Merger Mojo

There couldn't have been a much crazier year for retailing, with megamergers Federated-May and Sears-Kmart and an unprecedented level of sell-offs and consolidations rocking the landscape.

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There couldn’t have been a much crazier year for retailing, with megamergers Federated-May and Sears-Kmart and an unprecedented level of sell-offs and consolidations rocking the landscape.

The big debate became whether all the retail consolidation would ultimately benefit or hurt consumers, and at the forefront of the controversy was Marshall Field’s, which is being converted to Macy’s. Federated said Field’s would be stronger and have better merchandise under the Macy’s banner, and would not lose its distinct upscale character, at least at the State Street flagship, but critics said it means more sameness in the malls, and that consolidation overall means less competition and less incentive for retailers to keep prices down.

Despite the year’s tumult, high fuel costs, the Iraq war and devastating hurricanes that ripped through Gulf Coast states, consumer spending held up. (For more on the impact of national headlines on retailing, see page 8.)

A dramatic development was the rise in interest in retailers among private equity firms, such as Texas Pacific, Warburg Pincus, Cerberus, Apollo and Blackstone, whether it was for the real estate value of retailers or turnaround potential.

One exception was the the $5 billion-plus purchase of Neiman Marcus Group by Texas Pacific and Warburg Pincus. The firms paid up for the group, which includes the Neiman Marcus and Bergdorf Goodman stores, but they got one of the most consistently strong performing retail operations in the country. The deal did spark speculation about how the new owners might reshape the business if they push for faster growth and new strategies to recover their investment.

The biggest deals completed were the Sears, Roebuck-Kmart merger that created a $55 billion discounter, and Federated Department Stores’ takeover of May Department Stores, forming a $28 billion department store giant and accelerating the evolution of Macy’s into a national chain.

In other significant developments, Saks Inc. sold off its northern and southern department store groups, Liz Claiborne said it wants to buy J. Jill and Casual Corner said it would liquidate.

The next several quarters will see retailers try to squeeze costs out of their businesses to de-leverage from their acquisitions, with lots of structural and personnel changes, and fuel growth.

This story first appeared in the December 6, 2005 issue of WWD.  Subscribe Today.

“You can expect to see more seasoned retail executives looking for work next year, as the thirst for acquisitions by the private equity groups and hedge funds is not yet quenched,” predicted Hal Reiter, chief executive of Herbert Mines Associates executive search.

Going into next year, the economy remains strong, job creation is generally good with the exception of a few industries such as automobiles and consumer confidence is hanging in. Gilbert W. Harrison, chairman of Financo, said in a statement: “Although I am bullish in general for consumer spending in 2006, if the expected bad weather materializes this winter, it’ll be tough sledding for retailers, as consumers shy away from stores because of weather and high heating bills.” 

Other big trends this year were:

  • Price-promotion frenzy surrounding Thanksgiving, with Wal-Mart out of the gate two weeks earlier than 2004 with its “Home for the Holidays” ad campaign — featuring Destiny’s Child, among others. Executives have vowed to be aggressively promotional, innovative and more exclusive with merchandise. While noting the chain will bring in higher-grade products — such as $88 women’s boots at 150 stores, at least initially, whereas most of the footwear is priced at less than $20 — ceo Lee Scott cautioned analysts that the $285 billion discounter won’t walk away from low-income shoppers. “Don’t think the whole company is all about Metro 7 [the new contemporary line] and George and 400-count sheets,” Scott said last fall. “We have people selling the heck out of Tide and Clorox and deodorant.” (For more on Wal-Mart, see page 14.)

  • A flurry of new retail formats were either unveiled or announced. Gap introduced Forth & Towne, Abercrombie & Fitch launched Ruehl, Bebe announced Bebe Sport, Aéropostale started Jimmy’Z, PacSun announced plans for One Thousand Steps and American Eagle said it will launch Martin + Osa. Neiman’s also is planning a smaller format.
  • Off-mall ambitions, with Sears launching Sears Essential and Penney’s accelerating its own off-the-mall strategy. Federated’s chairman and chief executive, Terry Lundgren, also said Macy’s will be more open to off-mall branches in the future.
  • Private label programs, such as Federated’s INC and Hotel brands, grew faster than other areas of the store, while Kohl’s and Penney’s worked to build private offerings and exclusives.

  • Retailers put greater emphasis on food, with Bloomingdale’s, Saks and Bergdorf’s among those expanding food and restaurant offerings.
  • Continued momentum in luxury goods, particularly contemporary sportswear, designer accessories, shoes and celebrity launches. Business rolled right along at Bloomingdale’s, Bergdorf’s and Neiman’s. Also, Saks Fifth Avenue showed some improvement late in the year, though it was still in the throes of a turnaround. Saks stores generally look good, with the company keeping on top of renovations and extensively remerchandising with designer brands not previously sold at the store, such as Roger Vivier, Marni, Luella Bartley and Valextra, as well as Sean “Diddy” Combs’ Unforgivable men’s fragrance. Also, some tried-and-true designers have been getting played up, with Saks creating new shops for Marc Jacobs and Chloé, and rolling out exclusive Graff boutiques. The store has been spending big to elevate its image and orchestrate splashier special events, though there is still work to be done as far as getting customers in.

“Business hates uncertainty and retail is no exception,” said Andrew Jennings, president of Saks Fifth Avenue, adding that “2005 brought many uncertainties in the form of high oil prices, ferocious hurricanes and soft tourism.”

In 2006, Jennings said, “The winners will be the retailers who really connect with their customers in every way. Leadership, innovation and a compelling online customer experience will be the keys to their success.”

Shopping was strongest at vertically structured apparel specialty chains offering distinctive, fresh merchandise, whatever the price point. Abercrombie & Fitch, Hollister, Chico’s, Bebe, Dress Barn and Children’s Place were strong performers, and Ann Taylor seemed to be coming out of its rut with improved styles.

According to Financo Inc.’s report on monthly sales for the 11-month period through November, the apparel specialty sector rose by 7.1 percent on a comparable-store basis. A&F, with its youthful and sexy appeal, led the field with a 24 percent comp gain for the period, from being near flat the year before, Chico’s, with its strong service and appeal to middle-aged women, was strong with a 13.9 percent lift, particularly impressive considering that, in 2004, the chain rose 12.5 percent, while Children’s Place increased 8 percent, off a big 14 percent the year before. However, Gap Inc. and Limited Brand’s Express and The Limited divisions couldn’t get their acts together and showed prolonged negative comp s ales.

Department stores rose just 1.7 percent, on average, with J.C. Penney ahead 3.1 percent and Federated, 0.8 percent.

Discounters gained 2.4 percent, with Wal-Mart rising 3.4 percent for the 11-month period, while Target grew 5.8 percent and Dollar General rose 3.1 percent.

“Our business has been fantastic,” said Jim Gold, ceo of Bergdorf’s, who cited the store’s 14 percent gain for the quarter ending in October, which followed a 14 percent gain the year before.

Asked how the purchase of the business could affect things, Gold responded: “Our new owners are 110 percent committed to what we are doing. That’s why they bought the company. They loved the strategy.”

He said the business has been hitting “on all cylinders.…It’s not as if a couple of categories carried us. We had increases in the teens across many divisions.

“Going forward, there is always pressure. The bar keeps rising. There are a number of initiatives for continued growth,” including ongoing renovations that have already touched most of the store, and the BG restaurant, which opened in November. Early next year, Bergdorf’s is expected to open a Guerlain boutique, expand the second floor shoe salon and the personal shopping complex, and complete renovations on three for designer sportswear.

“Luxury is a hot sector right now,” he added. “There is a lot more attention being paid to luxury than there was five or 10 years ago.”

“Consolidations are not exclusive to retailing, said Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates. “It’s happening in the airline industry, and in the communications industry.”

Aronson characterized Federated’s acquisition of May as “the most important sea change development in department store retailing in 25 years. The field that is left is quite narrow. Even the small guys are consolidating to save their lives,” Aronson noted, citing the Belk acquisition of Proffitt’s and McRae’s from Saks Inc. and Bon-Ton’s purchase of Saks’ northern department store group.

“It’s a grow-or-die environment pervasive in most industries today,” he said. “The high cost of keeping up in terms of technology, logistics, supply chain and professionalism and product development and trying to differentiate — all of these things require intense capital and intensive human resources.”

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