California Apparel News

Where does California fit into Federated Department Stores Inc.’s new nationwide plan?

Federated Chairman Terry J. Lundgren did not mention California in a press conference following the Feb. 28 announcement that his company had purchased May Department Stores Co. for $11 billion in equity and had assumed $6 billion in May Co. debt. Instead, the ambitious chief executive steered his statements toward his company’s top goal: making Federated a national department store with a presence in every major market across the United States.

But California will loom large in any strategy Federated takes. The state has the greatest concentration of Federated and May stores of any region in America. With 160 combined stores in California, 113 Federated and 47 May Co., the company has a unique opportunity to dominate the state’s department store market. There is also a good chance the retail giant, which earns $30 billion in sales, will focus its consolidation efforts in California, said Al Frank, an analyst with Deloitte & Touche in Los Angeles.

“There’s an oversupply of department store square feet in California,” Frank said. “This merger will provide Federated an opportunity to right-size their store count, focus on the best name for a specific geographic area and cut the costs of the merger integration by selling excess real estate.”

Good, better, best

But that is not the only possible scenario. Another would have Federated keeping much of its real estate holdings and settling on a strategy to direct popular-price shoppers toward May stores, better shoppers toward Macy’s and luxury consumers toward Bloomingdale’s. Lundgren said he believes there is little overlap among the 950 stores his company now owns.

This strategy could be smart retailing, said analyst Larry Kosmont, president of Lee Kosmont Advisory Services in Los Angeles.

“Federated will appeal across the board to all markets in the trade area,” Kosmont said. “It works well in Century City.”

Los Angeles’ Westfield Century City is one of five California shopping malls anchored by a Bloomingdale’s and a Macy’s. The other four are Fashion Island in Newport Beach, Westfield Shoppingtown Fashion Square in Sherman Oaks, Stanford Shopping Center in Palo Alto and the Beverly Center in Los Angeles.

Bloomingdale’s has some bigger expansion plans for California. By the end of 2006, Federated is scheduled to open the first Bloomingdale’s in San Francisco at the city’s landmark Emporium building. The department store will be part of the Westfield San Francisco Centre, which is slated to be the second-largest shopping center in the United States after the Carousel Center in Syracuse, N.Y., according to the New York–based International Council of Shopping Centers. Nordstrom is another anchor at the Westfield San Francisco Centre. The closest Macy’s is several blocks away in Union Square.

Tom Dresslar, a spokesperson for California’s attorney general, said his office has been studying whether the merger would violate any antitrust laws. He gave no deadline for a decision but said his office has been working with the Federal Trade Commission.

Fallout predicted

Many analysts forecast that the poorly performing Robinsons-May stores will be shuttered whatever other steps Lundgren takes. “It’s not a matter of if it goes away, but when,” Kosmont said.

With Federated shedding Robinsons-May and perhaps putting the real estate of other stores up for sale, many retailers would have a unique opportunity to expand their reach in the market, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. “Target’s got their eyes on some of these locations,” Kyser said. “You can stuff a Wal-Mart in these 250,000-square-foot department stores.”

Manufacturers could get hurt in this merger, said Ilse Metchek, executive director of the California Fashion Association, especially those vendors who sold to both Federated and May. “You’re not going to have the business you used to have,” she said.

Federated’s merchandising focus will increasingly concentrate on private-label items, according to Lundgren. “It has outpaced market products in terms of growth rate,” Lundgren said during the press conference. Private-label merchandise makes up 17.4 percent of Federated’s business and 13 percent of May’s, he said.

One of the first initiatives for the merged company will be a “style out,” during which Federated’s private labels will compete against May’s. The winner may prove dominant in the new Federated, but name brands will continue to be important, said Lundgren, who also emphasized that the company’s buying policies will focus on diversity and choice.

Lundgren said the lifestyle merchandising buying policy, part of Federated’s “reinvent program,” will focus on four different customer types: traditional, neo-traditional, contemporary and fashion. Buyers will also have a hand in localizing the retail mix.

He said criticism that Federated offered a dull assortment of clothes was valid two years ago but now 40 percent of the company’s current apparel assortment is not found in other stores.

Federated will also continue to reduce the number of coupons used in its consumer promotions, Lundgren said.

The future of department stores

While the merger has generated a lot of talk, analysts are divided about whether this deal is the swan song of the department store or the harbinger of a tough new retailer.

“I don’t think the mid-level department store has a future,” Kyser said. “Retailing is changing, and consumers like value and quality and newness. It’s something midrange department stores haven’t been able to get their hands around.”

But George Whalin, president of Retail Management Consultants in San Marcos, Calif., disagreed.

“I don’t think department stores are dinosaurs,” he said. “They’ve had a difficult time, but J.C. Penney’s reinvented itself and Nordstrom is doing well. They continue to be a viable way to serve customers.”