The 99¢ EmpireHouseplants, hair gel, and the best deal on wine you’ll ever find. How one entrepreneur is rewriting the rules of discount retail.
July 7, 2003
(FORTUNE Magazine) – If you ever need to unload 16 cases of sponge cake, or a few pallets of barbecue forks with typos on the handles, or 14,000 Monica Lewinsky masks, you might call Dave Gold. The founder of a West Coast discount chain called 99¢ Only Stores, Gold is the rare wholesale kingpin who can move that kind of volume. Each of his 155 stores carries about 6,000 items, and every item in every store sells for 99 cents (or two for 99 cents or three for 99 cents, etc.). Those sponge cakes? He bought the whole load for 60 cents apiece. The barbecue tools, which were destined for Crate & Barrel and a pricetag of $30 a set, cost him just 75 cents each. Gold bought 100,000, and customers snapped them up.
Unless you’ve been to a 99¢ Only location–right now they’re in California, Nevada, and Arizona–you’re probably imagining something like the dingy, dark, everything’s-a-dollar store in the bad part of town. But Gold, who says his is the oldest existing single-price chain in the country, does discount differently–and in some ways better–than anyone else. His stores are immaculate, bright, and, at 16,000 to 30,000 square feet, the size of small supermarkets. Instead of the random trinkets and junk you find at most closeout stores, Gold makes sure that at least half his inventory is known brands, such as Yoplait, Neutrogena, Dole, Brawny, Hershey’s, and Haagen-Dazs. Nothing is past its expiration date. You can buy tools and cosmetics, and there’s a gourmet section with shiitake mushrooms, hearts of palm, chocolate-covered cherries, even wine. Recently the store picked up some Stanton Hills cabernet, which retails for $15; the 99¢ offer was mentioned in the Los Angeles Times, and 17,000 bottles sold out in two hours.
The stores are so popular that they’ve become a cultural phenomenon. The Rolling Stones and the Goo Goo Dolls have shot videos in them. A seven-by 11-foot photograph of one of Gold’s candy aisles made it all the way to the Museum of Modern Art in New York. (It was shot by German photographer Andreas Gursky–the first time he came in with his equipment, 99¢ Only executives thought he was spying for a competitor.) Bentleys have been spotted in the parking lots, Richard Gere came in for a case of San Pellegrino water, and Vanna White once dropped by with her bodyguards, looking for toothpaste. After Kmart filed for bankruptcy, Martha Stewart was seen in the West Hollywood location. A Russian guidebook even recommends 99¢ Only as one of the top three things to do in L.A. (along with Disneyland and Venice Beach).
In fact, the stores aren’t just a highlight of the region–they’re a highlight of all business right now. In an economy in which most retailers are struggling, discount chains are thriving. According to a recent survey by New York–based WSL Strategic Retail, 75% of consumers are shopping at dollar stores, half of them at least once a month. And 99¢ Only–based, appropriately enough, in a town called City of Commerce, Calif.–is doing better than most. Among competitors like Dollar General, Family Dollar, and Dollar Tree, as well as Home Depot and Williams-Sonoma, “99¢ has the highest operating margin and the best return on capital,” says Michael Baker, an analyst at Deutsche Bank. The company posted $714 million in sales in 2002, a 24% increase from the year before, and analysts estimate that it should hit $1 billion in 2004. It opens a new store every week and a half, with a Texas expansion planned for this summer. And its financials are almost as clean as its stores: more than $175 million in cash and zero debt. (Gold doesn’t believe in borrowing: He was once persuaded by an aggressive banker, received a loan on a Friday, then changed his mind and repaid it on Monday.)
Because of such fiscal prudence and such well-run stores, the stock of 99¢ Only has done well, up more than eightfold since the 1996 IPO. It has also made Dave Gold extremely wealthy. A college dropout who wears unironed clothes and a giant button that says ROLLING BACK PRICES EVERY DAY, Gold and his family now own stock worth about $680 million, all earned 99 cents at a time.
As a kid, Dave Gold worked at his parents’ grocery store in Cleveland, and later he and his sister bought their father’s liquor store in Los Angeles. It was there that he had his epiphany for the 99-cent concept. To move slow-selling wines, Gold slashed their prices and soon uncovered a reliable phenomenon: When a chianti or a chablis was marked 99 cents–not 98 cents, not $1.02–the bottles flew off the shelves. “It was like a magic number,” he says. (Academic research into this phenomenon is mixed. A 1998 study on psychological pricing found some increase in sales for items marked below a round number, but other studies disagree.)
Gold didn’t know about the studies but believed in the idea, and he fantasized for years about opening a store where everything on the shelves would cost 99 cents. By 1982 he’d retired from the liquor business but still talked about a single-price venture. Finally, succumbing to pressure from friends and family who were tired of hearing about it, Gold, at age 50, leased a space, a former Mexican restaurant near the Los Angeles airport, and opened the first 99¢ Only store.
From the start, Gold did things differently. He didn’t have a business plan, and instead of traditional advertising, he put up fliers that offered TVs for 99 cents to the first 13 customers (because he opened on Friday the 13th) and microwaves for 99 cents to the next 13. Locals saw the fliers and started lining up three days before the opening. Gold got family members and new employees to take turns calling the local news outlets. Then “they’d disguise their voices and call again!” he says. The opening appeared on every local TV station that night and on the front page of the newspaper the next day. After six months Gold knew his 99-cent idea was going to work, and over the next few years he bought two five-and-dime stores and seven leases from a grocery business that was closing. By 1984, 99¢ Only was beginning to look like a local chain.
As the stores grew in number, Gold continued to market to his own drummer. (To this day he doesn’t use a PR firm or ad agency.) New stores still sell 99-cent televisions on opening day, although now the deal is offered to the first 99 customers. For a recent opening in Bakersfield, Calif., one woman showed up six days in advance. This past April Fools’ Day, all the ads labeled products $99 instead of 99 cents, and a product named “Niagra Water” was once listed in an ad as “Viagra Water.”
“It’s not that different from Southwest Airlines, with their tongue-in-cheek approach,” says group president of VNU Expositions Sam Bundy, who organizes trade shows for the industry. That’s not to say that everyone gets the joke. One ad teasingly referred to a bridal registry, and the company received calls from people wanting to sign up. (Now it actually has one. “People need things we have, like pots and pans,” says Sherry Gold, Dave’s wife and co-founder of the chain.) Other times, missed humor doesn’t have such positive ancillary effects. When Gold ran an ad congratulating the Dodgers for their 99th loss of the season, Tommy Lasorda complained about it on NBC. And a class-action lawsuit was filed in response to one ad: 9 INTERNET STOCKS FOR 99 CENTS.
Even the company’s IPO in 1996 had that kind of offbeat, Gold-en touch to it. By that point Gold had hired his son-in-law, Eric Schiffer, who arrived with a Harvard MBA and venture capital experience. Schiffer managed to get the finances in order (no one had focused on them before) and helped steer the company toward a public offering. But in meetings with the investment bankers, Gold insisted that the listed price in the prospectus end in 99 cents. They thought it was a joke, but he got his way. The final range: $10.99 to $12.99. “In his heart he’s a merchant–much more of a merchant than a Wall Street CEO,” says Patrick McKeever, an analyst at Suntrust Robinson Humphrey in Atlanta.
For all the winking humor, the chain does have some elements that make it worthy of a business school case study. Just about every store in the chain is profitable in its first year. Gold typically spends about 60 cents for an item that he then sells for 99 cents, generating gross margins of 40%, the highest in the discount business. Even the premise–profiting from the goods that corporate America doesn’t want to, or can’t, sell–is interesting. “I was dealing with million-dollar investments before, and this is a penny business,” says Schiffer. “But those pennies add up to millions of dollars.”
Products can turn up at a 99¢ Only store for any number of reasons. A warehouse can be purged, a label changed, an item discontinued. “It can be because it’s the end of a quarter or the end of a year,” says Susan Ford, one of Gold’s buyers who specializes in health and beauty products (and pens). Many items are the result of orders that were canceled by other stores. Big retailers such as Wal-Mart and Target reportedly nix about 2% to 3% of their orders, and their logistics are so precise that if a delivery truck arrives a day later than scheduled, it could be turned away. Most manufacturers, finding themselves in one of those unfortunate situations, decide it’s simply better to sell to Dave Gold, even at a huge loss, than let the merchandise collect dust and take up valuable warehouse space.
However, you really don’t get an idea how Gold and his stores operate until you walk through the aisles with him–every product has a story. Gold recently received 42,000 cases of Frito-Lay potato chips when the bags were redesigned and the company needed to get rid of the old ones. In another instance, the stores received Tropicana orange juice when a fridge broke in a nearby supermarket. As for those barbecue tools for Crate & Barrel, they were supposed to be stamped STAINLESS STEEL and MADE IN CHINA, but instead they somehow came out reading STAINLESS CHINA.
In extreme cases Gold has to get creative in his marketing. McDonald’s recently had to unload 40,000 cases of frozen flat bread left over from a chicken sandwich promotion. The bread, which came in packages of ten, was unlabeled, making it much harder to resell. Gold offered 20 cents per package and then slapped a sticker on each, calling it “Italian-style Focaccia.” They sold out in two months, ringing up almost $400,000 in sales, 80% of it profit.
“Dave isn’t afraid of any deal,” says Larry Simms, a food broker who struck the McDonald’s deal and sells truckloads of butter, birdseed, and tissues to Gold every week. That’s for good reason. Not only does Gold do huge volumes at his stores–by some estimates selling five times more of an item than a supermarket can–but he also distributes leftover goods through his Bargain Wholesale division, which sells to mom-and-pop grocers, landscapers (Gold does a booming plant business), and, oddly enough, other dollar stores. Thanks to Bargain Wholesale, Gold can leverage better prices by buying huge quantities, selling whatever percentage he wants in his own stores, and then palming off the rest to competitors. It seems to be working; last year the wholesale division rang up $50 million in sales.
Today most of the dealmaking responsibility rests on his 12 buyers. Gold pinches pennies in every area of the business–no one has secretaries, the company headquarters includes a used conference table that cost $15, and everyone drinks coffee from half-sized cups because Gold got a great deal on them years ago–but he doesn’t skimp on the salaries of his buyers. In fact, he pays them double what they’d get at more upscale stores. He also has a generous stock-granting program. All employees get options after six months; they have already exercised $75 million in options, enabling not only the buyers but also 99¢ Only shelf stockers and truck drivers to buy homes for cash.
Of course not even impeccable buying instincts guarantee that every product will be a hit. Gold once bought some bamboo water, which he planned to price at four for 99 cents, but when it wouldn’t sell he had to make it more appealing, eventually offering 24 bottles for 99 cents. What was wrong with it? “It tasted like bamboo,” he says. “It was terrible!” Other bombs include shrimp deveiners, ‘N Sync paper goods, and Spice Girls figurines. The most memorable, however, was a batch of pink and purple parka sleeves (just sleeves, no parkas). Gold and his staff tried everything to unload them, including marketing them to kids to wear while waiting in line for nightclubs. Eventually they sold them to roofers as protection from the sun. It took five years.
Those are the exceptions, however. Gold insists that about 60% of the items in the stores are reorderable, meaning that brands such as Sun-Maid, Swiss Miss, and Ajax sell products in smaller sizes (examples: Swiss Miss cocoa in boxes of six envelopes instead of eight, and 8.5-ounce instead of 15-ounce Sun-Maid raisins). “It makes sense for manufacturers because with 99¢ you have no shelf fees, no advertising costs, and no deductions,” says Dan Fairbanks, a food broker who sells pine cleaner, canned meats, and clam chowder to 99¢ Only stores. “It makes a big difference, and as 99¢ grows it will be even more important.”
The company has begun to do its own manufacturing as well. Gold bought a defunct plastics company, so 99¢ Only can make its own reliable sellers like laundry baskets, ice chests, and cutting boards far more cheaply than it can buy them, even in the closeout market. He has also bought a few dormant brands, such as Rinso detergent from Unilever and Halsa shampoo from Dep Corp., and has struck deals with manufacturers to create private-label items for the stores. (Instead of being labeled 99¢ Only, products are given more appealing names such as “Breakfast Choice,” “Photo Plus,” and “Roasters Choice.”)
In June a 99¢ Only opened in Houston, one of 15 new locations coming to Texas this year, along with a $23 million distribution center (paid for in cash). It’s the company’s farthest move from home base, and it represents what Gold hopes will be the beginning of a national expansion. While most applaud the move, some analysts worry that Gold will face his first direct competition from the other, larger discount chains, including Dollar General, Dollar Tree, and Family Dollar. Another concern is that this is still a family-run business; almost half the board is related to Gold. (His two sons, daughter, son-in-law, and even his son-in-law’s father work for the company.) And then there’s Gold’s health to consider. He’s 71 years old, and no one wants to think about the future without him. “Without Dave I don’t know how the company will run,” says Jose G. Gomez, vice president of retail, who’s been with the company since the beginning. For his part, Gold–a millionaire many times over who buys his socks at his own stores and drives a hybrid Toyota that gets 51 miles to the gallon–doesn’t plan on leaving anytime soon. He’s been a vegetarian for the past 12 years, and still comes to the office between 3 A.M. and 4 A.M., six days a week. “They’ll carry him out,” says one employee.
Those are all longer-term considerations, though. Right now the company’s immediate future is fairly promising. Per-share earnings have been growing steadily in the past few years, and as of presstime the consensus estimate for 2003, according to Thomson First Call, was a number Dave Gold would be proud of–99 cents a share.