By  on April 5, 2007

Trying to narrow the gap with rivals such as J.C. Penney, Federated Department Stores Inc. is spending another $100 million to beef up Internet operations and crack $1 billion in direct-to-consumer sales by next year.

"With the benefit of the national rollout of Macy's, we are feeding this opportunity very aggressively," Terry Lundgren, chairman, chief executive and president of Federated Department Stores, said in an interview Wednesday. "Last year's growth was fantastic."

Lundgren said direct-to-consumer sales grew to $620 million last year, from $450 million in 2005. "In particular, we are seeing exceptional growth in online sales in new Macy's markets such as Illinois, Michigan, Minnesota, Missouri, Oklahoma, Texas and Utah."

Home goods sales, which have been weak in Federated stores, have done well online, Lundgren said. Fine jewelry in the $1,000-and-under price range is another strong category online.

Penney's already has surpassed $1 billion in online sales and is projecting $2 billion in sales, but has not specified what year that goal would be attained. Penney's had a head start online over Federated and other competitors because it already had fulfillment operations and huge traffic generated through its catalogue. Nordstrom and Neiman Marcus also have advanced online operations that are rapidly growing, and Saks Fifth Avenue considers the online business its second-largest single area for volume, surpassed only by the flagship on Fifth Avenue.

"For department stores, it makes a lot of sense to invest in online,'' said Christine Augustine, equity research analyst at Bear Stearns. "It's a way to reach markets where it may not make sense to open stores. In particular, it's interesting for Bloomingdale's. It's a great way for Federated to gauge pockets of demand where there could be justification for opening a Bloomingdale's."

Federated's $100 million expenditure is "pretty well in line with the competition," she said, adding that Nordstrom plans to spend millions over the next two years. Nordstrom also wants to reach $1 billion in sales online eventually, and is about halfway there.

"More and more consumers are getting comfortable buying apparel online. We're not just talking movies, books and music anymore. We've come a long way, and Federated is just in its infancy online."Federated's direct-to-consumer businesses include,,, and Bloomingdale's by Mail.

Federated will build a 600,000-square-foot distribution center in Goodyear, Ariz., which will serve primarily as the West Coast shipping point for Construction is to begin any day and will be completed in spring 2008. The facility will employ more than 500 full-time associates and can be expanded by another 400,000 square feet.

"Most of the [$100 million] goes into buying the land, [the] development of the building and the technology and systems inside," Lundgren explained. "It's definitely technology-driven, which is required. It's all about speed and how fast can we process incoming orders."

Included in the 2007-08 budget are an expansion of the direct-to-consumer warehouse management system, improvements to the order management system and enhancements to the Web site to support increasing customer traffic.

The $100 million is in addition to the previously announced $130 million for the 2006-07 period, which covered constructing a 600,000-square-foot distribution center near Portland, Tenn. The facility, opening later this month, will be the shipping point for to Midwestern, Southern and Central states.

"Originally, we were just shipping almost everything out of our facility in Cheshire, Mass.,'' Lundgren said. "With the opening of [the Tennessee facility], the whole middle of the country is being serviced from there, and with the opening of the Arizona facility, the whole Western portion of the country will be serviced. Federated's speed and efficiency are going to be very noticeable."

Federated launched its online business in January 1998 with four people. The operation now includes 350 staffers in New York, where the merchants and operations personnel are based, and in San Francisco, where technical staff is based. Fulfillment operations are run separately by Federated's logistics division.

The $27 billion Federated bought May Department Stores two years ago, raising business growth possibilities and challenges across channels. In the fall, 400 May units were converted to Macy's, which now has more than 800 locations, while Bloomingdale's has 38 locations. However, Lundgren discounted the possibility of relaunching a Macy's mail-order catalogue, which was attempted years ago and lasted only a few seasons. Macy's does send out direct-mail pieces to drive consumers to the stores and to"I don't think so," Lundgren said of the catalogue. "I think a lot of the business has gone to the online shopping."

But, even as a relative Johnny-come-lately, Federated one-upped the competition three months ago when launched a customer feedback mechanism enabling shoppers to rate products and let their friends and Federated officials know what they think.

"It's like a Consumer Reports online of our own product," Lundgren said. "We're really listening to what customers are saying about the products, whether they're describing the softness of sheets or the strength and absorption of towels. It's sort of a blog on the site. Peter Sachse [chairman and ceo of] and his team comb through the data and the comments. If anything is not right, they take products off the site. Frankly, a large majority of product gets reviewed positively. I get to look at [the blog] three times a week."

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