THE MOST FEARED FAMILY IN RETAILING When it comes to running stores, Herbert and Robert Haft are cheapskates, but they make big bets as raiders. Targets like Safeway take on punishing debt to stay free.
By Bill Saporito REPORTER ASSOCIATE Edward C. Baig

(FORTUNE Magazine) – ROBERT HAFT walks across a shopping center parking lot, looking at the supermarket across the way. ''I'd take you through Safeway,'' he says coyly, ''but we don't own it.'' Haft is one-half of the father-son team that also doesn't own Supermarkets General Corp., Jack Eckerd Drug Stores, Revco Inc., Federated Department Stores, and May Department Stores -- not that the two haven't tried to buy them. Robert Haft, his father, Herbert, and the company they control, Dart Group Corp., seem to have made a play for most major U.S. retailers. But the target companies made clear they would rather die on their own than live with the Hafts. Dart has earned about $150 million letting companies strike high-price deals for their freedom. Who are the Hafts and why do other retailers despise them? Herbert Haft, 66, parlayed a single Washington, D.C., drugstore into the Dart Drug chain, which reached sales of $283 million before he sold it in 1984. He now is chairman of Dart Group, a holding company for a finance corporation and two retail companies -- Crown Books, a discount book chain, and Trak Auto, a discount auto supply store. Like other raiders who go after giant targets, the Hafts are clients of junk bond issuers -- like Drexel Burnham Lambert -- which pronounce themselves ''highly'' confident that they can finance the deals. A diminutive man with a shocking white pompadour, Herbert Haft has a charismatic smile that belies an aggressive competitiveness. In retailing he is acknowledged as a relentlessly tough negotiator for whom compromise means losing. Robert Haft, 34, is Dart's president and runs Crown Books. Although his physical stature is slight, he carries heavyweight credentials. A graduate of the University of Pennsylvania and the Harvard Business School, he has become a key strategist in takeover plays. Pleasant and confident, Bobby is also the point man in handling Dart's public image. While he spoke to FORTUNE for this story, his father would not agree to be interviewed. In fact, Herbert Haft consented to be photographed only on condition that no questions be asked. Even in an industry where old-fashioned integrity is sometimes considered a liability, the Hafts are known to run stores on the cheap and push deals to the limit, and then some. At Dart Drug the Hafts cut costs 20% in three years, partly by shrewd management and partly by bullying suppliers. Some suppliers say these tactics included paying bills late, after endless haggling that often yielded Dart a discount. The Hafts also skimped on inventory and limited customer service. By the time they sold out, the stores were so shoddy that the new owners later took the unusual step of running ads in the Washington Post to state that the chain is ''no longer owned by the Haft family.'' The Hafts insist they are successful store managers who are simply looking to acquire more stores to operate. They point to Dart Drug's 1984 after-tax return on sales of 5.4% -- twice the industry average. Crown Books, they say, is another demonstration of their sound management, though they admit that Trak Auto has had a bumpier ride. ''In many ways the record speaks for itself. The Hafts are hands-on retail managers and innovators who have reorganized retail markets, founded three different chains, and been successful,'' says Claudine Malone, a management consultant and until recently a Dart director. But Haft haters maintain that the Dart philosophy is to milk operations rather than run them. They say the Hafts chase acquisitions only for the fun of being bought out. When they went after Jack Eckerd in 1985 the Hafts earned $9 million on their stock. Last year the Hafts fired Dart at Safeway Stores, the world's largest supermarket chain and, at $20.3 billion in sales, 60 times Dart's size. Rather than submit to Dart's $63-a-share offer, Safeway management got together with the investment firm Kohlberg Kravis Roberts in a $69-a-share leveraged buyout, in the process falling on a sword of $4.2 billion in debt (see box). The Hafts made $97 million in the process. Supermarkets General, the Hafts' most recent target, yoked itself with $2.1 billion in debt to go private in a leveraged buyout rather than be owned by Dart. In late May, Dart realized $40 million by selling its stake in the chain. The profits from these forays end up on Dart Group's bottom line -- making for eye-popping financial results and a stock price that has risen from $10.75 a share in 1982 to a recent $152. Dart's pass at Supermarkets General demonstrates the animosity that can accompany a Dart deal. Dart first approached the company in August 1986 with an offer to form a joint venture to own and operate the Washington area Safeway stores, which Dart had an option to buy. Rebuffed, the Hafts came back again in November to discuss a buyout, insisting they would do it only on friendly terms. Again they were turned away. Twice scorned, Dart quietly accumulated 4.9% of Supermarkets stock. Dart made a hostile offer in February. THE POWDER KEG exploded when Dart accused Supermarkets General management of demanding $35 million in golden parachutes as a condition for accepting the buyout offer. Supermarkets General says the accusation surfaced only after its management refused a bribe of stock to approve the deal. According to documents filed by Supermarkets General with the Securities and Exchange Commission, the Hafts offered Leonard Lieberman, the company's chief executive, and James Dougherty, the executive vice president, a ''free ride'' on 10% of the stock in the new company if they would agree to a buyout. A source close to Supermarkets General says the offer was made outside a room where attorneys and financial advisers for both sides were negotiating. The source says that after Lieberman and Dougherty refused the offer, Herbert Haft burst into the room of lawyers and accused the Supermarkets General lawyer of trying to gouge Dart and line the pockets of management. The lawyer happened to be Joseph Flom of Skadden Arps Slate Meagher & Flom, one of the foremost mergers and acquisitions attorneys in the U.S. In a heated exchange, Haft called Flom a ''son of a bitch.'' Supermarkets General claims Flom demanded and received a full retraction from Dart's financial advisers, Kidder Peabody & Co., and its counsel, Willkie Farr & Gallagher, on the issue of the golden parachutes. A Dart attorney says no such admission was made. Just after the meeting Dart publicly issued a letter that again accused Supermarkets General managers of trying to enrich themselves by $35 million as the price of the deal. Lieberman responded with a letter to Dart that said: ''Trust and integrity are hallmarks of our business . . . Your conduct indicates to us that no transaction involving trust and confidence can be entered into with you. Your propaganda and misstatements will not panic our board.'' The Hafts make no apologies. They still maintain that the Supermarkets General executives asked for, and were not offered, rich bailouts. Aside from the unpleasantness over that, Robert Haft considers the bargaining straightforward. He says: ''We offered $43 a share, an 80% premium over the price of Supermarkets shares as of January 1. Then we offered a premium that was four times book value and 30 times earnings. By any measure it was full and fair.'' Dart dropped out of the bidding after Merrill Lynch bid $46.75 a share. A secretive and aggressive character like Herbert Haft doesn't swim well in Washington's goldfish bowl society. But if the Hafts are not the most popular folks on the block, they surely are among the richest, with a net worth of more than $500 million, according to Regardie's, a Washington monthly magazine. Herbert Haft bought a mansion in downtown Washington for $1.4 million only to level it and construct an edifice worth $4 million. Among friends he is flamboyant, and he loves to entertain lavishly. His lawyer, Robert Hirsch, calls him a ''diamond in the rough.'' The Haft family owns 100% of Dart Corp.'s voting stock; it also holds 25% of its nonvoting stock, recently worth about $62 million. As chairman of Dart, Crown, and Trak, Herbert earned a combined salary of about $1.66 million last year, which included a bonus equal to 1.5% of Dart's pretax profits. He gets yearly options on 20,000 shares of Trak and 10,000 shares of Crown and Dart. As president of the three firms Robert earned about $1.76 million in salary last year, which included 1.5% of Crown's earnings. He gets options for 20,000 shares in Crown and 10,000 in Trak and Dart. Herbert's wife, Gloria, a cosmetician, is a vice president and director on the payroll for $325,000. More money comes from the family's extensive real estate holdings, Combined Properties Limited Partnership. A major shopping center developer run by Herbert's younger son, Ronald, 28, the partnership owns more than four million square feet of Washington-area real estate. Among Combined Properties' best tenants are other parts of the Haft empire. Dart carries the expenses, taxes, and maintenance on its Landover, Maryland, warehouse and headquarters and still pays Combined Properties $1.5 million a year. Many Crown and Trak stores are also on Combined Properties' rent rolls. Herbert Haft learned the drugstore business at an early age: His father was a pharmacist. After a hitch in the military, where he served as a supply officer, Haft, a George Washington University graduate, also became a Washington druggist. Though he owned his own store, his prospects seemed unpromising until he figured out another way to do business: discounting. When he started Dart Drug in the Fifties, Haft sold almost everything below the suggested retail price. That practice was then illegal for many items covered by ''fair trade'' laws. The low prices attracted customers by the thousands and lawsuits by the hundreds. Process servers became frequent visitors to the Haft household. Robert remembers: ''I used to tell them, 'My father says he's not home.' '' Supplier suits notwithstanding, Dart Drug grew with the burgeoning Washington suburbs. In the Seventies, Dart was one of the first to latch onto the super drugstore concept. While most drugstores were 5,000-square-foot corner stores stocked primarily with drugs and health and beauty aids, Dart began building outlets of up to 20,000 square feet, selling everything Haft could swing a deal on: lumber, hardware, lawn chairs, and beer. Prescription sales made up less than 15% of receipts, half the percentage in conventional drugstores. THE COMPANY acquired a reputation as a tough customer. Distributors typically sell their merchandise at a 2% discount if it's paid for within ten or 15 days. Plenty of retailers pay late and take the discount anyway, but some suppliers say Dart Drug was notorious for the practice. Eager to please such a big customer, suppliers were reluctant to crack down. ''It's just one of those practices that if you're soft, the other guy will get away with it,'' says Robert Thieman, former national sales manager for Merrill Dow, a | pharmaceutical company. While 2% of anything doesn't sound like much, it's equal to many mass retailers' profit margins. One former employee says the company tended to lose track of these overdue bills. Says he: ''We'd have no record of $600,000 in orders, and when the supplier demanded payment, we'd say, 'We don't have any records; why don't you come in and talk about it?' '' Talk may be cheap, but not with Dart, which usually negotiated a lower price. While this kind of behavior is considered unethical by some standards, it is perfectly legal. And, of course, Dart denies that it engages in such behavior, be it ethical or unethical. In the three years before its sale, Dart Drug went through a cost-cutting frenzy. The company tossed out about 33% of its merchandise -- stocking three sizes of toothpaste rather than seven, for instance. It also downsized some stores and opted for deliveries once a week rather than three times -- a move that pared transportation costs from the warehouse to the stores. Dart also stopped giving cash refunds. These policies saved the company about $12 million a year. The cost cutting boosted profits, and the company sold the drugstores to its operating managers for a fat $160 million. The stores' assets were worth only $24 million; with their leases, the stores were probably worth $100 million. The timing could not have been better. Says Robert Haft: ''We felt the industry was changing, and we were right.'' Since then many major drugstore chains have reported earnings declines as more supermarkets and mass retailers started peddling traditional drugstore items, such as prescription drugs and health and beauty aids. The successor company, Dart Drug Stores, is now fighting for its life, the victim of suffocating interest payments and a terrible image among consumers. At least one Haft project, Crown Books, is thriving. Robert Haft says he began to outline the company -- which has no connection to Crown Publishers -- after listening to a lecture by an executive of Dayton Hudson's B. Dalton Bookseller chain, who claimed that books could not be sold in a discount format. Haft proved otherwise. Crown sells about $154 million worth of books from 200 U.S. stores. Dayton Hudson recently sold B. Dalton to Barnes & Noble, a discounter. Not surprisingly Crown takes a marketing approach more akin to selling aspirin than books. The stores, which are clustered in major metropolitan markets so the company can concentrate advertising and distribution costs efficiently, are not found in malls. Instead Crown stores are located in downtown storefronts and in strip shopping centers, where the rents are less expensive. Other booksellers choose malls on the theory that strolling shoppers will come in and buy on impulse. Crown's view is that most books are planned purchases and that consumers will go out of their way to save money. All Crown stores discount hard-cover best-sellers 35% and paperback best- sellers 25%. The company does recognize some impulse buying: Stores always put paperbacks against the rear wall to make customers cruise past other offerings. Half the 10,000 books in each store are photo, cooking, and other gift books under $10. The stores will not accept special orders, because Haft says half of all special orders aren't picked up. Everything at Crown is done to minimize costs. The stores are identical, with the same inexpensive plastic signs and single fluorescent tube lights. (Most other booksellers use double-tube fixtures.) Crown's management is bare-bones too. Along with Haft, the company is run by Jeanne Herrick and Jose Gonzalez, longtime Dart executives, and a staff of three operations managers and five buyers for all the stores. No central computers track sales, handle inventories, or figure out what to buy and display. Haft says, ''We're trying to keep the business at store level.'' Store managers audit sales by counting the inventory, clipboard in hand, and reorder as needed. The managers are also responsible for local marketing decisions -- heavy on the military titles in Washington for instance. ''What the hell do we need a computer for,'' explains Haft, standing in a store a rifle shot away from an Army base. ''If we sold two Virginia Woolfs in this particular store the computer would go ahead and order three more. The manager knows better.'' The emphasis on moving books that move has its rewards. Crown returns only 10% of its stock to publishers, vs. the 30% to 60% that is typical for competitors. CROWN units average about $850,000 in sales a year. The company says that's about three times the industry average. In the year ended last January, Crown earned about $5.5 million on sales of $154 million, or about 3.6% after tax. Compared with food or drug chains, that's pretty good, but it's a falloff from a high of 5.7% in 1985. Haft blames the drop on protracted price wars waged by B. Dalton and Waldenbooks, among others. Haft reasons that the war cannot go | on forever, and that, as the low-cost operator, Crown will emerge the victor. Trak Auto, where car owners can buy mufflers, batteries, motor oil, and parts, is a Crown Books for motorheads. The company has the same pricing and marketing strategy as Crown and often puts stores in the same shopping centers as the bookshops. Since buying and selling car parts is more complex than bookselling, Trak does use a computer. Trak evolved from Dart Drug. ''We would go to the Orient and buy tremendous amounts of automotive supplies for Dart Drug,'' Robert Haft says. The large volumes made the Hafts look into the auto parts market. They found that mom-and-pop operations sold 80% of auto after- market products, leaving a wide swath open to a national retailer. After examining competitors such as Sears and Pep Boys -- Manny, Moe & Jack, the company launched Trak in 1979. Dart formed a partnership with Thrifty Corp., a Los Angeles chain, in 1982 to operate West Coast stores. Trak West lost $21 million in three years, and in 1986 Thrifty sold its share to Dart. Last year Trak earned just $1.3 million on sales of $184 million. Haft blames the lack of profits on lack of stores. He says: ''This is the beginning of an industry. We needed 50 stores in Chicago and 100 in Los Angeles to break even. We advertised as if we had the stores, but we didn't have them.'' Haft says the Los Angeles and Chicago stores are now holding their own, and the Washington stores will earn 5% on sales this year. Given their record with Trak, Crown, and the drugstores, the Hafts cannot understand why critics would question their ability or desire to run a big retailer. Says Robert Haft: ''Having started, redone, and renewed businesses, we think those skills are transferable.'' The Hafts also have developed another skill that is transferable: the ability to make serious plays for companies far larger than their own. Dart Group makes it clear that it hasn't stopped shopping. Whoever is on the list may end up participating in the latest rage in retailing: fighting the Hafts.

CHART: INVESTOR'S SNAPSHOT DART GROUP

SALES (latest four quarters) $367.4 MILLION CHANGE FROM YEAR EARLIER UP 208%

NET PROFIT $30.7 MILLION CHANGE UP 211%

RETURN ON COMMON STOCKHOLDERS' EQUITY 13% FIVE-YEAR AVERAGE 15%

STOCK PRICE RANGE (last 12 months) $178.50-$86

RECENT SHARE PRICE $152

PRICE/EARNINGS MULTIPLE 8

TOTAL RETURN TO INVESTORS (12 months to 5/22) 18%

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: NO CAPTION DESCRIPTION: Performance of Dart Group stock compared with that of Standard & Poor 500, 1982 through first quarter of 1987, based on 1982 index.