Fretter, Inc. History

Address:

12501 Grand River Avenue
Brighton, Michigan 48116
U.S.A.

Telephone: (810) 220-5000
Fax: (810) 220-5686

Public Company
Incorporated: 1951
Employees: 1,699
Sales: $545.51 million
Stock Exchanges: NASDAQ
SICs: 5731 Radio, TV & Electronics Stores; 5722 Household Appliance Stores

Company History:

Fretter, Inc. is a major retail seller of home entertainment products, consumer electronics, and appliances. Fretter stores are typically located near major shopping malls and are open seven days and six nights a week. Fretter competes in the marketplace on the basis of price.

The Fretter name was taken from the company's founder, Oliver L. Fretter, who established the organization in 1951. Before moving to its new headquarters in Brighton, Michigan in 1994, Fretter was headquartered in Livonia, Michigan, a suburb of Detroit. The company's guiding philosophy was to offer consumers the choice of many brands, features, and options, at low prices and to maintain a full inventory for take-home purchases or quick delivery.

Most Fretter stores were laid out in a similar manner. They featured an open floor plan designed so that a consumer entering the door would be able to see the entire store without having his or her view obstructed by merchandise or displays. Products within the store were grouped together by categories such as audio, video, appliances, personal electronics, and home office equipment. Each of the product areas, designated a "store within the store," was identified with signs and staffed with specialized sales people.

Between 1983 and 1986, Fretter underwent a period of rapid expansion, opening a total of 19 stores in three years. Company sales in 1984 totaled $152 million and yielded profits of $3.9 million; sales for 1985 reached $214 million and yielded profits of $9.9 million. By early 1986, the chain boasted 39 stores in five states: 17 in Michigan; 8 in Illinois; 7 in Ohio; 5 in Indiana; and 2 in Massachusetts.

Fretter made an initial public stock offering in 1986. Company officials planned the offering in order to raise between $90 and $100 million to fund growth and expansion, particularly in markets outside Fretter's home state of Michigan. At the time of the offering Fretter sales per square foot, judged to be $721, was among the most impressive in the retail industry. In addition, the average Fretter store was producing about $7 million in sales per year. The largest segment, video products, accounted for 46 percent of sales.

Fretter's plans called for opening 11 new stores in 1986 and nine to 12 in 1987. The company also planned to spend up to $24 million over a two year period for land, buildings, improvements, and fixtures. Other anticipated changes included the relocation and renovation of some existing stores and the addition of two distribution centers in Massachusetts.

To help manage the expanding chain, Fretter began upgrading its computer system at an estimated cost of $2.6 million. The new system enabled point of sale information to be gathered in all Fretter stores. Capturing detailed information at the time each sale was made enabled Fretter's merchandisers to immediately assess developing trends and consumer buying patterns. Timely availability of data allowed stores to shift merchandise mixes and stocks to meet customer demand. Data also provided the company's managers with details necessary to monitor store activity and make plans for the future.

During the year following Fretter's public offering, however, the home electronics industry began to experience economic difficulties. Although Fretter's year-to-date sales were up 35.3 percent, the company's stocks dropped to a low in December of 1986. The drop was precipitated by an announcement of poor sales by Highland Superstores, one of Fretter's major competitors. According to industry analysts, investors interpreted Highland's lagging sales as a sign that the entire industry was going to experience a slowdown. Soft market conditions in the Midwest and Texas proved to be a forerunner of adverse industry-wide conditions during the late 1980s and early 1990s.

Between January 1988 and January 1991, Fretter company officials noted a downward trend in net sales. Several contributing factors were identified. Markets for many items, such as microwave ovens and VCRs, were reaching saturation. The percentage of U.S. households with color televisions had increased from 92 percent in 1986 to 96 percent in 1990, and VCR ownership had increased from 40 percent to 69 percent. Some industry analysts blamed lackluster sales on an absence of innovative products and noted that most new items were improvements or refinements of older technologies rather than devices offering new capabilities. Some popular consumer electronic goods with less than 50 percent market penetration in 1990 included answering machines (35 percent), cordless telephones (28 percent); compact disc players (22 percent), and camcorders (11 percent).

According to a Detroit News report, the consumer electronics industry experienced growth of only about two percent annually during the late 1980s. At the same time, industry participants faced increased competition. Sears launched its store-within-a-store, "Brand Central." In a similar move, Montgomery Ward inaugurated "Electric Avenue." Fretter, along with other consumer electronics and appliance specialty stores, lost market share to the department stores.

In 1989, Fretter reported employment of 1,317 and total sales of $224.6 million. The company's selling expenses represented 25 percent of sales and its profit margin was less than one percent. Finances tightened in 1990 following a move by Sears to reduce prices on major appliances by $500 and offer zero-percent financing on some items. Fretter also cut prices. Industry observers began to question the organization's financial health. According to one report, Fretter stopped buying store locations and turned to leasing. The company posted losses during the first six months of 1990 and stock prices fell.

Despite its difficulties, Fretter continued its expansion policy. During the fourth quarter of 1991, Fretter opened four new stores. At the same time, Highland closed its stores in the Massachusetts market. Some observers expected Fretter to benefit from Highland's troubles. Others felt that any benefit would be offset by increased competition in the Ohio market.

In fiscal 1991, Fretter reported net sales of $217.35 million but posted a net loss of almost $10 million. Most of the loss was attributed to a required change in the accounting method used for reporting service contract revenue. Financial Accounting Standards Board Technical Bulletin No. 90-1 specified the manner in which revenue from the sale of service contracts should be recognized. Fretter, in adopting the changes, posted a charge of $8.7 million representing the cumulative effect of the change. Other factors contributing to the loss included a sluggish national economy and a lack of consumer confidence attributed to the Persian Gulf War.

Fretter began looking west of the Mississippi for new growth opportunities. In September of 1991, Fretter purchased Fred Schmid Appliance & T.V. Co., Inc., Fred Schmid, Colorado's oldest consumer electronics dealer, operated 18 retail locations in Colorado, Montana, and Wyoming. Schmid, however, was on the brink of bankruptcy. Financing restrictions by Schmid's lenders had resulted in inventory reductions of 75 percent, workers had been laid off, and the company faced dissolution. Nevertheless, Schmid had a reputation for customer service and carried some upscale brands to which Fretter had previously not had access. These included Thompson's ProScan, Kenwood, Pioneer, KitchenAid, Mitsubishi, and Maytag. At the time, Fretter's top brands were Goldstar, GE, Magic Chef, NovAtel, Packard Bell, Panasonic, RCA, Sony, Toshiba, and Whirlpool. Fretter had also applied for a trademark registration to market speakers and components under the Audio Dimension label.

Although industry analysts expected Fretter to bring some changes to Schmid, including the adoption of a low-pricing strategy and an expansion of the organization's computer offerings, Schmid and Fretter were expected to maintain separate and distinct identities. Some industry watchers questioned whether Fretter would be able to control its stores effectively because of the large geographic gaps between its markets. Two months after the acquisition, however, Schmid was showing signs of recovery. The Denver Business Journal reported that the sales staff size had been restored, advertising spending was up, and inventory had more than doubled. Prices were down and sales were increasing, even achieving record breaking numbers. During fiscal 1992 Schmid locations were incorporated into Fretter's point of sale (POS) information system.

The Schmid acquisition positioned Fretter for future growth during the remaining years of the 1990s. Competition within the industry, however, remained intense. In 1992, for example, Best Buy challenged Fretter's low price dominance in Boston and Detroit. In addition, Best Buy planned to open 18 stores in the Chicago area. Other major competitors included Circuit City and McDuff.

Highland Superstores had been a stiff competitor during the 1980s, but was floundering during the early 1990s (and went out of business in 1993). According to a report in the Detroit News, Highland, based in Plymouth, Michigan, closed 42 stores in 1991. The chain's sales for the fourth quarter that year totaled $115 million compared with sales of $193 million for the fourth quarter of the previous year. When comparing the same two quarters, Fretter's sales increased 14.6 percent exclusive of sales attributed to Fred Schmid; including Schmid sales, Fretter reported revenues of $66.8 million for the quarter, up 26.1 percent over the same quarter for the previous year.

In the fiscal year ending in 1992, Fretter reported a return to profitability. The company's net earnings totaled $4 million. Net sales, including sales at Fred Schmid locations, were up 35 percent over 1991, reaching $293 million. Comparable store sales, a measurement comparing each store's sales in a current fiscal year to its sales in a previous fiscal year, increased 12.2 percent.

Fretter attributed its restored profitability to an aggressive pricing policy which included the institution of everyday low prices on all product lines, a new advertising campaign, new stores, and the success of its Schmid acquisition. Some of Fretter's competitors criticized the company's advertising campaign because it focused on specific price comparisons. Some filed lawsuits (Sears) complaining that the ads were unfair. According to a published account in HFD, Sears complained that Fretter's ads were misleading because they compared Fretter sale prices with Sears nonsale prices. Another suit filed in conjunction with the direct price comparisons by Montgomery Ward was expected to draw a countersuit from Fretter charging Montgomery Ward with libel and slander. HFD noted that the national attention created by the controversy helped Fretter gain market share and bolstered Fretter's image as a low-cost provider of products. Some industry analysts, however, questioned whether any long-term benefit would result.

Fretter continued its policy of controlled and steady growth. In fiscal 1992, three stores were opened and a fourth was relocated. By the year's end, Fretter operated a total of 64 stores under the Fretter name in Michigan, Illinois, Indiana, Ohio, Massachusetts, and New Hampshire and 18 Fred Schmid locations in Colorado, Montana, and Wyoming. The company planned to add five new stores in its existing markets during fiscal 1993. Although Fretter's markets reached from the East Coast to the Rocky Mountains, some industry analysts noted that the company was still considered a regional participant rather than a national force because of the gaps between its locations.

During 1993, Fretter's advertising strategy continued to draw controversy. According to a report in the Wall Street Journal, Fretter pulled its advertising from the Massachusetts market following charges that it violated Federal Trade Commission (FTC) rules by not disclosing the fact that the "real people" in the advertisements had been paid for their testimonials. FTC guidelines specified that when noncelebrities were paid for endorsements, the advertising needed to include an on-camera disclosure. Although Fretter made no direct comments on the situation to the Wall Street Journal, a spokesperson for its advertising agency pointed out that the company had reacted quickly to the concern by pulling the ads.

Fretter also began testing a "PriceTrac" system which permitted its customers and sales staff to compare the prices and features of Fretter's products with the products sold by the company's competitors. Fretter claimed that it was, and would continue to be, an industry leader in using state-of-the-art information technology to help better manage its stores.

Fretter's expansion program progressed in 1993 with the December purchase of Dixons U.S. Holdings, Inc. and its subsidiaries from Dixons Group plc, the largest consumer electronics retailer in the United Kingdom. Dixons U.S. Holdings included Silo Inc. and YES! Silo, with retail locations in 22 states that sold home entertainment products, consumer electronics, and appliances. The three YES! (Your Electronics Store) retail locations were in New York. The acquisition increased the number of stores operated by Fretter to 242. Net sales for fiscal 1994 reached $545.51 million.

According to a Fretter statement, after acquiring Silo, a review was necessary to consider store consolidations and relocations. In the process some locations with overlapping territories or low-performing stores were closed and the inventory liquidated. Other locations were upgraded. A Fretter competitor, Circuit City Stores, Inc. announced an agreement with Fretter in early 1994 to assume leases for 18 Silo stores in Los Angeles and to assume Silo extended service contracts covering items that had been sold from the stores.

Fretter's annual report for the fiscal year ending 1994 announced some changes in the organization's leadership. Company founder, Oliver L. Fretter, stepped down from the chairmanship although he still retained a position on the board. His son, Howard O. Fretter, resigned from the board. John B. Hurley remained company president, and Ernest L. Grove, Jr. assumed the responsibility of chairman.

According to a Fretter statement, "The company's strategy has always been focused on providing name brand products at favorable prices and a high level of customer service." Fretter's executives expected the company's acquisitions to provide a means for it to meet its objective.

Principal Subsidiaries: Dash Concepts; Fred Schmid Appliance & T.V. Co., Inc.; Dixons U.S. Holdings, Inc.; Dixons Group plc; Fretter Real Estate Company.

Fretter, Inc. History

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