By and  on February 23, 2005

KING OF PRUSSIA, Pa. — The 2.9-million-square-foot King of Prussia Plaza & Court here would be Exhibit A of the potential of a Federated-May merger.

The mall features Macy’s, Bloomingdale’s, Lord & Taylor and Strawbridge’s — all nameplates of the two chains — as well as Neiman Marcus, Nordstrom, J.C. Penney and the soon-to-be merged Sears. A Federated-May merger would control more than one-third of the retail space in the second-largest U.S. mall based on gross leasable space.

A walk-through of King of Prussia, a microcosm of the mall retail market at-large, shows the different ways the joined companies could capitalize on market share and improve what they offer shoppers.

King of Prussia Plaza, owned and managed by Kravco Simon Co., a joint-venture of Kravco Co. and Simon Property Group, is an airy, modern mall with high ceilings and is flooded with natural light. The mall is huge: It offers hundreds of both high-end and entry-level shopping price points, but the main sensation you have when walking through it is that of space.

The mall isn’t overcrowded with temporary vendors, so small special displays, such as a flower show or a contest to win a luxury SUV, draw attention. The food courts are well-appointed and themed — one features Italian frescoes and columns along the checkout line — while upscale casual restaurants such as the Cheesecake Factory and Morton’s of Chicago line the perimeter of the property. A power center — including Best Buy, Nordstrom Rack, Pier 1 Imports, Toys ‘R’ Us and a large movie theater — is across the street from King of Prussia Plaza and does not detract from the mall’s many niche stores, such as Hollister Co. and White House/Black Market. This is a mall where both Payless Shoes and Hermès live comfortably side by side.

Many retailers — including Ann Taylor, The Gap and Coach — have more than one store in the mall, with units in both the Court section and the Plaza. Given the size of the mall and the fact that the buildings are physically separated, the repeated brands make sense: many shoppers do not cross from one section to another. Repeated brands within the different Federated and May department stores are also of less concern, given the mall’s strategic layout. Macy’s, for example, is a long, inconvenient walk from Strawbridge’s, leading to less competition for shoppers as well as less likelihood that the operators would shut down one of them.Geography creates much of the opportunity in the mall. Though Federated’s two nameplates exist in the smaller Court section, May-owned Lord & Taylor and Strawbridge’s are in the larger Plaza.

Should the two companies merge, Federated would have a bigger and better presence in the more luxury end of the mall, where the 119,000-square-foot Lord & Taylor opened in 1995 near Nordstrom and Neiman Marcus. Lord & Taylor could cross-sell the high-end brands Bloomingdale’s carries or expand and add other designer brands to better pull in the luxury shopper who is already trolling that area, which features Tiffany & Co., Hermès, Versace, Burberry, Cartier, Coach and Louis Vuitton.

Federated could also bring more of its private labels, such as I.N.C., to Lord & Taylor and even the 215,000-square-foot Strawbridge’s, which also features May’s private labels Valerie Stevens and i.e. With a wider demographic of shoppers in its stores, Federated might expand on its private labels’ merchandise, even offering different price points within the brand.

In light of the retail industry’s recent attempts to serve the petites and plus sizes markets better, those demographics would be potential major growth areas for the retailer. All in all, the four nameplates of a merged company would serve the plus-size and petite women well in the mall.

Bloomingdale’s and Lord & Taylor, both in separate sections of the mall, feature excellent plus-size sections. The 248,000-square-foot Bloomingdale’s has extensive petites offerings, including many of the designers featured on the general floor, such as Calvin Klein and Anne Klein. The petites rival the same section at its flagship store in Manhattan.

Federated would also more than adequately cater to all the different demographics that already shop at this mall: teens to young professionals to suburban moms to retirees. A person shopping for jeans would find a $35 pair at Strawbridge’s or a $200 pair at Bloomingdale’s. A shopper could also find a Coach bag on a haphazardly displayed sales table in Strawbridge’s, whereas one seeking more ambience could buy the same bag at a slightly higher price point in a discreet sales section in Bloomingdale’s.The Bloomingdale’s and Lord & Taylor stores mirror that dichotomy, while the 256,000-square-foot Macy’s and Strawbridge’s are slightly more cluttered and less intuitive but still full of shoppers. The broad mix of merchandise offered in different settings, tailored to both luxury and value-minded consumers, would also help the company compete against the nearby big-box stores as well as the other mall anchors and the 10 Wal-Mart stores within 25 miles of the mall.

Given that the stores share many labels, a joint Federated-May would best distinguish its nameplates by heightening the unique shopping experiences at each — for example, amping up the artistic displays in Bloomingdale’s and Lord & Taylor and creating more sales space in Macy’s.

Because of the two distinct sections at the King of Prussia Plaza, keeping the four stores in the mall would likely be beneficial to a Federated-May entity, as some shoppers could clearly visit one section and not the other on one trip.

“If there’s any place they could pull off keeping them all, it would be that one [King of Prussia Plaza], because you do have the separate halves, and they have their own personality to a certain extent,” said David Griffith, an equity analyst at Tradition Asiel Securities who covers both Federated and May and is familiar with King of Prussia Plaza.

Keeping all four stores “would be a way to keep out competition,” said Kim Picciola, an analyst at Morningstar.

If he were to choose, Griffith cited either Strawbridge’s or Lord & Taylor as the possible stores Federated would drop from the King of Prussia Plaza, though he does not expect Federated would cut both.

“I’m not so sure there’s a great reason to keep the Strawbridge’s nameplate in general,’’ he said. “It just doesn’t cover that much territory, [and] it does go right up against Macy’s” in terms of target demographic. As for Lord & Taylor, Griffith wondered about its possible fate, considering that Federated is changing all its non-Macy’s national stores to the Macy’s nameplate.

Should a merged company seek to close stores, mall owner Kravco Simon would have no problem accepting back anchor space. In a company conference call with analysts and investors, Richard Sokolov, president and chief operating officer of Simon Property Group, said that buying back underperforming anchor stores would create new possibilities for either breaking up the space or adding somebody new. “As we’ve shown in the past, if we get some opportunities [to buy back space] just like we did with Lord & Taylor boxes...our products are a lot stronger for having Lord & Taylor closed in them,” he said.For example, breaking up the smallest of the four would-be Federated and May stores, which is coincidentally the Lord & Taylor store, into two single-floor stores could attract retailers like H&M or Urban Outfitters’ Anthropologie division, both of which operate on a larger scale specialty format.

Robert Michaels, president and chief operating officer of General Growth Properties Inc., the second-largest U.S. mall owner, expressed a similar sentiment on his company’s recent conference call. “We see the consolidation that is probably going to happen as being very positive for us, because there is a lot we can do with those spaces. Historically, if you go back to when Montgomery Ward closed, people said, ‘What’s going to happen to all of the old Ward stores?’, and what’s happened is that you’ve got much better retailers in these spaces.”





The anchor sites in the lower level of King of Prussia Plaza.

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