Shopping Spree
Federated buys rival May to create a mammoth of the mall
Having spent the better part of his adult life in retail, Federated Department Stores CEO Terry Lundgren has plenty to say about the nature of selling. But when it comes to his personal retail philosophy, the 52-year-old Lundgren is a man of surprisingly few words: "I believe that if you can't buy it at Bloomingdale's or Macy's," he says, "you don't need it."
If only more shoppers shared Lundgren's point of view and spent a little less time and money at Neiman Marcus, Nordstrom, and Wal-Mart, he might not be in the position he is today: presiding over the creation of a retail colossus that could either reshape and revitalize the American department store or seal its long-anticipated demise.
Last week, Federated, owner of Bloomingdale's and Macy's, announced a deal to acquire May Department Stores, parent of Robinsons-May, Hecht's, Marshall Field's, and others, in a deal valued at $11 billion, or roughly $35.50 per share, plus the assumption of $6 billion in debt. Should shareholders and regulators approve, Federated would become the second-largest department-store chain in the country with 950 stores and $30 billion in annual sales. The company, which has not had much of a Midwest presence, would gain a foothold in nearly every major market and would be second only to the new combination of Kmart and Sears, Roebuck, whose $11.5 billion pairing was announced in January.
Reverberations. "This deal is a blockbuster in the world of department stores," says Christine Augustine, who follows the retail industry for Bear Stearns & Co. "It could completely reshape the retail landscape in ways that go far beyond the mall to suppliers and manufacturers, off-mall and big-box retailers, media outlets, and just about everything."
Lundgren offered few specifics about how the merger would work but confirmed there would be layoffs (analysts estimate several thousand), store closings (an estimated 150 or more), and that most, if not all, May stores, which include Lord & Taylor, Filene's, and Strawbridge's, will be "reinvented" as Macy's or Bloomingdale's by 2007. This will transform Macy's from mostly a bicoastal chain into a nationwide retailer with as many as 300 newly branded stores in 15 new states. Lundgren also made clear that the new Federated will be even better equipped to exercise its clout with manufacturers and suppliers, who may be forced to lower their prices or absorb merchandise that doesn't sell. "This merger will take all the management expertise and acumen that anyone can muster to create an 850-store chain that can operate as a single brand and achieve the economies of scale that are necessary," says George Whalin, president and CEO of Retail Management Consultants in San Marcos, Calif. "But it can be done, and Federated has a management team that could do it."
Despite its potential to reshape retailing, the merger was hardly a surprise to those in the industry, where consolidation has become synonymous with survival. Mainstream department stores, which count on apparel sales for nearly 80 percent of their revenues, have been in steady decline for years as discount stores, high-end retailers, and specialty stores have pecked away at their customer base. In the late '80s, department stores accounted for nearly 70 percent of all domestic apparel sales. That share has been cut in half to around 35 percent today, as shoppers have turned to discounters like Wal-Mart and Target, high-end retailers like Neiman Marcus and Nordstrom, and specialty stores such as Victoria's Secret and Banana Republic. "Department stores are simply being nibbled to death," says Cynthia Cohen, president of Miami retail consultants Strategic Mindshare.
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