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In Business, Nothing Stays the Same

Thomas Sowell — Jan 6th, 2001

The passing of a once-great business is often a time for nostalgia and regret, so the announced closing of Montgomery Ward has provoked much media comment along these lines. But both the rise and the fall of Montgomery Ward illustrates the dynamic adjustments of a free market economy and the prosperity that it makes possible.

Although most people today think of Montgomery Ward as a chain of department stores, the company was one of the dominant retailers in the country for more than half a century before it opened its first store. It began as a mail-order house in 1872, when the United States was a rural country, with very high costs of delivering goods to a widely scattered population. Neither trucks nor automobiles nor airplanes had yet arrived on the scene, so transportation costs added greatly to the cost of getting merchandise to small general stores in isolated communities.

Montgomery Ward mailed its merchandise, lowering delivery costs by using the most efficient transportation available at the time - the railroad - and the only nationwide delivery service, the U.S. mails. Railroad tracks ran right through the huge Montgomery Ward warehouse in Chicago. The net result was that it could charge lower prices than others who used more costly methods of transportation.

But nothing stays the same. Montgomery Ward was destined to change because of a young railroad agent who sold watches on the side. His name was Richard Sears.

The company that Sears set up also grew into a mail-order house - one that eventually surpassed Montgomery Ward. Meanwhile, the country itself was changing. By 1920, there were for the first time more Americans living in urban areas than in rural areas. That changed the whole economics of retailing.

Now the cheapest way to deliver merchandise to many Americans was by setting up chains of stores where they lived. But neither Sears nor Montgomery Ward had any stores - nor any desire to build stores. They had been highly successful for decades in the mail-order business. Why change? When an executive at Montgomery Ward suggested to the head man that they start opening stores to supplement their mail-order business, he was fired for his trouble.

The greatness of a free-market economy is that it does not depend upon the wisdom of those who happen to be on top at the moment. The rich and complacent men who ran Montgomery Ward and Sears were destined to be forced into change by a new man named James Cash Penney, born and raised in poverty.

Penney's ideas on retailing changed the whole industry. By 1920, there were 300 J. C. Penney stores - prospering, growing and taking business away from Sears and Montgomery Ward. Only then did Sears begin to listen to the executive who had been fired from Montgomery Ward and start opening its own stores, saving the company from the brink of bankruptcy. Montgomery Ward belatedly followed suit.

In the years after the Second World War, as the country grew more prosperous and people began moving to the suburbs, some Montgomery Ward executives suggested to the head man that they should start building stores in suburban shopping malls. They were fired for their trouble.

The net result was that Sears hit the shopping malls first and Montgomery Ward never caught up. Meanwhile, a young clerk in a J.C. Penney store - a man named Sam Walton - began learning retailing from the ground up. Later, he put his knowledge and insights to work in his own stores, which would eventually become the Wal-Mart chain, with sales larger than those of Sears and J.C. Penney combined.

Montgomery Ward once made a great contribution to the rising standard of living of ordinary Americans. But the continued prosperity of Americans eventually required that it be replaced by new businesses, better adapted to new conditions. Those who complain that some are "left behind" amid growing prosperity do not understand that leaving some behind is the way the country moves ahead.

Thomas Sowell is a fellow of the Hoover Institute. He can be reached at Creators Syndicate, 5777 W. Century Blvd., No. 700, Los Angeles, CA 90045.


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