How W.T. Grant broke capitalism

Last Updated on March 16, 2024 by Dave Farquhar

W.T. Grant was once one of the largest retailers in the United States, operating for 70 years, from 1906 to 1976. Its decline was rapid and catastrophic, and had lasting implications we still feel decades later. When your favorite company’s stock drops after announcing quarterly results in spite of turning a profit, just because its sales didn’t grow as much as the previous quarter, you’re feeling the after-effects of W.T. Grant.

The W.T. Grant Business model

At the time of W.T. Grant’s founding in 1906, the typical discount retailer sold items for 5 or 10 cents. Grant moved upmarket, raising the ceiling to 25 cents.

To put that in today’s money, if the typical discount retailer was like Dollar Tree, selling items for $1-$2, Grant was more like Family Dollar or Dollar General, selling items for up to $8.

They typically operated their stores in downtown commercial districts, as was popular at the time. Over time, inflation limited how many goods were able to sell at the five, 10, and 25 cent price points, so the store format came to be called a variety store. Some other noteworthy competitors included F.W. Woolworth, S.S. Kresge, Ben Franklin, McCrory, and TG&Y.

In the 1960s, some of the retailers in this category shifted to the modern discount store format dominated today by Target and Walmart. If you’ve never heard of S.S. Kresge, you may have heard of Kmart, the chain Kresge became that once rivaled Target and Walmart. In 2002, when Kmart filed bankruptcy, it broke W.T. Grant’s record for the largest retail bankruptcy in history. But they took somewhat different paths to reach that same destination.

The allure of the suburbs

Grant wasn’t as quick to move its stores from downtown into the suburbs as some other companies had been. But when they started opening suburban stores in the late 1950s, they found the growth addictive. By 1965, about half the company’s stores were in downtowns and half were in the suburbs. Yet 83 percent of its profits came from the suburban stores. But they found themselves at a crossroads, caught in the middle between discount stores like the modern Walmart or Target, and full-line merchandisers like JC Penney or Sears.

W.T. Grant decided to switch to a full-line merchandise format and open new, larger stores. But Grant had to do more than match price and selection with regional chains and national chains like Sears and JC Penney. Grant also had to compete with them for locations. And they weren’t able to get as much prime retail space as their upmarket competitors. This meant they sometimes had to open smaller stores or stores in lower-traffic areas.

Then, in the early 1970s, sales and profits slipped as the economy faltered. Yet Grant kept expanding, opening an additional 429 stores and bringing its total count to nearly three times what it had been in the 1950s. Just a year before filing bankruptcy in 1975, Grant was still the third fastest growing retail chain in the country, in terms of the number of new stores they were opening.

Credit

Another factor in its demise was the way the store handled credit. They were very lenient in who they would issue credit to. In the 1960s, when the economy was good, that wasn’t much of a problem because the majority of their customers were able to pay their bills. But in the early 1970s when the economy wasn’t as good, non-payment became a drag on the company’s bottom line. Meanwhile, the company was paying higher interest rates as it continued opening more stores.

Furthermore, Grant continued paying dividends at a higher rate than the industry average, even when it meant borrowing money to do so. Grant only stopped paying a dividend in August 1974. By 1975, W. T. Grant had a billion dollars in debt, and was no longer turning a profit. It filed bankruptcy in October 1975, and at the time was the second largest bankruptcy in U.S. history, second only to the Penn Central railroad. It is still the second largest retail bankruptcy in U.S. history, eclipsed only by Kmart’s 2002 bankruptcy.

Grant aggressively started closing stores, but was unable to quickly turn around its fortunes. The company went out of business in 1976.

W.T. Grant’s legacy

The modern attitude that the job of the board of directors is to maximize value for shareholders came from the Grant bankruptcy. The attitude of the W.T. Grant board was that their job was to run the company, and their only responsibility to the shareholders was to pay them a dividend every year.

They had a point. Just because an investor has enough money to buy a large percentage of a company doesn’t mean they are an expert in that company’s business model. Elon Musk demonstrated this when he purchased Twitter in 2022 for $44 billion. A year later, the company was worth $19 billion. Having the ability to scrape together $44 billion didn’t make him any better at running a social media company than Parag Agrawal or Jack Dorsey had been.

The relentless pursuit of shareholder value

In the wake of W.T. Grant’s record-breaking bankruptcy, corporate boards of directors swung to the other extreme, making shareholder value paramount, even if it ran against the long-term interests of the company. This gave rise to activist investors and corporate raiders, who would purchase large shares of a company and make demands, sometimes going as far as taking the company over, like Elon Musk took over Twitter. Corporate raider Carl Icahn took over TWA in 1985. At the time, TWA was the fourth largest airline in the United States. It was smaller than American and United, but bigger than Delta. Think of a situation like Twitter, only with it being a large airline rather than a social media company. TWA sold out to American in 2001, a mere 16 years after Icahn’s takeover.

But flipping whether the shareholders or the board of directors is in the driver’s seat didn’t really solve the problem of unrestrained pursuit of quarter-over-quarter growth. It just changed the size of the committee that would decide how they would pursue quarter-over-quarter growth.

One of the reasons Michael Dell took his eponymous company private in 2013 was because Dell needed to make changes that were going to affect quarterly growth in order to stay in business. The difference between Dell’s leveraged buyout and, say, Carl Icahn’s leveraged buyout of TWA after his hostile takeover was that Dell saw the continued existence of Dell Computer as a means to an end, where Carl Icahn stood to profit regardless of what happened to TWA.

Exploiting the conditions of post-Grant capitalism

Only the oldest members of Generation X have any memory of W.T. Grant. But approximately a half century later, we’re still feeling the aftershocks.

A current example was the Q3 2023 financial results for technology companies. Apple in particular was hit hard, but they were hardly the only technology company who turned a profit that quarter, and a strong profit at that, but the growth wasn’t as high as previous quarters, and some investors expect continual growth quarter over quarter.

The result was strong stocks took a dive just because they didn’t set any new records this quarter, in spite of the overall results still being good. I am no fan of Apple. I’m very much the opposite. You’ll never see me standing in line to buy an Apple product at midnight. But I recognize the opportunity to buy their stock at a deflated price, and hold it for about 14 months. Why 14 months? Ask an accountant about the tax implications of holding a stock more than a year. At some point around mid-quarter, the stock price will be higher than you paid and you can sell, take a profit, and owe less in taxes than you would on regular income. And I don’t have to stand in line at midnight to do it either.

Companies exploit this too. When interest rates are low, companies will borrow money to buy back their own stock to keep the price high. It’s less risky than opening new stores, or trying to create an innovative new product.

Did W.T. Grant break capitalism?

Maybe saying W.T. Grant broke capitalism is taking things a bit too far. After all, smart speculators exploit this quirk, using it as an opportunity to buy a strong stock at a bargain price, and then sell sometime after the share price recovers. And they’ll be just as annoyed that I’m suggesting this may not be an ideal state as those Apple fans are annoyed at me that I would dare say there’s one person alive who doesn’t like their products. They may also be annoyed I called them speculators. They prefer the term investors.

No doubt this condition existed on a smaller scale prior to W.T. Grant’s bankruptcy. But the W.T. Grant situation exacerbated it.

A board of directors with expertise in a particular business model, accountable to shareholders for the long-term interests of the company would be a better model. But I don’t know how you get there from here. The Michael Dell solution of taking the company private every 15 years or so when the shareholders get out of hand doesn’t scale, and it relies on someone having a vested interest in the company’s continued survival.

W.T. Grant and Louis Marx

My only memory of W.T. Grant is buying cheap train sets in the early 2000s. At that time, train sets that W.T. Grant sold as a seasonal special from October to December at prices ranging from $10 to $20 were still extremely common, frequently still in their original box. The paper buildings and the plastic telephone poles that came with the set frequently weren’t there anymore, but the Marx train was usually all there, and it still worked.

And I knew they came from Grant because Grant was one of the few stores to sell Marx trains in its own exclusive packaging. The trains were cheap and entry level, but Grant sold enough of them in its 1,400 stores to get that concession from what was still one of the largest toy companies in the world.

At the turn of the century, those sets were common enough that they frequently sold for about the price printed on the box, without adjusting for inflation. I could buy the sets for $15 or $20 in 2003 and run out of space to store them before I ran out of money. They don’t turn up nearly as often as they used to, and when they do, they are more likely to sell for $50 than $20.

And with each passing year, it becomes less and less likely that the person buying that train has any recollection of ever shopping in a W.T. Grant store.

In the 1960s, Marx produced a Penn Central-lettered train set for W.T. Grant, unknowingly linking the two future bankruptcies together in a single product.