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The Trials and Tribulations of May Co.

May Co. has come under intense scrutiny since Gene Kahn resigned as chairman and ceo and speculation of a takeover by Federated heightened.

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NEW YORK — The name of a nostalgic Oleg Cassini display in Lord & Taylor’s Fifth Avenue windows, “Now & Then: 50 Years of Fashion,” hasn’t been lost on retail observers, who said it epitomizes many of the problems of its long-suffering parent, May Department Stores Co.

While L&T has made significant efforts over the last 18 months to modernize and capture a younger customer, such a promotion of a longterm, established designer sends a mixed message that is borne out inside the store. On the second floor, where contemporary collections are sold, music blares and racks of HotPants, ponchos, shrugs and other “hot trends” are reduced by 50 to 80 percent. And customers appear to be in their 50s and 60s, far from the target market for such merchandise.

The floor above, where designer collections are housed and Cassini’s “couture” dresses hang in a circle, has a nostalgic feeling with gray carpets and sales associates speaking in hushed tones. And while the chain is trying to attract customers with deeper pockets, anything with a price tag of $500 or above is connected to a security device, which puts a damper on trying garments on.

May Co. has admitted that Lord & Taylor is a work in progress. Yet it and every other aspect of the May business has come under scrutiny since Gene Kahn abruptly resigned as chairman and chief executive officer of the retail giant last month and news leaked that Federated Department Stores was in talks about acquiring the St. Louis-based retailer.

Whether Federated buys May, is acquired by another suitor or is left to turn around its business under a new chairman and ceo, a new team will have to cope with the aftermath of Kahn’s tenure, which has left an indelible mark on employees.

Kahn could not be reached for comment, while current members of the May board did not return telephone calls and May executives declined comment.

But Kahn is said to have fostered a culture where dissension wasn’t broached. As a result creativity — and results — suffered.

Under Kahn’s leadership, net profits at the $13.34 billion, 500-department store operation have been shrinking steadily over the last few years, from $927 million in 1999 to $434 million last year. Same-store sales and the stock price declined, although in recent days, the stock price has picked up, only to fall again on Thursday.

The company has closed 34 underperforming L&T stores, but has not yet developed a cohesive image for the chain. Meanwhile, May Co. has yet to articulate a plan for Marshall Field’s, which it bought last summer for the steep price of $3.24 billion, and its other nameplates are awaiting redos of their women’s sportswear departments. The plan uses a prototype designed by Fort Lauderdale firm Pavlik to try to attract new vendors into the company’s stores.

May’s senior executives were deeply involved in the effort to sell the makeover. One vendor remembers being treated recently to a full court press by Kahn, vice chairman William P. McNamara and Jay Levitt, president and ceo of May Merchandising Co. and May Department Stores International.

But critics say May nameplates such as Foley’s, Hecht’s, L.S. Ayres, Famous-Barr and Kaufmann’s are in need of more than women’s sportswear updates. The retailer had batted around ideas for updating its men’s and young men’s businesses, but those plans appeared to go nowhere. In addition, May’s private  label merchandise is in need of an injection of fashion and a quality upgrade, observers said.

When Kahn took the reigns from David Farrell in 1998, the American retail landscape was already in the throes of a seismic shift. Consumers were beginning to cross-shop everywhere from Kohl’s to Wal-Mart. May Co. stores, which traded mostly in moderate goods, found themselves under pressure from Kohl’s, which was presenting brand names in new easy-to-shop stores. May’s reaction was to compete on price.

“The inevitable department store consolidation started to occur and the overall culture of the May Co. changed,” said a former May executive. “The responsibilities of a merchant began to change. Corporate began to have more control and told stores who they should be doing business with and how much business they should be doing. May Co. was trying to leverage its size to get the best deals possible. The business became more about deal-making than merchandising and product development.”

The development of the merchandising matrix had a big effect on May, with Farrell an early and avid proponent.

“The matrix system made it very difficult for small creatively designed products from smaller fashion houses to make it to the floors of May Co. stores,” said Laurence Leeds, chairman of Buckingham Capital Management. “Other companies use the matrix, but they have other ways for small manufacturers to show their stuff.”

But while Kahn and Farrell share common characteristics in management and style, their results were radically different. Farrell obsessed over details and inspired fear in employees, but grew the company successfully. Workers recalled painting store walls the night before a last-minute visit by Farrell and how the ceo drilled down to the micro level in a branch store to find out why one item was selling better than another item. “He created a culture where people would be up for all hours of the night,” the executive said. “It was like cramming for a final exam. You had to make sure you knew all your numbers and all aspects of the business. But it was a merchant-oriented culture as much as it was a culture of detail-orientation.”

As Kohl’s and discounters put the squeeze on May, Kahn reportedly commissioned a report from McKinsey and Co., which convinced him that the stores needed to attract younger customers.

“Our key initiatives in the better and young elements of our business, and in proprietary product, must be more productive,” May Co. vice chairman William P. McNamara said on a conference call with investment analysts last year. “We must be more successful in keeping pace and moving faster with the ever-changing needs and wants of a broader customer base.”

Executives said Kahn was obsessed with the McKinsey study. “What ended up happening was May Co., in an attempt to fund the younger business, ran away from and neglected the core customer,” said a former staffer. Evidence of this could be seen on the retailer’s ready-to-wear floors, where the side of the floor dedicated to youthful lines was redecorated and recarpeted. “They cut the funding back on the side of the floor for the older customer,” the staffer said, so that it was left with the old carpet. “Gene didn’t do it incrementally. He went after the younger customer with a vengeance.”

Another former executive who spent over a decade at the company said, “It was chaos there, absolute chaos. Gene could never make any decisions and micromanaged everything. The minutia we went through was mind-boggling. When David Farrell ran the company, we operated with about five different reports that we used to run the business. When Gene got done there were 100 reports that we were expected to use. He paralyzed people’s ability to run their businesses because they couldn’t think.”

The jewel of the group has always been Lord & Taylor, which has been scaling back its national ambitions to focus on the Northeast at the same time as it has been trying to attract a younger customer. But some critics say the efforts at L&T are evidence of the problems all of May faces.

One L&T vendor cited $5,000 evening dresses at L&T next to Nine West shoes. “Those ‘better’ customers need service and they don’t have the support staff to do that kind of business. Their focus is very inconsistent throughout the store. They need to have a consistent flow of better merchandise in each department. They don’t react to business — you can have the hottest item and they wouldn’t reorder. They always have money issues. Every season in the last three years there’s been a problem. Financially they can’t get a flow so orders are pushed back or canceled altogether.”

The vendor said buyers are frustrated because they are told what to buy and how much. “They’re extremely aggressive with markdown money. I had a buyer recently ask for markdown money. I said no and they completely cut me off for spring and summer.”

Others, however, appreciate the efforts at L&T. “She [Jane Elfers, L&T’s ceo] has got the right idea,” said Bud Konheim, chairman and ceo of Nicole Miller. “I hope May Co. would give her more backing and understand her entire message. L&T isn’t the biggest part of the May Co. Still, Federated has understood the meaning of Bloomingdale’s to the whole picture. It acts as their halo. I haven’t quite seen that happen at May Co.”

Comparisons between Federated and May Co. are inevitable, two giant retail chains with multiple nameplates (although Federated is in the process of changing its remaining chains other than Bloomingdale’s to Macy’s). Federated has invested in talent at Federated Merchandising Corp., where private label brands such as Charter Club, INC and Alfani have been nurtured. Chairman and ceo Terry Lundgren said these lines do more volume than any powerhouse brand, including Estée Lauder and Ralph Lauren.

“There’s a tremendous amount of dissension from May Merchandising Co. down to the stores and the way Jay Levitt [president and ceo of May Merchandising Co.] manages things,” said a former executive. “He doesn’t know how to get along with people at all. They had a couple of important programs that did $200 million to $300 million a year. The minute they changed the specs for younger customers they ran customers out of the stores. Valerie Stevens was one [private label brand]. ‘Be’ was a nightmare.”

After spending more than $12 million to start the “be” brand in 2002, including more than $3 million for advertising, May Co. was sued by Bebe for trademark infringement. May was forced to change the brand’s name to Identity.

 “There’s an army of people developing private label outside MMC for L&T and that’s not working either,” the executive said. “Private label is a big problem.”

Sources estimate May Co.’s private label penetration is 14 to 18 percent, with rtw accounting for around 30 percent of that and home about 6 percent. Kahn reportedly began an initiative two years ago where he expected to get the total company’s private label penetration up to 20 percent over a three-year period. “Stores were basically forced to buy to those plans and the product wasn’t right,” the executive said.

Former board members were perplexed as to why the current board waited so long before taking action over Kahn. Andrell Pearson, former chairman of YUM who retired from the May board in 1999, said, “I’m heartbroken. I’m surprised that the board took so long to act. It’s hard to believe. All of the board has stock and the stock has gone nowhere.”

Edward H. Meyer, chairman of the board, president and ceo of Grey Advertising Inc., who retired from the May Co. board of directors in 1999, said, “Gene inherited a situation where the segment itself, the deceleration of department stores, speeded up a little bit and became a harder area in which to compete. Federated has been more imaginative in trying more different things. The Federated strategy of renaming everything Macy’s is the right thing to do. This is something I used to preach to the May board. There are economies of being able to advertise nationally. A company is at a disadvantage if it preserves local names and is forced to use expensive local media.”

Another former May executive was surprised at the way the board tolerated some of Kahn’s spending; for instance, upgrading the company jet from a GII that Farrell had purchased years ago to a GIII that reportedly cost $25 million.

“They knew the difference of what was going on,” the executive said. “Gene romanced them. He took them away on long board meetings to places like Napa Valley, Calif. The board should have done something two years ago. Now it’s going to be a long haul back.”

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