By and  on February 26, 2002

NEW YORK -- Will there be another wave of mega-mergers to ultimately save the department store?

Industry observers say there is nothing in the works at the moment, but big deals could happen in the future. There recently has been a stream of rumors about different permutations -- some more believable than others. The latest, as reported, is that Federated and May Co. might want to buy Dillard's, but the consensus is that the Dillard family is a long way from wanting to sell.

That doesn't mean Dillard's -- or Elder-Beerman, Bon-Ton and some Saks Inc. chains -- might not be snapped up eventually -- or that Federated and May Co. wouldn't look for a mega-merger with the likes of Nordstrom, Marshall Field's or even each other. "In order to be effective, the department stores need a bigger base on which to operate," said Gil Harrison, chairman of Financo Inc. "There is no question there will be continued consolidations."

Federated and May Co. are antsy for greater growth after experiencing several years of poor comp-store performance, and have been opening just a handful of stores annually. Most importantly, they've seen market share declines due to the rise of the likes of Wal-Mart, Target and Kohl's as well as specialty chains like Talbots. Retailing is increasingly becoming a game of scale, and the department stores will need to be big to better compete. Consolidation also seems likely since there is so much idle space and landlords are more flexible with deals. As retail analyst Walter Loeb said: "I believe there are some department stores in the U.S. that are irrelevant for the future."

But while the speculation on potential mergers runs amok, the reports remain unsubstantiated. Aside from the Dillard's rumors, there have been rumors about Federated and May Co. getting together, foreign companies such as Carrefour or Metro coming into the market or H&M purchasing a retailer to speed its U.S. expansion. Nordstrom takeover rumors have come and gone; like Dillard's, it's believed Nordstrom family members still take pride in controlling the Nordstrom business. Speculation on a Neiman Marcus-Saks Fifth Avenue combination, or Gucci or LVMH Moet Hennessy Louis Vuitton buying one of them, has run hot and cold for years.

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