Payless ShoeSource, Inc. - Company Profile, Information, Business Description, History, Background Information on Payless ShoeSource, Inc.

3232 East Sixth Street
Topeka, Kansas 66607-2207

Company Perspectives:

Payless ShoeSource is the largest family footwear chain in the United States. Our mission is to satisfy our customers' needs for affordable footwear by providing fashion, outstanding value, selection and convenience in a self-service shopping environment. We are committed to achieving a superior profit growth rate.

History of Payless ShoeSource, Inc.

Payless ShoeSource, Inc. is the largest footwear retailer in the United States. The company's 4,261 stores operate in all 50 states as well as Puerto Rico and the U.S. Virgin Islands. Payless has built its success by offering a large selection of shoes at very low prices. In 1996 the average cost of a pair of Payless shoes was only $11.00. The company has been able to maintain its affordable prices by sticking exclusively to a self-service format, keeping a tight rein on cost structure, and insisting on efficient sourcing and inventory controls. Founded in Topeka, Kansas, in the mid-1950s by cousins Louis and Shaol Pozez, Payless was acquired by May Department stores in 1979. The company remained a May subsidiary until 1996, when it was spun off to May shareholders. Payless ShoeSource had become such an American institution by 1996 that, during that year alone, over 40 percent of women in the United States purchased at least one pair of shoes from a Payless store.

Company Origins in the 1950s

Payless ShoeSource was founded as Pay-Less National in Topeka, Kansas, in 1956 by two cousins, Louis and Shaol Pozez. Three "Pay-Less" stores were opened in Topeka within a year of the company's founding. The company then expanded into Oklahoma, Texas, and Nebraska, opening 12 new outlets by the end of the decade. From the start, Payless stores were designed to maintain low prices by keeping overhead to a minimum. The first outlets were located in former supermarkets with the original fixtures replaced by simple, unpainted, wooden shelving, constructed in large part by store managers. The self-service format of the stores allowed Payless to limit staff, which usually consisted only of a manager and one or two clerks. This no-frills approach to operations kept the average price for a pair of shoes at the original Payless stores below $3.00.

Payless was not alone in offering budget footwear in a self-service format to American consumers. The self-service shoe industry emerged soon after World War II when cheap imported shoes began to be available on a widespread basis. Growth was fuelled by changes in fashion that emphasized a looser fitting, more casual shoe as well as more variety in footwear. The 1950s baby boom also contributed to the rise in large discount shoe stores which catered primarily to middle income families with children. Like most of these low-end shoe stores, Payless's major market was in women's and children's shoes which constituted about 60 and 30 percent of sales, respectively. By the early 60s, the $6 million sales rung up in Payless's 38 stores represented only a small fraction of the estimated $270 million volume of the self-service retail shoe industry.

Growth and Acquisitions in the 1960s

In the early 60s, Pay-Less National, which had been operating retail stores under various names, including Pay-Less Self Service, National Self Service, Gambles Discount Shoes, and Shopper's City, changed its corporate name to "Volume Distributors" in order to reflect the company's diverse operations more closely. In 1962 Volume Distributors went public to raise capital for further growth. The influx of cash from the IPO allowed the company to open an average of 12 new stores annually in the early 60s. In order to cope with the increased inventory, in 1966 Volume Distributors adopted a new computerized inventory system that used stock-keeping units (SKUs) to keep track of the large number of shoe styles and sizes that were stocked in the company's 50 stores. The new system was temporarily sidetracked when a tornado completely destroyed the company headquarters and warehouse in Topeka on the very evening that the first computer-generated inventory report was to be produced. Volume Distributors quickly picked up the pieces from this natural disaster and built new corporate offices at another location in Topeka.

In 1967 "Volume Distributors" was renamed "Volume Shoe Corporation" in order to identify it more closely with the footwear industry. In the same year the company launched an accelerated expansion program that saw the number of stores top 100 and annual sales rise to over $10 million by the end of the decade. In addition to new store openings in the late 1960s and early 70s, Volume Shoe implemented a program of acquisitions to accelerate growth further. From 1968 through 1973 Volume Shoe purchased eight smaller retail shoe companies, adding a total of 145 stores to the growing chain. The prosperity of the company during the inflation-plagued early 70s actually led to a conflict with the Nixon administration in 1971 when Volume Shoe raised its dividend in spite of a government imposed wage-price freeze. Company president Louis Pozez was summoned to Washington to justify the dividend hike in a meeting with the President's "Cost of Living Council," but ultimately no further action was taken against the firm.

Accelerated Expansion in the 1970s

The rate of new store openings continued to accelerate through the mid-1970s. By 1975 Volume Shoe was operating 486 retail units in 31 states with total net sales of almost $75 million, making it the largest chain of family shoe stores in the United States. The Payless ShoeSource name was adopted in 1978 for the bulk of Volume Shoe retail outlets and the company logo was changed to the now familiar yellow, orange, and brown. The success of Volume Shoe and its Payless ShoeSource outlets was due in part to the company's skill at choosing locations for its stores. Although early stores were primarily freestanding, in the late 70s Payless outlets also opened in major malls across the country. By 1979, 40 percent of all Payless stores were mall-based. The distribution of Payless units in a variety of real estate locales including suburban strip developments, central business districts, shopping centers, and shopping malls, promoted the visibility and consumer recognition of the bold yellow logo as well as increasing the range of customers who would feel comfortable shopping at Payless stores.

From the start, Payless's relationship with its suppliers was key to the company's success. In the early years, the company bought their shoes "off the shelf" from American as well as foreign manufacturers, protecting themselves from shortages and sudden price increases by utilizing a large number of suppliers. In the early 60s no single manufacturer supplied more than six percent of Payless's merchandise. By the mid-60s Payless was having shoes made to their own specifications to ensure that the shoe styles available in their stores matched the expectations of increasingly demanding consumers. These company specific shoe styles would eventually evolve into private label brands that would become the staple of Payless ShoeSource outlets from the mid-70s. The development of in-house brands allowed Payless to maintain tight control over style and quality, the two issues that had driven customers away from many discount chains in the 70s.

Acquired by May Department Stores

In 1979 Volume Shoe, with its 739 Payless ShoeSource stores generating annual sales of $191 million, was acquired by May Department Stores in a $160 million stock swap. May was one of the leading retailers in the United States, with annual sales near $3 billion. The retail giant owned 11 department and discount store chains but Volume Shoe was May's first entry into the discount shoe business. Volume Shoe was considered an excellent acquisition by analysts. The self-service shoe chain was earning operating profits of $28 million or almost 15 percent of sales, one of the best performances in the retail sector. May's capital allowed the Payless chain to expand at an accelerated pace and by 1981 there were 1,089 Payless outlets in 34 states. More than half of these stores were located in the Sunbelt states, where an influx of population was creating record retail growth. In the early 80s, the Payless chain included 246 outlets in Texas and California alone. In 1983 Payless's presence in California was further strengthened by the acquisition of 66 Koby Shoe Stores, a California-based chain formerly owned by Kobacker Co.

In order to accommodate the growing number of Payless stores, Volume Shoe constructed a new 300,000-square-foot distribution center in Topeka. The new center, which would be expanded twice over the course of the following decade, became the heart of the Payless network of stores as its computerized inventory and picking system insured the delivery of the 20,000 pairs of shoes sold annually by the average Payless store in the early 80s. With changes in the worldwide economy, Volume Shoe began to rely more heavily on Asian manufacturers to supply these shoes and in 1983 the company opened an international office in Taipei, Taiwan, to coordinate overseas production. By the beginning of the next decade, factories in China were producing 80 percent of Payless's merchandise and the Taipei office became the center of the company's sourcing subsidiary, Payless ShoeSource International.

Louis and Shaol Pozez, the cousins who founded Payless, stayed on to facilitate the transition to the new ownership but retired in the early 80s to be succeeded by former executive vice president Harry Berger. In 1985, Berger was in turn replaced as president by Richard Jolosky, who ran the company through 1988. After an eight-year hiatus Jolosky returned to Payless as president in 1996. Jolosky's distinctive management style, which on one memorable occasion included dressing up as General Patton to rally the sales troops, was instrumental in the development of the aggressive competitiveness that marked Payless's approach to business through the 80s and 90s. Jolosky had spent a number of years as a senior vice president of Wal-Mart, the giant discount chain that dominated the industry in the 80s and 90s, and says he learned a lot from founder Sam Walton. "When I visited stores with Sam, he never looked to see the things that we were doing better than the competition," Jolosky recalled in a 1996 interview with Forbes. "He always looked for the things that the competition was doing better than us." As president of Payless, Jolosky turned this lesson against Wal-Mart as he made certain that Payless always remained competitive in both price and product with the huge discounter.

May continued the vigorous expansion of the Payless ShoeSource chain through the late 80s and early 90s, opening about 200 new stores each year. With almost all of these stores now known under the Payless name, in 1991 the corporate name was also changed from Volume Shoe to Payless ShoeSource. During the early 90s, Payless also introduced Payless Kids stores, which were added adjacent to existing Payless ShoeSource outlets. In 1985 there were 1,662 Payless stores. By 1991 this number had almost doubled to 3,295. Sales during the same period rose from near $700 million to $1.5 billion.

Independent Again in the 1990s

Although Payless's earnings also increased through the late 80s, return on sales failed to keep pace with the company's earlier performance or with May's core department store holdings. Earnings as a percentage of sales had been about 15 percent when May purchased Volume Shoe, but flat sales in the discount shoe sector saw this figure fall to about 11 percent in the late 80s and then tumble again to less than 8 percent in 1995. Growing competition from such giant discount chains as Wal-Mart and Kmart as well as an overall decline in the off-price apparel market contributed to this downturn. In addition, the consolidation and conversion of 679 shoe stores acquired from Kobacker Co. and Shoe Works Inc. in 1994 added substantially to operating costs. Payless, whose contribution to May's overall sales shrank from 20 to 14 percent from 1993 to 1996, was no longer considered a key part of May's long-term strategy for growth and in 1996 May spun off Payless ShoeSource to shareholders.

As Payless ShoeSource embarked on its new life as an independent publicly traded company, the company operated 4,270 stores including 775 Payless Kids outlets. Plans were quickly implemented to close or relocate about 500 of the less profitable locations and to continue opening new stores. While overall sales declined during the first half of 1996, store-for-store sales as well as profit margins were up from the same period in 1995. Payless CEO Steven J. Douglass was optimistic that the implementation of new promotional strategies would see improved earnings through the end of the decade.

Principal Subsidiaries: Payless ShoeSource International (Taiwan).

Additional Details

Further Reference

Grove, Mary Beth, "The Odd Couple," Forbes, November 18, 1996, p. 178-180.Houser, Douglas, "Volume Shoe Maintains Program to Expand Shoe Store Network," Investment Dealers' Digest, February 15, 1972, p. 30.La Monica, Paul, "May Department Stores: The Shoe Doesn't Fit," Financial World, April 8, 1996, pp. 16, 18."May Department Stores Agrees to Buy Volume Shoe Corp.," Wall Street Journal, July 24, 1979, p. 2."May's Return to Its Roots," Business Week, October 19, 1981, pp. 89-92.Patterson, Gregory, "May Stores Buys Shoe Outlets from Two Stores," Wall Street Journal, July 28, 1994, p. 8B.Quintanilla, Carl, "May to Spin Off Payless to Holders, Close or Move Stores," Wall Street Journal, January 18, 1996, 4B.Sanger, Elizabeth, "Productivity by the Square Foot," Barron's, January 13, 1986, pp. 41-42.Solomon, Goody, "Best Foot Forward: Self-Service Shoe Stores Are Growing by Leaps and Bounds," Barron's, February 22, 1965, pp. 11-12, 15."Volume Distributors Walk Profit March on Self-Service Sales," Investment Dealers' Digest, December 30, 1963, pp. 19-20."Volume Shoe Building Sole Base for Extensive Expansion Effort," Investment Dealers' Digest, December 25, 1967, pp. 37-38."White House Talks with Six Firms on Payout Rises Are Inconclusive," Wall Street Journal, September 8, 1971, p. 3.

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