Mervyns Revamps
This year could be one of the hardest for Rick Leto.
When the veteran retailer was hired in December 2004 as president and chief merchandising officer of Mervyns LLC, he was given the task of guiding the ailing Hayward, Calif.–based mid-tier department store back to financial health. Leto has been successful by embarking on a program of selling under-performing stores, increasing marketing efforts and improving the merchandise and look of the 57-year-old retailer.
But 2006 will present him with a more bruising challenge: a battle for dominance among mid-tier retailers in California. Mervyns’ main mid-tier rivals—Hoffman Estates, Ill.-based Sears Holding Co. and Menomonee Falls, Wis.–based Kohl’s Corp.—will be aggressively seeking prime real estate space on the open market after last year’s merger of Federated Department Stores Inc. and May Co., according to retail analysts, including George Whalin, president of Retail Management Consultants, a San Marcos, Calif.–based consulting group. Federated put many of its locations on the market when it felt they wouldn’t fit into the company’s post-merger plans.
The mid-tier retailers are being joined by companies across the retail spectrum in a quest for the available property. The list ranges from Bentonville, Ark.–based Wal-Mart Stores Inc., to European fast-fashion stores such as H&M and Zara. These retailers also may have an eye on Mervyns’ moderate customers—households with incomes ranging from $25,000 to $50,000. “That customer marketplace is brutal, and it will get more brutal,” Whalin said.
Kohl’s should up the ante in June when it opens a distribution facility in the Northern California city of Patterson. It will have the capacity to support 110 stores, which should help drive the retailer toward its goal of opening 500 stores in the next five years, according to an April 26 company statement.
Mervyns has its own lofty goals. On May 8, it announced a plan to open in October four stores that will showcase its new prototype. Two of the stores will be located in California— in San Jose and National City. The other two will be constructed in Gilbert, Ariz., and Brownsville, Texas.
“It’s just the beginning of our new-store-opening program between now and 2009,” Leto said. “To remain relevant, we’re going to have to grow more.”
Mervyns announced in February a more-than-$100 million investment campaign to expand and improve its 187 stores. Leto did not say how many additional stores Mervyns would open.
While Mervyns will focus on Sunbelt states, it announced in September that the health of its bottom line depended on selling more than 62 under-performing stores in the West and South. These stores accounted for 25 percent of Mervyns’ locations but only 17 percent of the chain’s total sales. In February, the retailer also announced it would close 19 stores in Oregon and Washington and one in Utah.
Leto said the 80,000-square-foot prototype stores will offer customers a better shopping experience compared to existing Mervyns’ stores, which typically are 50,000 square feet. He added that store aisles will be widened to improve circulation, ambient lighting levels will be increased, and upgraded fixtures and additional tables will produce a better presentation of key items.
The key items will include fashion. While Mervyns dropped its exclusive celebrity branded lines from boxer Oscar De La Hoya and actress Holly Robinson Peete last year, Leto boasted that Mervyns’ fashions should be able to perform against any mid-tier competitor.
This summer, Mervyns will add fashion and streetwear brands such as South Pole, Avirex and Seven7 Jeans to its mix. Footwear brands And1 and SM New York by Steve Madden, also will be part of a retail mix that will include Mervyns private-label brand Hillard & Hanson.
Leto said he hopes to spread word about the new fashions in the store by advertising three times each week in major daily newspapers and on broadcast TV. The increased advertising was part of the strategy to turn around Mervyns’ business in 2005. Some of the advertising, and most of the retailer’s new stores, will be directed toward areas dominated by Mexican-Americans. “Our best performing stores are neighborhoods with a high Hispanic demographic,” Leto said.
The Latino market in the United States is burgeoning, with Latino spending estimated to grow to $900 billion by 2007—a figure that is larger than the gross domestic product of Canada, according to Cheskin, a Redwood Shores, Calif.–based marketing consulting company that serves general and multicultural markets. While Mexican-Americans and other Latinos have been loyal customers, Leto said Mervyns is not the only mid-tier retailer to aggressively pursue the Latino dollar.
Last year, Sears debuted Latina Life, a contemporary label of clothes geared toward Hispanic women. In the past few years, mid-tier retailers such as Sears, JC Penney and Kohl’s either sought to carry fashion lines with Latino cachet, such as Kohl’s Daisy Fuentes label, or began hiring bilingual sales people and adding Spanish-language signage and catalogs, said Stephen Palacios, an executive vice president with Cheskin.
“The retail channel, especially in value and mid-tier, has jumped ahead of apparel manufacturers in their ability to respond to this demographic,” Palacios said.
For many retailers, it may just be a case of responding to a customer who has always favored them. According to Palacios, the Latino consumer, in general, is upwardly mobile and when shopping with families, prefers large-format stores to specialty stores.
The mid-tier game, however, may be getting too competitive to rely so heavily on one demographic, according to Whalin. “It’s a very important marketplace,” he said. “But Mervyns has to appeal to a broad range of moderate, value-oriented consumers. They have to get creative in marketing and not be narrowly focused. It should be more than just ’we’re having a sale on Wednesday.’”
That should be just one of the things Leto might mull over more than once during a very busy year. “It’s competitive,” Leto said. “It will get tougher for everybody, and we’re going to try to compete.”
