By  on November 28, 2005

NEW YORK — Terry Lundgren wants to get the right products to the right locations, buff up stores and focus on marketing as his Federated team remakes May stores to create a national Macy's chain.

Lundgren, chairman and chief executive officer of Federated Department Stores, said in an interview he will "sort through all of our options" before making a decision on the future of May's Lord & Taylor division and defended the conversion of Chicago's venerable Marshall Field's to the Macy's nameplate.

The execution of the $17 billion merger, creating a $28 billion, 950-unit Federated, won't be quick or easy. Consolidation will take about another two years, and May employees have to buy into the program to make things work; so do consumers accustomed to shopping the more moderate-priced May stores.

Beyond the broad strokes — renaming virtually all May department stores Macy's and feeding Federated's most profitable private and national brands into the ex-May doors — there is the nitty-gritty of cost-cutting, sell-offs, systems work, human resource concerns, and respacing and rearranging merchandise and categories involved in integrating May into Macy's.

"It's a big project, but when you take May's capital budget, $650 million, and [Federated's] $600 million a year in capital, when you put that together, there's a tremendous amount of resources that you can apply to getting the stores right and making the customer store experience more consistent," Lundgren said.

During the hourlong interview, Lundgren gave a sense of what lies ahead and what he is doing to implement the Macy's strategy. Among the key initiatives are:

  • May stores will be examined "location by location" and put through Federated's planning and allocation machinery to get products and locations in sync. As Lundgren described it, the effort is almost a surgical procedure to determine how products and brands perform at each door and how consumers shop in each market.

    In addition, May doors will get a good dose of Federated's "reinvent" program, which involves retrofitting stores with enhanced fitting rooms, price lookups, signs, wider aisles and increased amenities. The process takes six to nine months per location. "We are working with May management now to identify reinvent work for next year," Lundgren said.
  • Off-mall sites will be considered as Macy's seeks to conquer even more turf. It will bring the chain in closer competition with Wal-Mart and Target. Macy's and May have only a handful of off-mall sites currently, but Lundgren said they all perform well.

  • Federated will be more open to testing new designers, though "It's not an all-store strategy," Lundgren said.

  • Some categories — Lundgren cited shoes, accessories and furniture — will be respaced in many doors to conform to Federated's floor plans, causing some disruption to selling floors. May stores tend to have larger furniture departments and smaller ones for shoes and accessories, compared with Federated's.

  • Macy's central marketing team, based in New York, will be pumped up with increased talent, under Federated's chief marketing officer, Peter Sachse, to create "a first-class marketing organization." Lundgren's suggestion: Think Target.
"I have tremendous amount of respect for Target's marketing capabilities," Lundgren said. "To me, no one else out there has done the job. I think we are next. It will take a year or 18 months to hit our stride. We will not just throw things out there. We will be thoughtful on how we execute our strategy. The marketing subject is a high priority for me personally.

"We will definitely be building Peter Sachse's organization so that it's a full organization that takes advantage of our new national presence."

Lundgren said corporate marketing will recruit creative people who will work with outside agencies, and will develop additional consumer research capabilities. Moreover, the seven Macy's divisions around the U.S. will maintain their own marketing arms for more localized efforts.

Federated has other concerns. High on the list is Lord & Taylor, which this season started to show some improved sales results. Federated might sell it piecemeal or in its entirety, and possibly to a private equity firm, or spin it off into an independent chain.

"We want to truly understand the potential of that business," Lundgren said. "It's a good brand. I want to make sure we sort through all of our options." Retaining Lord & Taylor "is clearly one of our options," Lundgren said, adding that he's "impressed" with Jane Elfers, L&T's ceo.But with so much work to be done consolidating May into Federated, L&T, which has been in a multiyear turnaround, might be deemed too much of a distraction and a specialty business that ultimately doesn't fit into Federated's grand department store scheme revolving around Macy's and Bloomingdale's.

A decision on L&T is expected in January. In the meantime, Lundgren has been meeting with L&T staff, trying to understand their concerns and keep the ship afloat through the holiday season. He has been meeting with the other May divisions, as well.

"The first step has been to listen closely to the people, to be sensitive to them, to understand that in some cases we have disrupted their lives. We are sensitive to that fact," Lundgren said. "At the same time, we are trying to show them the opportunity attached to being part of the new company…and telling them about the vision for the business. People are generally turned on by the vision."

Converting Marshall Field's to Macy's hasn't been a turn-on to Chicagoans, considering Field's is an institution with huge hometown loyalty. But Lundgren defended the decision, saying it's principally a change in name only, and that the Field's business has not performed well for five years. As an example of how desperate May was to drum up business, Lundgren said Field's has added 100 days of sales promotion since 2004.

"Marshall Field's is a great brand name, but why would [people in Chicago] be shocked" by the renaming? Lundgren asked. "The regional department store concept has been struggling for some time now. The State Street flagship has been a good store for them, but it's a small percent of the overall business. State Street is one store. There are 61 other Marshall Field's. The idea of taking advantage of a national brand just makes all the sense in the world.

"Certainly, it's a difficult decision," Lundgren added. "The Marshall Field's name is perhaps the most respected regional name...But when you think about it, you could not expand the business." Previous attempts to do so, including putting stores in Texas and Columbus, Ohio, didn't work. They were ultimately closed, Lundgren noted."Most who have criticized the Marshall Field's change have not looked at the potential of the Macy's brand, and keep in mind we want to serve customers by location, with the best assortments," Lundgren said. "We will continue to make the State Street store an upscale, very exciting place to shop. The truth is, Marshall Field's needs a formula that is more exciting than it is today. We are already working with the Marshall Field's team and Frank Guzzetta [Field's ceo]. He's got great ideas and a lot of passion for the business. We will work together to create a very exciting shopping experience.

"The only thing [with Field's] that is changing is the name on the building," Lundgren said, generally retaining its buyers, sales associates and department managers.

By last month, Lundgren said he had visited about 20 May stores, including some Marshall Field's units, and that his team visited 45 or 50 stores.

"We kind of divide up the territory and any time we are close to a May store, we try to pop in," he explained. "Our impression is that the stores are generally in good shape. There are different standards, different areas of focus and intensification, merchandise-wise. [Federated stores] consistently have more space allocated to women's shoes and accessories, and they have more space devoted to furniture. Sometimes, furniture is a whole floor, sometimes just 8,000 square feet. There are more fixtures on the floor at a typical May company store, per square foot, than at a Macy's store. That's not right or wrong. That just makes them different.

"Overall, the boxes are the same and the layouts are generally the same size. There are a lot of similarities, but there will definitely be some tweaking and changes."

Lundgren's road trips also entail selling the vision of a national Macy's to May workers. Federated plans to cut 6,200 jobs, eliminating May corporate and divisional headquarters: Filene's/Kauffmann's in Boston, Foley's in Houston, Hecht's/Strawbridge's in Arlington, Va., and Robinsons/May/Meier & Frank in Los Angeles. The company expects to achieve about $172 million in cost synergies next year and $450 million in 2007 and beyond."There are definitely a lot of May people who have decided to stay and we are very excited about that," Lundgren said. "Several thousand people have indicated their interest in being part of Federated, and are going through a detailed interview process."

As part of the pitch, he outlines four priorities: improving the assortments and furthering Federated's fast-growing private label business, simplifying pricing with fewer coupons, promoting the "reinvent" strategy geared to make shopping faster and easier, and plans for a national Macy's marketing strategy.

He said May stores will benefit from fitting-room upgrades, the addition and respacing of the private brands and an opening up of aisles to make the departments easier to get into, but now "we are spending most of our time working with our vendors and really trying to understand the performance of products in their stores.

"We are not just making these black-and-white decisions," Lundgren said. "We are analyzing at each location what consumers want and need, and trying not to think about the business in only a macro sense, but rather in a by-location sense. That's where I think we have advantages. Our planner-distribution function is very important for us. Our planners and distributors are spending a tremendous amount of time by location, trying to see how certain stores behave. Initially, we should use science and technology here. Why do guesswork?"

It is as if the Federated teams will be "living in the stores, talking to customers, looking at the behavior of product," he said. Federated's regional merchandise structure is "pretty extensive," with 20 to 40 regional merchandise managers typically in each division.

"I don't know anybody who has the structure we have," Lundgren added. "We have [divisional] headquarters in seven cities. Our structure may cost more, but we think it's the right structure. If you are in the fashion business, you need to have people who really understand those customers" in each region. "This will be what separates us from most of our competition."

Asked about the implications of a national chain, Lundgren responded, "There are a number of them. First of all, you think of the assortment, which is critical. We have had tremendously positive response from our resources."Lundgren said Federated's size excites vendors. "They love to talk about doing something unique with stores. It's about exclusivity, or introductions only at Macy's, for a time...We have been somewhat overwhelmed with vendors who have the desire to work with us on that basis. We are unique in that regard. We can provide the growth that is required by many of these resources."

For any retailer to succeed, "I always believe that it starts with the product," Lundgren said. "If it is unique in the stores, that is the first step...That is a critical subject for all of us. Many businesses have failed because they haven't been unique. Customers get bored when they see the same type of merchandise. That's when business is in danger of disappearing."

Products, Lundgren added, must be "the best in class in terms of design, price competitiveness, style and fit. We are fortunate in that our private brand has been the fastest-growing part of our business for the last few years. We love INC. We love Hotel.

"There is another opportunity for us to work with new and up-and-coming young designers, to make sure we add uniqueness and to keep the modern part of our business alive," Lundgren said, though that's "not an all-store business."

Asked about finding new types of locations for Macy's as it goes national, Lundgren said, "Anything is possible now. I want to listen and work with the real estate community, and clearly do not want to limit Macy's to the traditional mall. That is our home base and where we have the vast majority of our stores...We take responsibility for making the mall work. We are the anchors."

However, with lifestyle centers and other off-mall formats, "if the idea is right, we are very interested in exploring options," he said.

May and Federated operate stores in a few off-mall sites, including the Irvine Spectrum outside Los Angeles, Easton Town Center in Columbus, Ohio, and City Place in West Palm Beach, Fla. Lundgren said the stores are all successful. "Those stores typically don't have the normal 180,000 square feet. They could be 110,00 or 120,000 square feet, or in many cases might be a fill-in strategy," meaning there could be a larger Macy's in a shopping center not far from a smaller Macy's in a lifestyle center."For the first time, Macy's will have a national presence and can market our message nationally, as Target and Wal-Mart are able to do,' Lundgren said. "In our case, we truly are in the fashion business. That's different from what's being offered by the other guys. The fashion business is a very different business [requiring] very different skills, different inventory cycles. You have to make room for new fashion deliveries each month.

"We've got this national umbrella for marketing and for private product, but we will also be tailoring assortments to each location," Lundgren stressed. Macy's will be coming up against Wal-Mart and Target more often, though Lundgren emphasized, "We don't plan on trading our business down to carry lawn mowers or Clorox bleach."

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