Mervyn's had stopped updating its 00:18:45.359 --> 00:18:47.740 financial status to its lenders. That's the corporate 00:18:47.740 --> 00:18:50.920 equivalent of going radio silent. And the market 00:18:50.920 --> 00:18:53.839 reacted immediately. Vendors. The companies that 00:18:53.839 --> 00:18:56.759 make the jeans, the shoes, the frying pans, they 00:18:56.759 --> 00:18:59.400 stop shipping. And consider the timing. July. 00:18:59.559 --> 00:19:02.660 This is the lead up to back to school. The second 00:19:02.660 --> 00:19:05.039 most important season in retail. If you don't 00:19:05.039 --> 00:19:08.480 have inventory in August, you are dead. Mervyn's 00:19:08.480 --> 00:19:11.099 shelves started to look bare. Lenders denied 00:19:11.099 --> 00:19:14.000 requests for working capital. They were suffocating. 00:19:14.319 --> 00:19:16.839 And this is where Mervyn's, the company, does 00:19:16.839 --> 00:19:18.819 something extraordinary. They sue their owner. 00:19:18.960 --> 00:19:21.680 This is so rare. And it highlights just how contentious 00:19:21.680 --> 00:19:25.000 this buyout was. In September 2008, the debtor, 00:19:25.039 --> 00:19:27.420 Mervyn's, filed a lawsuit against the private 00:19:27.420 --> 00:19:30.039 equity firms, Cerberus, Sun Capital, all of them. 00:19:30.119 --> 00:19:31.640 We need to be specific about what they alleged. 00:19:31.720 --> 00:19:33.619 They didn't just say you did a bad job. No, they 00:19:33.619 --> 00:19:36.400 alleged fraudulent transfer. The lawsuit claimed 00:19:36.400 --> 00:19:38.880 that the 2004 deal had stripped the retailer 00:19:38.880 --> 00:19:41.460 of its real estate assets, leaving it insolvent. 00:19:41.599 --> 00:19:44.210 So they were essentially saying, You set us up 00:19:44.210 --> 00:19:47.269 to fail so you could loot the real estate. That 00:19:47.269 --> 00:19:49.509 was the core of the argument. They claimed the 00:19:49.509 --> 00:19:51.650 structure was designed to benefit the shareholders 00:19:51.650 --> 00:19:54.390 at the expense of the company's long -term viability. 00:19:55.069 --> 00:19:57.309 Now, the private equity firms denied this, of 00:19:57.309 --> 00:19:59.309 course. They argued they tried to save the company 00:19:59.309 --> 00:20:01.509 and that the recession was the real culprit. 00:20:01.750 --> 00:20:04.150 But the fact that the lawsuit was filed at all 00:20:04.150 --> 00:20:06.829 shows the level of internal toxicity. Oh, absolutely. 00:20:07.190 --> 00:20:09.730 And while the lawyers were fighting, the stores 00:20:09.730 --> 00:20:14.180 were dying. On July 29, 2008, Mervyn's filed 00:20:14.180 --> 00:20:16.839 for Chapter 11 bankruptcy. Chapter 11 is usually 00:20:16.839 --> 00:20:19.359 an attempt to reorganize. Right. You hold off 00:20:19.359 --> 00:20:21.500 the creditors. You restructure the debt. You 00:20:21.500 --> 00:20:24.259 try to emerge as a leaner company. Mervyn's vowed 00:20:24.259 --> 00:20:27.140 to keep stores open. But the reality on the ground 00:20:27.140 --> 00:20:29.019 was chaotic. I read about the grand openings 00:20:29.019 --> 00:20:31.200 that happened during this time. It's just tragic. 00:20:31.539 --> 00:20:33.799 There were three stores that had held their grand 00:20:33.799 --> 00:20:36.359 openings just a few months prior to the bankruptcy 00:20:36.359 --> 00:20:39.839 filing. Imagine hiring staff, training them. 00:20:40.200 --> 00:20:43.299 Cutting the ribbon and then telling them 90 days 00:20:43.299 --> 00:20:46.420 later that the company's insolvent. It shows 00:20:46.420 --> 00:20:48.299 a complete disconnect between the operational 00:20:48.299 --> 00:20:51.180 plans and the financial reality. So they're in 00:20:51.180 --> 00:20:54.480 Chapter 11. They close 26 more stores. They pull 00:20:54.480 --> 00:20:56.640 out of Idaho. They exit San Antonio. They're 00:20:56.640 --> 00:20:59.539 desperately trying to find a buyer to save the 00:20:59.539 --> 00:21:01.960 remaining core. And there was a glimmer of hope. 00:21:02.220 --> 00:21:05.579 Forever 21. Right. Forever 21 was on a rocket 00:21:05.579 --> 00:21:07.160 ship ride at this point. They were expanding 00:21:07.160 --> 00:21:10.319 massively. They were. And they made a bid. They 00:21:10.319 --> 00:21:13.480 offered to purchase 149 of the remaining Mervyn 00:21:13.480 --> 00:21:15.259 store. That would have saved thousands of jobs. 00:21:15.299 --> 00:21:17.160 It would have kept the storefronts active, even 00:21:17.160 --> 00:21:19.960 if the name changed. It would have. But the negotiations 00:21:19.960 --> 00:21:23.259 fell apart. The details are sealed in the bankruptcy 00:21:23.259 --> 00:21:26.319 dealings, but usually these things fail over 00:21:26.319 --> 00:21:28.460 price or over the rejection of certain leases. 00:21:28.779 --> 00:21:31.200 Forever 21 walked away. And that was the final 00:21:31.200 --> 00:21:34.740 mail. On October 17, 2008, the bankruptcy court 00:21:34.740 --> 00:21:36.579 converted the case from Chapter 11 to Chapter 00:21:36.579 --> 00:21:38.980 7. And for listeners who aren't bankruptcy lawyers, 00:21:39.119 --> 00:21:41.660 the difference between 11 and 7 is it's the difference 00:21:41.660 --> 00:21:43.799 between the hospital and the morgue. That's a 00:21:43.799 --> 00:21:45.880 good way to put it. Chapter 7 is liquidation. 00:21:46.220 --> 00:21:49.380 It means the entity is effectively dead. The 00:21:49.380 --> 00:21:51.660 goal is no longer to save the company. It is 00:21:51.660 --> 00:21:54.779 to sell off every stapler, every mannequin, and 00:21:54.779 --> 00:21:56.819 every light fixture to pay back the creditors. 00:21:56.980 --> 00:21:59.119 The going out of business signs went up. And 00:21:59.119 --> 00:22:01.880 by the holiday season of 2008, Mervyn's was gone. 00:22:02.059 --> 00:22:04.779 The aftermath was a feeding frenzy for the surviving 00:22:04.779 --> 00:22:07.720 retailers. Coles and Forever 21 eventually came 00:22:07.720 --> 00:22:09.819 back to the table, but not to buy the company, 00:22:09.900 --> 00:22:12.079 just to pick the carcass. Right. They won a joint 00:22:12.079 --> 00:22:15.440 bid to take over the leases of 46 stores. Coles 00:22:15.440 --> 00:22:19.240 took 31. Forever 21 took 15. It's interesting 00:22:19.240 --> 00:22:21.400 that Kohl's took so many. In a lot of ways, Kohl's 00:22:21.400 --> 00:22:24.140 is the spiritual successor to Mervin's. The store 00:22:24.140 --> 00:22:26.740 layout, the pricing, the racetrack aisle design, 00:22:26.980 --> 00:22:29.599 it feels very similar. It does. Kohl's effectively 00:22:29.599 --> 00:22:32.599 absorbed that middle -class mom demographic that 00:22:32.599 --> 00:22:34.579 Mervin's abandoned. So the stores are converted 00:22:34.579 --> 00:22:36.559 or demolished. The headquarters in Hayward is 00:22:36.559 --> 00:22:39.720 knocked down with the name Mervin's. It didn't 00:22:39.720 --> 00:22:41.940 completely vanish. This brings us to the zombie 00:22:41.940 --> 00:22:45.240 phase of our deep dive. First, the physical ghosts. 00:22:45.789 --> 00:22:48.049 If you drive around California today, you can 00:22:48.049 --> 00:22:50.730 still find Mervyn's on the map. Literally on 00:22:50.730 --> 00:22:53.190 the map. There is a Mervyn's Drive in Fullerton, 00:22:53.349 --> 00:22:55.849 California. What's on Mervyn's Drive now? A floor 00:22:55.849 --> 00:22:58.930 and decor. But the street sign remains. It's 00:22:58.930 --> 00:23:01.309 a municipal tombstone. And there's a Mervyn's 00:23:01.309 --> 00:23:03.890 Place in Bakersfield and a Mervyn's Way in San 00:23:03.890 --> 00:23:06.549 Jose. These streets were named when Mervyn's 00:23:06.549 --> 00:23:09.410 was the anchor that developed the area. The anchor 00:23:09.410 --> 00:23:11.869 is gone, but the city infrastructure remembers. 00:23:12.289 --> 00:23:15.069 But the brand itself, the intellectual property... 00:23:15.230 --> 00:23:18.650 had a stranger journey. In 2009, the Morris family 00:23:18.650 --> 00:23:22.089 stepped back in. Jeff Morris, the son of the 00:23:22.089 --> 00:23:24.529 founder, Mervyn Morris, bought the rights to 00:23:24.529 --> 00:23:26.829 the Mervyn's name and the customer list out of 00:23:26.829 --> 00:23:29.130 bankruptcy. There is something poetic about that. 00:23:29.210 --> 00:23:31.329 The son buying back the father's name from the 00:23:31.329 --> 00:23:34.210 ruins. It is poetic. And his intention was to 00:23:34.210 --> 00:23:36.450 relaunch it. He wanted to bring Mervyn's back 00:23:36.450 --> 00:23:38.829 as an internet -based enterprise. But for a long 00:23:38.829 --> 00:23:41.549 time, nothing happened. Years. There was a website 00:23:41.549 --> 00:23:44.609 that just said, coming soon. Or ask for an email 00:23:44.609 --> 00:23:46.950 address. It just seemed like the project had 00:23:46.950 --> 00:23:49.529 stalled. But if you go to Mervins .com right 00:23:49.529 --> 00:23:53.670 now, in 2024, it is active. It is. But it's not 00:23:53.670 --> 00:23:55.630 the Mervins you remember. You won't find the 00:23:55.630 --> 00:23:58.569 High Sierra brand shirts or the specific private 00:23:58.569 --> 00:24:01.230 labels they used to carry. What is it then? It's 00:24:01.230 --> 00:24:04.109 essentially a closeout retailer. They sell overstock 00:24:04.109 --> 00:24:07.029 merchandise from other brands. It's an online 00:24:07.029 --> 00:24:10.009 discount bin wearing the skin of Mervins. A zombie 00:24:10.009 --> 00:24:13.200 brand. Exactly. It leverages the trust and nostalgia 00:24:13.200 --> 00:24:16.279 people have for the name to sell goods that have 00:24:16.279 --> 00:24:19.119 no actual connection to the original company's 00:24:19.119 --> 00:24:21.900 lineage. So let's try to synthesize all of this. 00:24:21.960 --> 00:24:24.539 We started with a guy in 1949 looking for crooked 00:24:24.539 --> 00:24:27.900 stitches and shirts to sell to GIs. We ended 00:24:27.900 --> 00:24:30.000 with a private equity collapse and a website 00:24:30.000 --> 00:24:33.440 selling leftovers. What is the big takeaway here? 00:24:33.700 --> 00:24:36.220 I think the Mervyn story is the perfect illustration 00:24:36.220 --> 00:24:38.500 of the financialization of the American economy. 00:24:38.660 --> 00:24:41.250 How so? In the beginning, the value of Mervyn's 00:24:41.250 --> 00:24:44.250 was its ability to serve its customers. It made 00:24:44.250 --> 00:24:46.630 money because it sold good stuff at good prices. 00:24:46.809 --> 00:24:49.329 But by the end, the value of Mervyn's wasn't 00:24:49.329 --> 00:24:51.410 its relationship with the customer. It was its 00:24:51.410 --> 00:24:53.690 real estate portfolio and its capacity to hold 00:24:53.690 --> 00:24:56.309 debt. The product became secondary to the financial 00:24:56.309 --> 00:24:59.309 engineering. Exactly. The company was consumed 00:24:59.309 --> 00:25:01.329 by the very capital markets that were supposed 00:25:01.329 --> 00:25:04.049 to support it. And when the recession hit, it 00:25:04.049 --> 00:25:06.529 had no resilience left because it had been hollowed 00:25:06.529 --> 00:25:08.849 out from the inside. It's a cautionary tale. 00:25:08.970 --> 00:25:12.049 Just because a company is huge, 83rd largest 00:25:12.049 --> 00:25:15.349 in the country, doesn't mean it's safe. If the 00:25:15.349 --> 00:25:17.470 land is worth more than the business, the business 00:25:17.470 --> 00:25:20.190 is living on borrowed time. And in the case of 00:25:20.190 --> 00:25:23.390 Mervyn's, that time ran out in 2008. Well, next 00:25:23.390 --> 00:25:25.690 time I drive past a Kohl's that looks suspiciously 00:25:25.690 --> 00:25:27.890 like a Mervyn's or I see that street sign in 00:25:27.890 --> 00:25:29.829 Fullerton, I'm going to think about the I that 00:25:29.829 --> 00:25:32.809 became a Y and the empire that just disappeared. 00:25:33.109 --> 00:25:35.609 It's a landscape full of ghosts if you know where 00:25:35.609 --> 00:25:37.950 to look. Thanks for joining us on this deep dive. 00:25:38.130 --> 00:25:40.910 It's a complex story but one that explains so 00:25:40.910 --> 00:25:43.170 much about how our retail world got to where 00:25:43.170 --> 00:25:45.289 it is today. We'll catch you on the next one.