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Federated’s Game Plan: Macy’s to Add 330 Units, Future of L&T Undecided

Macy's department stores will balloon to 770 units next year, occupying just about every major U.S. market, as a result of its parent buying May Co.

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NEW YORK — Macy’s will balloon next year to 730 units that will occupy almost every major U.S. market.

Federated Department Stores Inc., owner of Macy’s and Bloomingdale’s, disclosed a game plan Thursday for its $17 billion merger with May Department Stores Co. that calls for the giant retailer to convert 330 May stores to Macy’s nameplates in fall 2006.

The fates of two of May’s best-known divisions, Lord & Taylor and Marshall Field’s, haven’t been decided, but Lord & Taylor will not be converted to Macy’s, the company said. In addition, Terry Lundgren, Federated’s chairman, chief executive and president, said in an interview that five to 10 May stores may become Bloomingdale’s.

Federated identified 68 duplicate locations [in 66 malls] to be divested starting next year. That includes 41 May stores operating in 12 states under various nameplates, and 27 Macy’s in 14 states. Dillard’s, Nordstrom and J.C. Penney are likely to be among the rival chains most interested in many of the sites.

The company said stores to be shed represent $2 billion in volume, which means the combined Federated-May empire will have about $28 billion in sales. Sears is considered the nation’s largest full-line department store chain with over $30 billion in sales; Macy’s becomes the second largest. About 50 percent of the May sites are company owned; 50 percent are leased.

Ever since Federated purchased Macy’s in 1994, rescuing it from bankruptcy, management has sought to catapult the brand into a national chain that gives Macy’s greater buying clout and the ability to advertise nationally, roll out private label brands such as INC and Charter Club, cut millions in expenses and have a wider web for luring talent.

Among the challenges will be keeping the chain’s fashion edge and servicing the increased debt from the merger and integrating management and technologies.

“Being merchant-driven has been the mantra, but fast response and taking fashion risks doesn’t typically find a home in large and inevitably bureaucratic retail organizations,” said Isaac Lagnado, president of Tactical.org., a consulting firm. “How do you keep creativity and experimentation within the context of a multibillion-dollar entity?”

Federated operates 450 department stores. Last year, the retailer had sales of more than $15.6 billion. May had sales of $14.4 billion.

This story first appeared in the July 29, 2005 issue of WWD.  Subscribe Today.

The merger, approved by shareholders on July 13, is likely to close in the third quarter and the plans outlined Thursday are subject to change. It is possible more locations will be cut, officials acknowledged. However, Lundgren said he is trying to keep everyone up to speed on the integration process and reduce anxieties among May staffers over their futures.

“One of the things I have said to May Co. employees is that, as we get to the point where we have made firm decisions, I will try to communicate them broadly so they are not wondering what is going to happen. We want to continue an open and honest communication,” Lundgren said.

He promised that the management in the stores will be retained, as well as the vast majority of May associates. “You can do that through normal attrition, and we think we can grow the store businesses, particularly by adding private brands to the mix. If the stores perform better, the result is [that] we can hire more people.”

No job cuts will occur before March, Lundgren said. Macy’s stores will include employees from the former May stores. Lundgren has already met with many May personnel from various divisions, in what one May executive called “meet-and-greets.”

The conversion of May units to Macy’s means just about all of May’s regional nameplates, including Filene’s, Strawbridge’s, Hecht’s, Robinsons-May, Famous-Barr, Foley’s, The Jones Store, Kaufmann’s and Meier-Frank, will disappear.

Lord & Taylor could be sold, liquidated or retained, but might not be part of the Federated empire, long-term. Developers are said to have already begun showing an interest in the flagship on Fifth Avenue and 38th Street here.

Lundgren acknowledged that, should the Marshall Field’s nameplate be retained, there would be a big geographic hole in the grand plan to make Macy’s truly national. “Marshall Field’s is a very good name. It’s unique among other department stores. We want to make sure we do the right thing. We will study the customer and do the research.”

Federated has been conducting research on how consumers would view the name changes. While the study isn’t complete, data obtained so far indicates that the May regionals “are all great names, though clearly viewed as regional names and not expandable beyond their borders,” Lundgren said. “There is a positive response to the Macy’s name.”

Conceding that employees are protective of their store names, Lundgren maintained: “Why protect the status quo when the national idea is the best idea? Why not try something new and different?”

He explained that decisions on store dispositions stem from a desire not to have excess real estate in the portfolio where Federated stores compete against themselves in the same shopping centers. The federal government has been examining the merger and potential restraint of trade issues, but has not yet issued any directives to Federated. Decisions made by Lundgren and his team could help satisfy government concerns.

Lundgren said Federated is familiar with most May stores, many of which are similar to Macy’s in square footage and merchandise content.

“We know the business,” he said, though Lord & Taylor is an exception. “It’s very different in size and assortment from the rest of May, and we are restricted from learning too much about their current business strategies until the deal closes.”

Both Field’s and L&T have been struggling.

“We respect that May Co.’s regional store names are deeply rooted in their communities, we appreciate the heritage and traditions associated with those names, and we expect to continue to play an important role in the communities where our customers live and work,” Lundgren said.

The largest number of May-related divestitures are on the West Coast, where 16 Robinsons-May stores will be shed. Nine Strawbridge’s locations, primarily in the Philadelphia area, also will be among those sold off.

Two markets Macy’s still won’t be in are Omaha and Jacksonville, Fla. It’s possible Federated would build Macy’s stores there, but that has not been planned.

Macy’s took a major step to become national in March by changing several of Federated’s regional department store nameplates to Macy’s. Those former Federated regional nameplates were Rich’s, Burdines, Lazarus and Bon Marché.

The merger, while strengthening the Macy’s brand and bolstering Federated’s clout over vendors, as well as providing new talent to the organization, will force management to figure out how it tailors merchandise to local fashion preferences. However, Lundgren previously has said Macy’s will still operate with its regional headquarters in Miami, Seattle, New York, Atlanta and San Francisco to help regionalize the goods.

“Integration historically has been a big problem, but Federated is one of the better integrators, and they are probably the best qualified at evaluating talent,” said Tactical.org’s Lagnado.

Integrating systems is always a headache for retailers, but it is not the obstacle it was 10 years ago. “The personnel is increasingly savvy and adaptive to these things,” Lagnado said. “The technology is good.”

Still, Federated’s “leviathan size and deep pockets and capital-raising power will allow Federated to take a much longer view on certain programs and tolerate the kind of risk with launching new formats, which lesser players could not,” he said.

“This move finally makes real the concept of ‘branding’ in traditional department store retailing,” Lagnado continued. “The economies of scale of a single nameplate like Macy’s are enormous and they apply to both the top line as well as the expense side of the ledger. Although it has long had clout, Macy’s private labels can now approach or exceed many independent national brands in scope in five to seven years.”

Not everybody welcomed the changes. “It is the homogenization of retailing,” said Steve Gartner, president of Philadelphia-based Metro Commercial Real Estate, a real estate brokerage and advisory firm. “You visit any great mall, whether it is Short Hills [N.J.], King of Prussia [Pa.] or Tysons Corner [Va.], and the retail lineup is almost identical. There is no differentiation.

“The good news is that Macy’s emerges as the only national middle to upper full-line department store. That is cause for optimism and nobody will have that depth of geography, and they sit above Penney’s and Sears.”

The next question is whether Federated will decide to drop its own corporate nameplate and call itself Macy’s. Asked if he was contemplating that, Lundgren said, “No. Not really.”

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