Changing times (Corporate Dealmaker)

Changing times

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marshallfields2005,jpg.jpg In voices ranging from wistful nostalgia to fiery indignation, Marshall Field's shoppers let loose earlier this summer on plans by Federated Department Stores Inc. to pry off the fabled nameplate at the Chicago flagship store and replace it with a Macy's sign. Some offered memories of afternoon teas in the 98-year-old department store's Walnut Room or first dates that started with a meeting "under the clock" on State Street.

Elsewhere on the grass-roots preservationist Web site www.keepitfields.org, the outrage hardened into resolve never to shop at Macy's - even if it were the last place on earth to get a pair of leopard-print pumps. Visitors dumped more than 35,000 words on the site with the same message to Marshall Field's new owners: Don't monkey with the moniker.

"Shoppers have an emotional connection to their flagship stores. They're an emblem for the city," says Amanda Nicholson, a professor of retail management at Syracuse University who has also worked for a number of retailers. "That makes shoppers very sensitive to everything at that store, down to even the shopping bags."

Despite all the kvetching, by this time next year the name Marshall Field's will be erased by Cincinnati-based Federated, which acquired May Department Stores Co. in an $18 billion deal that closed in August. And while it has its tools and paint handy, Federated also plans to bolt Macy's signs onto 10 other iconic regional chains, including Filene's, Meier & Frank, Hecht's, Robinsons-May and Kaufmann's in cities nationwide.

The move accelerates Federated CEO Terry Lundgren's strategy of creating a nationwide department store brand selling fashionable high-end wares, a model he believes can thrive in an industry in which traditional department stores have been forced to revamp strategy to compete with discounters and specialty retailers. The effort began in earnest in March, when a handful of Federated chains, including Rich's and Lazarus, adopted the Macy's nameplate.

But the May integration is like nothing Lundgren has ever undertaken. At a cost of $12 billion and the assumption of $6 billion in debt, the deal is the most expensive transaction ever in the retail industry. It basically doubles the number of Macy's stores to about 950, covering 64 of the 65 largest metropolitan areas in the U.S. With roughly $30 billion in sales, Federated will be the No. 5 general-item retailer in the country.

Stripping off the names of the so-called "merchant princes" who dressed the folks in their respective cities for generations is just the most visible challenge. In addition to closing stores and laying off workers, Lundgren, who pushed the deal through after merger talks failed at least three times, also faces stagnant sales at May and the challenge of converting the May chains' surplus of low-price fashions to higher-end Federated brands without further alienating shoppers.

Certainly, the one-brand strategy from Federated makes fiscal sense. Rather than printing Filene's shopping bags for stores in Portland, Maine, and Meier & Frank shopping bags in Portland, Oregon, Federated can print a single line of Macy's bags. Advertisements can be taken nationwide, and there will be a single brand that's immediately identifiable across the country. (As it stands now, unless shoppers spend time in mid-Atlantic malls, they have no idea what the heck a Hecht's is.)

Lundgren has attempted to appease outraged locals by showing he's sensitive to concerns about the "homogenization" of their stores. Already he has said the supply of Frango, Marshall Field's chocolate mints, would continue uninterrupted. Lundgren will likely take a similar approach regarding deep-seated traditions elsewhere. And while it's unlikely he'll generate as much goodwill as Marshall Field did in helping to found the Art Institute of Chicago, the University of Chicago and the Field Museum, Lundgren may decide to maintain some level of local involvement in Chicago and in other cities where the homegrown department store has been active in local civic and charitable activities.

They'll all be Macy's soon
As Federated goes about stamping the Macy's name on century-old department stores nationwide, local angst could undermine long-term sales
Store location	Founded	Description
Marshall Fields Chicago, Ill.	in 1852 by Marshall Field	With its Tiffany ceiling and State Street clock, the store was immortalized in a Norman Rockwell drawing for the Saturday Evening Post
Meier & Frank Portland, Ore.	in 1857 by Aaron Meier	Locals continue to lunch in the elegant Georgian Room and the Christmas train draws families from throughout the region. Friday Surprise sales events began in 1887 and continue to draw regulars
Kaufmann's Pittsburgh, Penn.	in 1871 by brothers Jacob and Issac Kaufmann	Festive window displays and, like Marshall Fields, a landmark clock made the downtown store a popular spot for shopping and socializing
Source: The Deal

More of a concern than the largely symbolic scrap over May nameplates, however, is the worsening financial condition of the stores themselves, an indicator that the locals are more attached to the store name than to the merchandise. Calls to Federated weren't returned, but in an early October conference call, Federated CFO Karen Hoguet indicated that cash registers at stores in the May chains have been even quieter than last year. Same-store sales, a key retailing metric measuring sales at locations open longer than a year, slid 4% in the first eight months of 2005. The declines will worsen through the end of the year, she added.

With customers staying away, the number of sweaters, towels, dresses and other items on the shelves at May chains is "way above plan," she acknowledged. To shed the surplus inventory, the stores will have to mark down items - a move that whittles away revenue and can "cheapen" the store image in the mind of shoppers who then balk at higher prices later. That's been a constant problem for May, which has failed to draw in customers to its sometimes thinly staffed stores carrying a jumble of unfashionable blue-collar clothing.

"May has always been for the masses, while Federated has always been for the classes," says Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm. "May has kept their low-end brands, while Federated moved up-market where the consumer has been shopping. As a result, Federated is more fashion-forward. They're always at least a season ahead of May."

Getting rid of May's workman-like wardrobe is expected to chew through a fair amount of the $1 billion in one-time charges Federated plans to take in connection with the acquisition over two years. Executives haven't detailed the breakdown, which will also tally up quickly as Federated begins handing out severance checks. About 6,200 May employees, or about 5% of the company's work force, are expected to get pink slips.

To turn the short-term pains into long-term gains, Lundgren is expected to concentrate on stocking more upscale, fashionable clothes and home décor items. One area where Lundgren has led Federated - and will likely extend into May stores next year - is the proliferation of house brands. Federated designs and markets these clothing lines itself, cutting out traditional clothing suppliers. Nearly all retailers have some version of private label goods, but Federated has been particularly successful with the dozen or so lines it has launched. Federated's private label sales now account for roughly 18% of overall revenue, compared with only about 12% at May. Tellingly, only two private label brands from May are slated to find their way onto shelves following the combination.

Private label not only tends to be more profitable for retailers, it's also exclusive to the company. That means the stores are less likely to get into an unwinnable price war with Wal-Mart Stores Inc. or other discounters on "commodity" clothes. "Take a look at something like [Federated's private brand] INC," Nicholson said. "We're not talking about how many acrylic sweaters you can buy for $50. This is more Ellen Tracy-ish."

Of course, private label brings its own set of risks, as the initiative is effectively the company betting on itself to identify trends ahead of time and oversee the design, manufacturing and distribution of its brands. Recovering from a misstep can take several seasons. (Just ask the vertically integrated behemoth Gap Inc., which veered into blocky sweaters and all sorts of corduroy pants that didn't take with shoppers a few years ago. The clothes are still making their way through the discount outlet channel.)

For some observers, however, the concerns over merchandising and rebranding aren't the real worry. "The issue isn't the short-term," says Davidowitz, who predicts Marshall Field's shoppers will "get over" the change to Macy's. "Federated has bet the company on the department store sector, which has lost market share for the past decade and will probably lose market share for the next decade." The Macy's model has its work cut out for it. - Brenon Daly

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