By  on September 14, 2006

Call the conversion of 400 May stores to Macy's daring or risky. But don't call it the homogenization of malls. It makes Terry Lundgren bristle.

"This is not a cookie-cutter deal," said Lundgren, the chairman, chief executive and president of Federated Department Stores, which orchestrated the nameplate change on Saturday following Federated's $17 billion acquisition of May last year. "We have tailored the assortments to the individual locations."

Though there are now two Macy's in 160 or so malls, they are not twins. They generally offer different categories; mall mates could be a Macy's home store and a Macy's fashion store. But the proliferation of the nameplate across the nation has heightened consumer concerns about a deepening sea of merchandise sameness.

Lundgren reacts differently, saying the merger "gives us an opportunity to use our planning and distribution organization and our regional buying offices to our advantage." Among national department stores, "we are the only ones who have these regional buying, planning, distribution and marketing organizations. That's a very unique competitive advantage."

The competition, in particular Kohl's and J.C. Penney, have gone on record stating that they expect to capture more shoppers with the merger. Asked if he was worried about consumers defecting to non-Federated stores, Lundgren said, "We have always had a great deal of competition and I respect our competitors, both higher- and lower-end. But, ultimately, it is about the brands and the quality of the brands we carry, like Ralph Lauren, Coach, or the uniqueness of MAC cosmetics." Kohl's is signing exclusive deals for private labels, following Federated's lead, but Lundgren, expressing some cynicism about some of these deals, said, "It's not just about having names slapped on a particular garment."

At this point, less than a week since the Filene's, Foley's, Marshall Field's and other May nameplates were replaced by Macy's signs, all the former May doors have been touched to some degree by Federated's private label and "re-invent" store experience programs, Lundgren said. He cited "a huge capital project" for upgrading lighting, widening aisles, removing some fixtures from floors and upgrading fitting rooms and restrooms. "There's been a lot of change, too, in between the merchandise. I would say that the customer would say we are more shopable now. We have really worked hard to change the shopping environment. We've got clearer aisles with more open vistas, better clarity of positioning of the brands and, in certain areas of the stores, we come across with less goods piled up on the racks."He expects sales at the former May doors to grow by 3 percent to 4 percent, in line with the rest of Federated this year.

Private label, accounting for about 18 percent of Federated's business, was proportionately given 18 percent of the floor space at May doors, more or less, whereas May's private label, which has mostly been wiped out, accounted for 7 percent of the business. Federated's private labels started flowing in to May doors in mid-July. Lundgren believes "they have been well received."

Federated is considering other changes, such as entering the food business in a much bigger way, inspired by Field's State Street offerings, to some extent, and the chance to roll out the Macy's Cellar to certain doors. "We are evaluating whether we will expand food to certain other locations. We think it's a fun category," Lundgren said. He cited the potential for packaged food and candy, particularly for holiday. The famous Frango chocolate mints have been subbranded into Frango cheesecake. "Our food experts went through 15 taste testings. It's outstanding," Lundgren said.

At this point, it's too early to gauge consumer response to the conversions. Advertising for the new national Macy's just began Sept. 7, and Macy's has ratcheted up its marketing in other ways, such as special events, charity activities and discounts.

Asked when there might be a verdict on the consumer response, Lundgren replied, "I will never stop evaluating it. Janet, Tom, Sue and I will be [constantly] out in the stores," he said, referring to Federated vice chairmen Susan Kronick and Tom Cole, and Janet Grove, chairman and ceo of Macy's Merchandising. "This is not a short-term deal. There is no wavering with our commitment to this national Macy's strategy. We are never going to stop asking questions and learning how to do better."

"We examine daily the sell-through and customer acceptance of brands or private label," Grove said. "In many cases, we are getting very aggressive on getting reorders and, on the other side of the coin, taking markdowns."

Last Saturday, there were about 100 protestors by Field's in Chicago, many dressed in Marshall Field's green and carrying placards that read: "Field's is Chicago, Boycott Macy's." Inside the store, the mood seemed different. Shoppers appeared to be taking the name change in stride. Elizabeth Purcell, 55, who shopped at Field's three to four times a week, was one of the first 500 visitors to Macy's on State Street who received a free $10 gift card. After taking in a Macy's fashion show and purchasing a black-and-white houndstooth cap, black leggings, socks, a sweater and camisole, Purcell said, "I've thoroughly enjoyed my day here."The retired investment broker said she noticed little difference in price or selection, except the strong promotion of Macy's house brands I.N.C., Charter Club, Alfani and Style & Co. "I'm not interested in them," she said. "For price-conscious people, it's good. I'd rather see people wearing $39.99 knockoff pants than a T-shirt and jeans, but I like to buy on style, not price."

She was concerned about Macy's positioning itself as too youthful. "They better focus on the Baby Boomers," she warned. A native of Chicago for 35 years, Purcell said she may continue to shop at Macy's, but wished the Marshall Field's moniker remained. "It's a Midwestern town. People like stability in the Midwest," she said.

Rikki Ragland, 34, said, "I was one of the ‘I love Field's people' and initially thought Saturday was Field's last day in operation instead of its first day as Macy's." Though initially reluctant, Ragland, who lives in neighboring suburban Evanston, liked the Macy's touch. She appreciated what she saw as a more youthful, trendy vibe, but also noticed little change in price or assortment, other than Macy's private brands. "It's sexier," she said, noting a colorful mural of life-size models in active poses surrounded by a skyline and Macy's red stars. "It's not your grandmother's store anymore. It's the edge that Chicago really needs to stay competitive."

Betty Pirrello, 66, and her daughter Lisa Pirrello, 42, who both frequented Field's and bought the in-house line Field Gear, which Federated has dropped, said aspects of the department store needed updating. "I think it's good to have some change," said Betty Pirrello, who stopped buying gifts at Field's because she considered the return policy too stringent. "Field's hasn't been the same the past two or three years. It used to be top-notch and now they give you a hard time returning things." The policy has been liberalized to 120 days, from 90.

She hopes Macy's will provide better customer service. "Today, the service is better," she said. "We'll see." Her daughter is also open to shopping Macy's. "Initially, it bothered me. Field's has been here over 150 years, but I'm OK with it."The bottom line? Mother and daughter made a day of it at Macy's. They ate lunch in the Walnut Room and opened Macy's charges. "So far, it's been a very nice experience," Lisa said.

"Some consumers will have difficulty relating to the change," said Chicago fashion designer Orlando Espinoza. "The Field's stores have always appealed to the consumer on a personal level, but overall, consumers will realize the potential benefits they get, such as the addition of new collections, the opportunity to shop online and the reassurance that Macy's will continue to maintain the esthetic appearance of the stores.

In Dallas, where Foley's switched to Macy's, shoppers responded with curiosity, an eye for bargains and a bit of skepticism. At the upscale NorthPark Center, the newly christened Macy's buzzed with traffic and a promotional ambience, thanks to the "Extra Extra Extra" price-slashing that ended Sunday. Anticipating a rush of first-time Macy's shoppers, the store heavily promoted its in-house credit card with extra 20 percent discounts for new users. Like Foley's, Macy's spotlighted on the main floor upper-moderate, better and bridge apparel and accessories along with a vibrant beauty department. Fall trend presentations included white shirts, black leather, knits, suits and dresses, all merchandised with a mix of Macy's private brands — Style & Co., Charter Club and I.N.C., along with DKNY and Jones New York Collection, among other national brands. Denim was used as a focal point throughout the women's departments in brands such as Apple Bottoms, Tommy Hilfiger and Baby Phat.

Amy Golden, 37, a Dallas native, was eager to check out Macy's and wondered if the preponderance of Macy's stores across Texas and the U.S. spells fashion repetition. "I'm definitely on a budget, but I also follow fashion and I'm thinking about how many women will be dressing similarly, considering there's so many Macy's stores. I may buy fashion items at Macy's and complete my wardrobe at smaller specialty stores so that I have a more unique look."

Luisa Montelongo, 28, stayed an extra week in Dallas after Labor Day before returning home to San Francisco, a Macy's stronghold. "I was curious to check out the offerings in Texas, especially since I am a former Foley's ‘Red Apple' sale shopper," said Montelongo. "I am pleasantly surprised with the merchandise and prices.""I'm positively impressed with how quickly and orderly they've cleared out the old May merchandise," said Robert Buchanan, retail analyst at A.G. Edwards, who visited the new Macy's at Tyson's Corner in McLean, Va., on Saturday and has seen converted units in St. Louis and Newport Beach, Calif. "Macy's has many clearly established strengths in the misses' area and other parts of women's apparel." But the store's real challenge will be to compete effectively against specialty chains focused on men's, young men's, children's and home. The reason Macy's and the rest of the department stores continue to lose market share year after year is that in many areas...the best specialists are simply doing a better job." He cited Abercrombie & Fitch, American Eagle Outfitters and Crate & Barrel. Buchanan said, "They are closer to the target consumer."

"On a conceptual basis, Terry Lundgren is making a mistake by not leasing any space to some of the better specialists," Buchanan continued. "While he can do a great job in women's, he's not as effective as some of the best specialists in other areas of the store. May didn't appear to have its heart in the effort to revive their stores. I think [Macy's] is better. You've got the right guy in the driver's seat. Somehow, they need to figure out how to stop losing market share. Just being better than May and Belk's and Dillard's is not enough."

Deborah Weinswig, retail analyst at CitiGroup, in a research note wrote that Federated "will incorporate traditions of its acquired regional banners into its ongoing events, which will help gain local acceptance." Commenting on Macy's new national ad campaign, launched a week ago, she said, "Though the company is campaigning aggressively this fall, we believe Federated can save approximately $400 million per year in ad spending in the long term." The advertising campaign includes national broadcast and cable TV, local newspapers, local and national magazines, targeted radio spots, outdoor billboards and the Internet. Direct-mail efforts include a glossy, 54-page Macy's magalogue, which was sent to the homes of 3.8 million potential customers in markets that are new to Macy's.

Weinswig's target stock price of $48 a share, or 15 times the 2007 earnings per share estimate, "reflects our view that Federated should be valued as a turnaround story, as the company will be keenly focused on improving the May business following the merger.... Federated is on the mark with merchandising, reinventing store enhancements, a national branding strategy and home store centralization. All are sound initiatives that serve to differentiate the company from the competition."Still, risks remain, related to the magnitude of the merger. "As one of the largest department store operators, Federated could be negatively impacted by the secular trends, including apparel deflation and a heavy reliance on national brands with declining sales and customer relevance."

Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, noted Federated was placing a greater emphasis on better brands than mainstream brands, which were important to May. "It starts with the product and continues with service in stores and visual displays.

"There's technology to help customers look up prices, bigger fitting rooms and better departmental signage. Not each one of these things is a home run, but each one is a base hit. Add them all up and you have a big inning. May was a big price promoter," Aronson said. "Price won't be the most compelling element anymore."

With contributions from Sharon Edelson, Rusty Williamson and Beth Wilson

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