SIC 5331

This category includes establishments primarily engaged in the retail sale of a variety of merchandise in the low and popular price ranges. Sales usually are made on a cash-and-carry basis, with the open-selling method of display and customer selection of merchandise. These stores generally do not carry a complete line of merchandise, do not carry their own charge service, and do not deliver merchandise.

NAICS Code(s)

452990 (All Other General Merchandise Stores)

Industry Snapshot

Discount department stores generated $134.4 billion in sales in 2001, up 2.64 percent from the previous year. They are also known as discount variety stores, general merchandise discount stores, mass merchandisers, full-line discounters, or discount houses. Discount stores numbered 9,120 in 2001, up 10.5 percent for the decade. This industry is dominated by the Wal-Mart, Kmart, and Target chains. Combined 2001 sales for these "Big Three" discount retailers was more than $123 billion, with Wal-Mart adding an impressive $63 billion to the total.

The Big Three discount retailers began operations as individual variety stores, and by the late-1990s had evolved into chains averaging 80,000 square feet of discount-selling space per store, providing: clothing; hardware, housewares, auto supplies, and small appliances; stationery and candy; sporting goods and toys; health and beauty aids; pharmaceuticals; gifts and electronics; and shoes and jewelry. Although overshadowed by the Big Three, groups of regional stores, such as Ames Department Stores, McCrory, Family Dollar Stores, and the Dollar Tree Stores, are also listed under the variety stores category. The common element among all stores in the industry is the focus on low prices.

The emergence of discounters, which relied heavily on technological advances to improve productivity and cut costs, had a tremendous impact on the financial wellbeing of full-price retailers. This trend was expected to continue in the new millennium, as consumers are increasingly concerned with value shopping and saving money. Other factors affecting the future of discount retailing include a consumer base of greater ethnic diversity, a heightened concern for the environment, interactive technology, and international retailing.

Organization and Structure

Variety stores can be categorized by price and level of service, and generally fall into one of the following categories: discount department stores, wholesale clubs, supercenters, hypermarts, and so-called category killers.

Wholesale clubs are no-frills stores that sell in bulk to people who pay dues to maintain membership. Originally targeted toward small businesses, which appreciated the opportunity to purchase supplies in large quantities, membership requirements have been made broader to include many segments of the general populace. Super-centers, or superstores, are large retail outlets offering general merchandise in addition to a complete grocery area. The supercenter concept evolved from the hypermart, which offers discounted merchandise and groceries, as well as ancillary businesses, such as branch banking and photo processing. Finally, category killers are specialty chain stores offering a single line of merchandise, such as T. J. Maxx, Dress Barn, and Burlington Coat Factory. Although industry information related to discount retailers often includes statistics on category killers, many of these stores are formally listed under the SIC related to the merchandise in which they specialize.

Background and Development

Although discounted sales have existed since the early 1900s, the discount variety store industry picked up shortly after World War II. During this time, according to Discount Store News, entrepreneurs were prompted to open large variety stores due to the increasing demand for consumer goods, including such new products as record players and television sets. In the northeastern part of the country, in particular, large facilities became available to potential variety store owners when manufacturers moving operations to the South vacated several mills. Taking over such facilities for retail operations, variety store owners found that their proximity to those mills that had remained in operation facilitated the timely restocking of stores with apparel and domestic items.

By 1962, industry leaders and a standard store format were well established. Discount department stores were formed by the Dayton Company, which pioneered the Target chain, as well as Kmart stores, an offshoot of S. S. Kresge, the F. W. Woolworth Company's Woolco stores, and Sam Walton's Wal-Mart. These new stores transformed the variety store business into large, low-price, self-service stores, featuring both hard goods and apparel.

Several mergers occurred in the late 1960s and early 1970s, as chains sought to expand quickly through acquisitions. During this time, Kmart became the decided leader with more than 300 stores, which was more than double the number of the next largest chain. Although over a dozen discount stores filed for Chapter 11, attributable to economic recession, Kmart and Woolco grew into national companies, whereas Wal-Mart expanded in the Southeast and Target in the Midwest.

During the 1970s, discount stores began exploring advances in technology, using computers, electronic registers, UPC bar coding systems, point-of-sale (POS) scanning, and satellite communication systems. Wal-Mart's explosive growth, in particular, was attributed to its successful implementation of computer technology. The company established highly automated distribution centers, which cut shipping costs and delivery time, and installed an advanced computer system to track inventory and speed up checkout and reordering. As a result, Wal-Mart increased the number of its retail establishments from 18 in 1970 to 270 in 1980.

By the end of the 1980s, Kmart, Target, and Wal-Mart dominated the industry. At the same time, other chains had filed Chapter 11, including Woolco, FedMart, Memco, Twin Fair, Zayre, Zodys, Kings, Ames, and Hills. Regional operators experiencing moderate success included James-way, Caldor, and Bradlees in the East; Rose's in the South; Clover in Philadelphia; Fred Meyer in the Pacific Northwest; Fedco in southern California; and Venture, Meijer, and Value City in the Midwest.

The introduction of a full line of grocery items to the discount store format represented an important aspect of the successful supercenter in the early 1990s. Although the majority of store profits were attributable to merchandise sales, food divisions began to draw customers into the store and accounted for 40 percent of a supercenter's sales in the early 1990s. This trend was expected to have a negative impact on the traditional supermarket owner. Nevertheless, some analysts have viewed the discounters' venture into the food business with skepticism. Critics noted that since grocers earned an average of less than one penny per dollar of sales in the early 1990s, superstores faced the challenge of imposing even stricter cost controls to compete.

In their ongoing battle for market share, discounters also began focus on appealing to specific ethnic groups, striving to become familiar with the needs of the diversifying market in the 1990s. For example, some stores employed bilingual clerks, particularly in Hispanic communities, and featured signs and advertisements in languages other than English. Moreover, an awareness of traditions and holidays specific to certain ethnic groups helped store managers to stock seasonal merchandise.

In another effort to draw and retain loyal customers involved the promotion of environmental awareness. In addition to touting recyclable and environmentally friendly products, many discount stores attempted to cut back on lighting, heating, cooling, and other energy-draining expenses. They also began using recycled paper for printed advertisements and sign boards.

In June 1993, Wal-Mart opened an "environmental demonstration store" in Lawrence, Kansas. The store featured a community recycling center as well as an environmental education center. During this time, Kmart introduced programs to recycle cassette tapes, auto and truck tires, and auto and marine batteries. Target sponsored Kids for Saving the Earth, a grass roots environmental organization.

Some consolidation in the industry, particularly affecting the warehouse clubs, occurred in 1993 due to increased competition, market saturation, and a slow economy. In November 1993, Wal-Mart agreed to acquire 91 of Kmart's 113 Pace Membership Warehouse clubs for $300 million. The sale gave Wal-Mart access to five additional states and expanded its presence in California. Some of the Pace Warehouses would operate as Sam's Clubs, and others were designated for remodeling as supercenters.

Wal-Mart's supercenter business achieved annual sales of $5 billion by 1994, a substantial increase over the reported $1 billion in 1992. By 1997 there were 344 Wal-Mart Supercenters in operation, mostly in Texas and Missouri, and by 1998 that number climbed to 441.

Led by the strength of such retailers as Wal-Mart, the discount industry surpassed $200 billion in sales in the early 1990s. The Dollar General chain of discount stores was second to Wal-Mart in percentage sales growth, having found a niche market in towns considered too small to support Wal-Mart stores. Kmart maintained its position as the second largest discount chain in the nation in volume, with $31 billion in 1996 sales; and Target neared $18 billion in sales in 1996. Regional discount chains that achieved strong sales growth included Connecticut-based Caldor (with $26 billion in 1996 sales) and St. Louis-based Venture Stores (with $1.5 billion in 1996 sales). The increased popularity of discount operations also led to their inclusion as anchor stores in suburban malls, a location once considered inappropriate by developers and more up-scale merchants.

Since strong national chains originated in the 1960s, they have taken an increasing share of the market away from traditional full-price retailers, a trend that continued into the late 1990s. Discounters have seen sales rise from $2 billion in 1960 to $175 billion in 1998. The battle for market share is ongoing as traditional department stores try to fend off increased competition from these discount retailers. The August 1999 Chain Store Age State of the Industry Supplement stated, "Discount stores continue to be in the catbird seat in the retail industry. As long as they continue to provide customers with value and quality merchandise, they will be hard to beat."

In keeping with that statement, discounters maintain top position in the market in girls, boys, and men's apparel. Traditional department stores and specialty stores still have control over the women's apparel segment, but discounters are gaining market share quickly. The stores success is attributed to meeting consumer demands, constant review of product mix, and offering higher quality, private label products. For example, Kmart began offering a "business casual" line, and Target has focused on a trendier line with its Xhileration label. Sears, Roebuck and Company's CEO Arthur Martinez stated in Chain Store Age , "Target and Wal-Mart have done a better job of improving and are more credible on price than Sears and mass-market retailers."

Discount stores have also seen success by diversifying product mix. In 1998, more than 36 percent of vitamins and mineral supplements were sold at discount stores. These stores also account for the largest share of bath product sales with 36 percent. In 1998, Wal-Mart took the lead over Toys "R" Us in toy sales, and Kmart and Target also saw gains in this area.

This industry has also increased focus on brand names, proprietary brands, and partnering. Kmart teamed up with Garth Brooks in 1999 to promote his new CD online. The company has also paired with Martha Stewart to offer her line of home products, sales of which exceeded $1 billion in 1998. Kmart's apparel lines—Jaclyn Smith and Kathy Ireland—also were successful in the 1990s, as well as its Sesame Street line. Wal-Mart has also shared success in partnering; its Kathie Lee apparel line had more than $250 million in sales in 1998.

Along with its success, however, the industry saw bankruptcies, consolidation, and mergers in 1998 and 1999. Many regional chains suffered under the increasing competition from larger chains. Jamesway and Clover went through liquidations, Caldor and Venture no longer operate, ShopKo purchased Pamida, Ames bought Hills, and Bradlees filed Chapter 11.

Meanwhile, stronger, successful chains continued to grow. Both Target and Wal-Mart increased square footage significantly from 1998 to 1999. Wal-Mart, Dayton Hudson, and Kmart also increased expenditures in efforts to expand. At the same time, retailers invested in older store overhauls and closed stores that were not profitable.

Current Conditions

The early 2000s were a tough time for retail due to the events of September 11, 2001, combined with a shaky economy. The picture for discounters was mixed at best. More people went to discounters to save money but overall sales were generally flat. The big three continued their dominance in this sector in the new millennium, and small businesses within the industry were becoming scarcer. Small companies such as Ann & Hope closed completely, regional ShopKo was forced to close stores, and Ames was forced into bankruptcy.

Leader Wal-Mart not only bucked the flat sales trend but also became the largest company in the world during 2002. Not surprisingly, the company continued plans for expansion in 2003, with an estimated 45 to 50 new discount stores and 200 to 210 new supercenters, 140 of which would be expansions or relocations. Sam's Club planned 40 to 45 new stores. New retail space for the company would total 48 million square feet, up 8 percent over 2002. Wal-Mart operated 1,066 stores at the end of 2001. Supercenters, which generated the largest portion of sales, remained the company's number-one growth vehicle. Wal-Mart also added more food to its mix, unveiling the new Neighborhood Markets in the United States and in China. By 2002, the megacompany was making headway toward the goal of becoming the largest grocer in the United States. Entering a newly hot market, Wal-Mart also began offering more than 12,000 DVD titles for rent through its Web site. Most Wal-Mart stores currently have less than 1,000 titles available to rent. Wal-Mart managed a gain of more than 5 percent in sales in 2001.

Target is also expected to grow in the future. A report from Retail Forward, a management consulting and market research firm, forecast that Target could grow to more than 1,500 stores and sell $65 billion per year. Target was not as aggressive at converting into superstores in the early 2000s. Instead, the retailer focused on honing its merchandise assortments, including the trendier line of clothing and merchandise that has differentiated Target from its less chic competitors. Target gained more than 6 percent in sales during 2001.

Kmart had its share of problems early in the decade. After a foray into specialty retailing that cost the company sales, Kmart filed for bankruptcy in 2002. In all, some 600 stores were closed in a massive restructuring effort in 2002 and 2003 that also saw a complete turnover in its executive leadership. The company also suffered during an investigation of stock transactions by Martha Stewart. Stewart was accused of receiving insider information leading her to sell shares of ImClone. The store continued to support Stewart, whose products accounted for approximately $1.5 billion of Kmart's $36 billion in sales. However, Brand Keys Customer Loyalty Index noted a decline in consumer perception for both brands in different areas. Still, Kmart continued to convert its traditional stores to superstores, also adding food. The new concept of in-the-box supercenters combined the traditional discount store and grocery store into one supercenter. Kmart posted a sales loss of 2.43 percent in 2001.

Dollar stores continued their popularity and expansion. By 2002, leader Dollar General had 5,500 stores, followed by Family Dollar with 4,455 stores, and Dollar Tree at 2,060. Others in the category included Freds, headquartered in Memphis, Tennessee and 99 Cent Only Stores, with headquarters in City of Commerce, California.

Industry Leaders

Wal-Mart. Arkansas-based Wal-Mart has long been the world's largest retailer but in 2002 it surpassed General Motors and Exxon Mobil Corp. to become the world's largest company, as well. That year the company also made serious headway into becoming the largest grocery chain in the United States with addition of the newly conceived Neighborhood Market chain of grocery-drugstores. The company operates more than 4,700 stores, including Wal-Mart discount stores, supercenters, and Sam's Clubs. In 2003, Wal-Mart reported $244 billion in sales and employed 1.4 million workers. Net income reached more than $8 billion. Their sales exceeded the combined sales totals for Target, Kmart, Sears, J. C. Penney, Costco, Kohl's, BJ's, ShopKo, and Ames. Wal-Mart's founder, Sam Walton, entered the industry with a few Ben Franklin stores operating under the "Walton 5 & 10" name. When management at the Ben Franklin Company rejected the idea of opening larger discount stores, Sam Walton and his brother James "Bud" Walton opened their first Wal-Mart Discount City in Rogers, Arkansas, in 1962.

The explosive growth of the chain was facilitated by its effective use of computer technology. In the early 1990s the company invested almost $600 million in computerization and information systems, enabling it to reduce its costs to 15 percent of its annual revenues, well below the 25-percent industry average. An innovator of the wholesale club and hypermart concepts, Wal-Mart eventually came to favor the supercenter format, and in the early 1990s many Wal-Mart stores were redesigned as supercenters. In 1998, more than 40 percent of Wal-Mart's selling space went to its supercenters. During the mid-1990s the company's return on capital declined significantly due to large-scale investments in international stores, which totaled 310, with expansions mainly in Canada and Latin America. The company benefits from large economies of scale, and in 1998 foreign sales were up 63 percent to $12.2 billion.

Kmart. Michigan-based Kmart was the country's third-largest retailer in 2002, with about 1,500 stores after closures—down from a high of 4,792 in 1992. With sales steadily declining, the company filed for bankruptcy in 2002, emerging as a leaner operation after hundreds of store closures the following year. The company posted revenues of just over $30 billion, a 14.9 percent loss for the year, resulting in a net loss of $3.2 billion. Kmart employed 212,000 workers in 2003 and had stores in all 50 states.

Kmart's origins may be traced to 1897, when Sebastian S. Kresge and John McCrory opened their first fiveand-dime stores in Memphis and Detroit. They split their partnership in 1899, and Kresge remained in the retail business. Kresge incorporated his company in 1912 as the S. S. Kresge Company, the second largest dime store chain in the United States. By the 1950s, Kresge's company had grown to become one of the largest general merchandise retailer in the nation. In 1958, company management decided to enter into discount retailing, transforming three unprofitable stores into discount operations. The first Kmart discount store was opened in Garden City, Michigan, in 1962. Americans soon grew accustomed to Kmart's "blue-light" specials—spontaneous sales in various departments signaled by a flashing blue light.

Growth continued in the 1970s, and the Kresge Company changed its corporate name to Kmart in 1977. During this time, the company began a series of acquisitions that included Furr's Cafeteria and Bishops Buffets, both of which were sold in 1986. Other acquisitions included Payless Drug Stores, Waldenbooks, and Builders Square. In 1988, Kmart opened its first Pace warehouse clubs as well as its first hypermart, American Fare. By 1990, Kmart had surpassed Sears, Roebuck & Co. in retail revenue, but sales at both stores were quickly eclipsed by Wal-Mart. A major rejuvenation program, begun in the early 1990s, included the renovation or relocation of more than 2,400 Kmart stores. However, outdated inventory and old storefronts hurt sales, and the company found itself heavily discounting merchandise to retain sales. As reported in Valueline, "the crucial core challenge remained the same: get customers to come back more often." The typical Kmart customer came in only 15 times a year, compared to 32 for Wal-Mart. Customers, in addition, often drove greater distances to avoid Kmart and go to Wal-Mart.

Target. Target Corporation, formerly Dayton Hudson, operated more than 1,500 stores, including more than 1,100 Target stores, along with Mervyns and Marshall Fields department stores. Target stores, including SuperTarget and Target Greatland, accounted for more than 80 percent of Target Corporation's sales. The company posted 2003 sales of $43 billion, up more than 10 percent from 2001, and had 306,000 employees.

By 1995, Target operated 30 Greatland stores in and around the Chicago area. The company also launched its Club Wedd bridal gift registry and the Lullaby Club baby registry. At the same time, Target also began the development of a prototype store for smaller markets, carrying merchandise similar to that in larger Target stores. Dayton Hudson, as reported in Valueline, earmarked 80 percent of its $1.4 billion capital budget for 1997 to add an additional 65 stores, 5 of which would include groceries. This added eight million additional square feet to Target stores, an increase of 10 percent in 1997.


The retail industry was a significant source of employment in the United States, accounting for roughly 18 percent of the labor force. According to the U.S. Department of Labor, the retail industry should realize significant growth between 1998 and 2005, with more than three million new jobs created. Discount stores employed nearly two million people in 1999.

As larger companies relied more heavily on computer technology, lowering labor costs and increasing productivity, employees of Wal-Mart, Kmart, and other discount establishments found that job descriptions changed accordingly. With these advances, more jobs became available. According to Discount Store News editor Tony Lisanti, Wal-Mart is the largest employer in the United States and soon will become the largest employer in the world.

The average nonsupervisory retail worker's hourly wage was $9.17 in September 1999 and average weekly hours were 28.7.

America and the World

Whereas the economy remained strong in the United States and Europe in 1998 and 1999, Asia suffered. Consumer spending in that region decreased dramatically in 1998 with the economy in recession. However, international growth remained a priority in growth strategies for discount chains. The advent of the Euro has sparked interest in many European markets; Wal-Mart has forged into the German market, and Latin America remains attractive.

In 1999, Wal-Mart had operations in Puerto Rico, Canada, China, Mexico, Brazil, Germany, the United Kingdom, Argentina, and South Korea. David Toung, analyst with Argus Research, stated, "These are very important areas for them because there is more growth opportunity for them than there is in the U.S." The company remains focused, along with other strong discounters, on operations abroad. By the 2002, Wal-Mart saw its greatest growth opportunities in the Asian markets of China, Japan, and Korea. The company had 20 stores in China at that time, and planned to open 120 to 130 stores worldwide by 2003. By the late 1990s, several discount retailers had opened stores in foreign markets, most notably in Europe and Mexico. Furthermore, companies began creating alliances with foreign operations in the form of licensing and franchising agreements, investments, and joint ventures.

Kmart began entering into joint ventures with foreign partners as early as 1968 with Coles Myer Ltd., the largest retailer in Australia. A long-time operator of stores in Canada, Kmart was also the first U.S. discount retailer to enter Eastern Europe with a 76-percent purchase of Maj, a large Czechoslovakian department store in 1992. The company had operations in Puerto Rico, Guam, and the U.S. Virgin Islands by 1996. Overall, Kmart has spent more than $100 million on the selection and renovation of department stores in the downtown areas of several foreign cities.

Success in international retailing remains linked to a company's sensitivity to cultural differences. In a Chain Store Age article, Ames Department Store CFO Rolando de Aguiar stated, "Too many retailers do not pay attention to differences of doing business in different countries." This mistake lead to technological problems as well, as different countries use different types of communication and computer systems.

Research and Technology

The Internet became a significant contributor to the retail environment with the increasing number of retailers who created Web sites for general marketing information and to allow customers to purchase goods online. In 1996, Wal-Mart created two Web sites for both higher and lower priced items, Kmart began offering online shopping in May 1998, and Target offers online purchasing as well. With Internet sales expected to increase by the billions by 2003, discount retailers have been forced to create an online presence to tap into increased market share. As a result of increasing technology, information technology and information services retail professionals have been called upon and now play substantial roles in the discount stores infrastructure.

Due to the price sensitive nature of the industry, discount stores have to maintain efficient operations to achieve maximum profitability. The implementation of computer technology was, and is, essential to store operations. Development of technology such as computerassisted bar code scanning, online receiving, merchandise tracking, and labor management is crucial to store profitability. With the onset of computerized operations, discount stores were able to reduce inventory, speed up inventory turnover, and shorten the lead time required to move merchandise into the store.

Interactive touch screens for point-of-sale (POS) operations went into development in 1998. Graphical user interface (GUI) payment terminals are slated to become increasingly popular, despite negative feedback. Jim Dion, a senior partner with the J. C. Williams Group, stated in a Stores article, "For some time now, retailers have made interactive kiosks, touch-screen information terminals, and similar capabilities available to customers at or near the point-of-sale. In most cases, the technology was ignored by customers over age 50 and used infrequently by 25- to 50-year-olds. Most stores and malls have backed off this technology for the time being."

Nevertheless, vendors are pushing the new POS systems. Checkmate developed a new product, the eN-Touch 1000, which is predicted to replace existing countertop credit and debt terminals. In the same Stores article, Mary Lynne Campbell, Director of Business Development for Checkmate, stated, "retail marketers can achieve 'virtual customer intimacy' through nonpayment applications such as advertising, personal messaging, instant credit, loyalty programs, cross selling, electronic coupons, surveys, managerial signoff, information kiosks, and product locators." Large, national retailers are expected to implement these new devices.

Use of handheld computers in the industry also increased in the late 1990s, greatly facilitating in-store communications, particularly for price verification and inventory tracking. Wal-Mart, Target, and Kmart used wireless in-store systems. The handhelds proved beneficial in maintaining stock levels and facilitating price markdowns.

Moreover, the development of spread-spectrum radio promised greater bandwidth in wireless communications, allowing stores to use wireless systems for a wide variety of tasks. Future applications for spread-spectrum radio included use as a local-area network infrastructure, which would connect handheld computers; new generations of wireless (and possibly mobile) POS systems; and electronic shelf labels to provide graphs of sales trends among other information. Manufacturers of spread-spectrum radio systems continue development on graphical interfaces.

Further Reading

"Braving New Worlds." Chain Store Age, September 1999.

"Company Capsules." Hoover's Online, May 2003. Available from .

Dixon, Jennifer. "Wal-Mart Bags More Food Sales to Become Largest Grocery Chain in U.S." Detroit Free Press, 23 October 2002.

Hein, Kenneth. "Kmart Taking Stock of Stewart's Numbers." Brandweek, 21 October 2002.

"International Growth Could Come From Asia." Home Textiles Today, 7 October 2002.

Murphy, Patricia. "Interactive Touch Screens Seen Reshaping Retail Checkout." Stores, July 1998.

"Retail Landscape Changes With Tastes, Technology, and Trends." Research Alerts, 7 December 2001.

"Retailers of the Century Named; Wal-Mart, Walgreens, Home Depot, McDonald's, Kroger, Sears, Toys 'R' Us." PR News-wire, 29 October 1999.

Schulz, David. "The Nation's Biggest Retail Companies." Stores, July 1999.

"The Shifting Global Marketplace." Stores, February 1999.

"State of the Industry: Discount Stores." Chain Store Age, August 1999.

"Survey Reveals Multiple Shopping Venues Spread Holiday Cheer Among Consumers and Retailers." Business Wire, 2 November 1999.

"Target Could Double Sales, Add 500 Stores in Five Years." Drug Store News-Newsfirst 25 September 2002.

Thau, Barbara. "Wal-Mart to Continue Focus on Supercenters." HFN, 7 October 2002.

"Top Discount Department Stores." DSN Retailing Today, 8 July 2002.

Turcsik, Richard. "The Almighty Dollar Stores." Progressive Grocer, 1 August 2002.

Valueline. Retail Store Industry. 21 February 1997.

"Wal-Mart Outlines 2003 Expansion Plans." DSN Retail Fax, 7 October 2002.

"Wal-Mart Will Rent Mail-Order DVDs." Online Reporter, 28 October 2002.

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