PIC 'N' SAVE GOES SHOPPING : The deep-discount chain is on a spree to expand nationally. That's hurt profits, but kept 'unique bargains' on its shelves, says CEO Lewis Merrifield.

By MARTHA GROVES

Sept. 11, 1989 12 AM PT

<i> Times Staff Writer</i>

A “reckless feeling” comes over one normally cautious shopper when she enters Pic ‘N’ Save. Another likens it to the county fair, where she never knows what she’ll find but always goes home with something.

Yet another routinely scours the store for housewares, children’s clothes, and school and party supplies, inevitably walking out with at least $20 in bargains.

Impulse buyers such as these have helped turn Pic ‘N’ Save, a “close-out” chain based in Carson, into one of the nation’s most profitable peddlers. Its after-tax profit exceeds 10% of sales, more than double that of traditional retailers.

Lately, though, the company has gone on a spending spree of its own--expanding into New York, opening new stores, building a management team and adding distribution space--that has depressed earnings and raised some concerns among industry analysts.

So far, the costly moves, including the purchase of 15 Job Lot Pushcart stores in New York last December, have all been financed without borrowing. And there’s no end in sight: From its current 176 stores in California, the Southwest and the South, the chain plans to grow to more than 300 in 1993, with sales by then topping $1 billion from this year’s projected $500 million.

Meanwhile, expenses as a percent of sales are increasing, yet sales gains at newer stores have yet to reach the company’s historically high level.

Despite this, the company staunchly defends this high-risk strategy as necessary to capture a potentially huge market before somebody else does. Dismissing criticism as shortsighted, the company’s top executive maintains that Pic ‘N’ Save and its shareholders will benefit from the investments in the long run.

“We offer exceptional value for a particular kind of shopper, and we offer it in a way that no one else does,” said Lewis B. Merrifield III, the one-time corporate lawyer who became Pic ‘N’ Save’s chairman in 1985. “By expanding, we are bringing more unique Pic ‘N’ Save bargains to more people.”

Pic ‘N’ Save does occupy an unusual niche. Finding bargains--for itself as well as shoppers--is its business.

It sells first-quality overruns, boo-boos and rejects from manufacturers such as Procter & Gamble, Gerber and Rubbermaid that view Pic ‘N’ Save as a “safety net” for castoff merchandise. Because it buys the items inexpensively, sometimes for as little as 10 cents on the dollar, it can charge a hefty markup and still sell at a deep discount--usually 30% to 70% below other stores’ prices.

When Colgate-Palmolive decided recently to repackage its Fab 1 Shot detergent in 32-count boxes, Pic ‘N’ Save got a deal on 10,000 cases of the 36-count packages. The boxes sold for $4.95, compared to a retail price of $6.95 to $8.95.

Although most items are less than $6, the stores also sell luggage, comforters and TV stands that cost much more.

Opportunistic buying makes for unpredictability--for both Pic ‘N’ Save and its shoppers. The company often buys enormous quantities of Christmas wrapping paper in January so inexpensively that it can afford to store it until the next holiday season.

“The Pic ‘N’ Save customer is kind of an unusual bird,” said William D. Tichy, a Dean Witter analyst in San Francisco. “You don’t go there knowing exactly what you’re going to walk out with. It’s all over the ballpark.”

As a result, signs and displays are designed to create a sense of urgency: “Factory Close-Outs While They Last, New Arrivals Every Week! or Wow! Look What I Found!” Shoppers who hesitate can lose out, and most are not shy. By day’s end, the floors are often strewn with toys, party goods and wicker baskets, and shelves are a shambles.

Seasoned Pic ‘N’ Save shoppers often make several trips a month, steering grocery-style carts up and down the aisles to see what’s new. Lately, customers have been seeing more packaged foods and garden supplies, among other merchandise.

One Beverly Hills matron, who visited the new Culver City store to match some plates she had bought a few weeks before at another Pic ‘N’ Save, left the china department disappointed. But she made the trip worthwhile by buying a dozen candles at 25 cents each.

“I shop in all of the good stores, but once in a while I come here,” she said, declining to give her name. “They have some very interesting things. It’s fun.”

To be sure, mistakes happen. Hundreds of 6-foot inflatable Alfs, modeled on the TV character, languished in the stores.

“It just stood there looking at us,” said Steven J. Miral, general merchandise manager. “It was bad enough we made a mistake; it had to be such a large one.”

With more stores, finding enough quality merchandise could prove problematic, some observers say. But Merrifield and his crew say they have spent years developing close relationships with suppliers and expect to benefit from those as they expand.

To accommodate the growth, the company recently updated and expanded (by 600,000 square feet, to 1.4 million) its Rancho Cucamonga warehouse and is building a $50-million, 1.1-million-square-foot distribution facility in New Orleans.

The expenses have put a crunch on earnings. For the second quarter ended July 2, Pic ‘N’ Save’s profit fell to $6.4 million from $8.2 million in the same period a year earlier. Sales, meanwhile, grew nearly 23% to $102 million. The company and many analysts project that profits in the year’s second half will improve.

Rival Expanded

Among close-out retailers, Pic ‘N’ Save is second in size after Consolidated Stores, which operates units primarily in the Midwest but expects to compete directly with Pic ‘N’ Save later this year in Atlanta.

Consolidated, based in Columbus, Ohio, also has rapidly expanded. Although earnings have tumbled, the company has said it will proceed with its plan for growth. In June, Pic ‘N’ Save attempted to buy the troubled chain, but talks fell through.

In Merrifield’s view, acquiring stores in other regions and improving distribution are necessary to prevent the business he inherited from founder William Zimmerman from becoming moribund.

Indeed, some observers agree that Zimmerman was a conservative businessman who declined to pump profits back into the stores.

“Sure, (expansion) carries risk,” analyst Tichy said. “You could sit there fat and sassy and not expand, just cannibalize yourself, stay small. But these people have a responsibility to shareholders to grow the business, if they can, in a prudent manner.”

That’s where Merrifield figures he can put to use years of experience in studying corporate strategy.

Intensely intellectual, Merrifield reads as many as nine books a week, usually about organizational development, management theory or martial arts. He meditates and practices tae kwon do for relaxation.

After receiving a bachelor’s of science degree in economics at UCLA, he graduated first in his USC law school class in 1966 and then became a clerk for the late Supreme Court Justice William O. Douglas. He taught at USC as an assistant law professor before entering private practice in 1969.

In 1971, Merrifield, who will turn 50 next month, became a director of Pic ‘N’ Save, which was formed in the 1950s. As members of the old guard departed, the board appointed him chairman, then president and chief executive. Merrifield, in turn, brought in his own management team.

Some critics say he has a tendency to run the company too much by the book and not enough by instinct, regarded as a fatal flaw by many in the retailing business.

Merrifield, however, claims that “I’ve always liked goods.”

An Eagle Scout as a youth, he recalls hours spent in the trading tents at Boy Scout Jamborees, where he and other scouts bartered for kerchief holders, badges and other items. And, he says, he has spent hours walking the aisles of Pic ‘N’ Save to keep up with sales trends.

The work has proved lucrative. Last year, Merrifield’s salary was $850,000. In addition, he owns about 2.3% of the company’s stock.

As he carries out the risky growth strategy, one observer noted that Merrifield’s “Patton-like ability to inspire lieutenants to follow him into battle” will prove important.

Just inside Merrifield’s bookshelf-lined office--decorated in rich woods and leather, unlike his stores--is a discreet plaque that appears to sum up his approach to the challenge of expanding Pic ‘N’ Save:

“Come to the edge of the cliff, he said.

We’re afraid, they said.

Come to the edge of the cliff, he said.

We’re afraid, they said.

They came.

He pushed.

They flew.”

Of Pic ‘N’ Save’s strategy, Merrifield says: “The only significant risk, as I see it, is not being really entrepreneurial.”

PIC ‘N’ SAVE AT A GLANCE

Headquarters: Carson

Number of stores: 176 operated as Pic ‘N’ Save or Job Lot Pushcart in California, Southwest, South and New York

Number of employees: 5,000