Ideas that Serve
JULY 01, 1978 by WILLIE E. NELMS
One feature of the free market which is seldom completely appreciated is the close relationship between innovation and the meeting of consumers’ needs. In a market environment, the entrepreneur must be both a man of ideas, who has vision to foresee ways of producing goods and services more effectively, and a man of action, who can implement these ideas.
Many people believe that consumers are at the mercy of producers, who have a captive audience to buy whatever they offer. Individuals sharing this view do not realize that the businessman’s innovations must cater to the desires of consumers, or he will not prosper.
The market encourages innovation, yet it rewards only those who meet the demands of consumers. When the entrepreneur loses the creative spark or when he ignores the wishes of his customers, he risks his business life. Where entry in the market is free, there will always be competitors willing to move ahead and provide for demands.
An excellent case study of this principle is the business empire built by Alexander Turney Stewart during the comparatively free market of nineteenth-century America. Today, Stewart’s name is unknown, but in the early and mid-1800s, he pioneered the development of what became the department store.
Stewart was born in 1803, in County Antrim, in the north of Ireland. When his father died soon after his birth, young Alexander was placed in the care of his maternal grandfather. A bright, intelligent youth, he was at first pledged to the ministry.
While still in his teens, Stewart visited New York and soon decided to enter the business world. Although he had no experience as a merchant, he was captivated by the hustle and bustle of the New York business world. Deciding to import and sell Irish lace, he opened his first store in the summer of 1823. The shop was on Broadway and consisted of a twelve-by-thirty-foot room filled with the wares he planned to sell.
From the beginning, Stewart demonstrated the creative genius and hard work that would prove to be his trademarks. He opened his store early and closed it late, he cultivated personal politeness toward customers, and he carried quality merchandise.’ His canniness in business encouraged him to open another store. When he outgrew it, still a larger building was acquired, so that by 1850, he had the largest retail business in the city.
"Ten Per Cent and No Lies"
Stewart’s success and the growth of his concerns were a direct result of his hard work and innovative efforts. In a day when most merchants believed in marking up prices very high on each item, Stewart undersold his competitors and reaped the benefits of selling large quantities at a small margin of profit.
His slogan of "ten per cent and no lies" shows the connection between his mark-up on merchandise and the manner in which he insisted his products be represented to the public. He abhorred misrepresentation to customers and insisted that his salesmen not make false claims for the material they sold.² This practice was counter to the conventional business wisdom of the day, but it won Stewart a reputation for honesty and reliability which he converted into new sales.
Another feature of Stewart’s business was the establishment of uniform pricing. Most of his competition arrived at prices for merchandise by haggling with customers. To simplify his operations, he established uniform prices, which applied to all customers. The success of this policy was huge, and eventually his competitors were forced to follow suit.³
The variety of material and services provided in Stewart’s store also added to his sales. His innovation of a single complete building, where shoppers were free to roam at will and view the merchandise, greatly simplified business. The atmosphere was pleasant and convenient. In addition to a wider variety of merchandise than was available elsewhere, Stewart’s offered several fringe benefits. These included writing desks for customers, a library, a delivery service, and toilet facilities for women. In the mid-1800s, even the latter convenience was considered innovative in the retail trade.
Another important feature of the store was the unrestricted right of customers to enter, inspect and decide on purchases without interference by company personnel. Today such action is taken for granted, but at the time, patrons of retail establishments were seldom left unattended to select material.4
Very early in his career, Stewart adopted the practice of allowing merchandise returns for exchange or cash refunds. In general this was not an accepted practice of the period. Most merchants viewed each sale as final. Stewart’s policy allowed for many satisfied customers to remain in that category by being allowed to return unwanted items.5
Sales were another feature of the Stewart business enterprise. He held a variety of them, ranging from fire sales to remnant sales. Needless to say, these brought great benefit to his many patrons and equal discomfort to his competitors, who did not follow suit.6
The success of the Stewart enterprise is considerable, even by today’s inflated standards. His business grew to the point that by the 1860s he had 2,000 people employed in his enterprises. By 1865, his total retail sales were $8,000,000 per year. This grew to more than $12,000,000 by 1873. By comparision, R. H. Macy’s store did not reach $1,000,000 annual volume until 1870, and it was not until 1896 that John Wanamaker became the second American dry goods merchant to sell $10,000,000 worth of retail items in a single year.
Other examples of Stewart’s business success can be seen from the records showing that 10 per cent of all imports at the Port of New York during the 1860s came to him. He was the greatest single taxpayer in the United States, and he owned more real estate than anyone in New York, except the Astors.7
At his death in 1876, the Stewart estate was said to be worth $60,000,000, which included numerous factories in Europe. The Stewart empire was built on hard work and innovative thinking which met the demands of consumers. Unfortunately, the executor of his estate, Henry Hilton, did not demonstrate the same characteristics. Hilton failed to keep pace with the business trends of the time and allowed personal prejudice to affect his decisions.
An example was Hilton’s closing of the Grand Union Hotel in Saratoga, New York to Jews. This action, taken just two months after Stewart’s death, resulted in much bad publicity for the business. In addition, over a hundred prominent merchants withdrew their wholesale trade from the Stewart dry goods store.
Where Stewart was able to stay one step ahead of his competitors and correctly anticipate customers’ demands, Hilton was able to do neither. Through mismanagement and a lack of response to customers’ needs, Hilton reduced the Stewart estate to a shambles. The large retail store was sold and the fortune dissipated in less than twenty-five years.
The story of the Stewart empire illustrates how creative genius and hard work in the free market environment can lead to success and benefit both consumers and merchants. Stewart’s enterprise was a model of retailing in its time. But the Stewart story also illustrates how the market treats lack of creativity and a failure to accurately meet consumers’ needs. Stewart’s successor showed neither the willingness nor the ability to meet the competition of the department store movement. As a result, Stewart’s business empire is unknown today. This case should serve as an example to anyone who charges that entrepreneurs in a free market need not worry about meeting the desires of customers. It illustrates the rewards that can occur when ingenuity is combined with hard work, and the problems that result when these two assets are missing.
¹"Alexander Turney Stewart" in Dictionary of American Biography, Edited by Dumas Malone, Volume IX, part 2 (New York, 1958), pp. 3-4; Edwin P. Hoyt, The Idea Men (New York, 1966), pp. 20-24.
²"Alexander T. Stewart," Fortune (January, 1975), p. 70; Harry E. Resseguie, "Alexander Turney Stewart and the Development of the Department Store, 1823-1876," Business History Review, Vol. 39 (Autumn, 1965), pp. 307-309.
³"Alexander T. Stewart," Fortune, p. 70; Resseguie, "Alexander Turney Stewart," pp. 309, 310.
4Ibid., pp. 310-312, 321.
5lbid., pp. 311-312.
6Hoyt, The Idea Men, pp. 30-31.
‘Ibid., p. 45.
‘Ibid., pp. 46-47.
9lbid., pp. 48-49.