NEW YORK--Three weeks after shaking hands on a merger, Federated Department Stores Inc. is getting into the nitty-gritty of swallowing up R.H. Macy & Co.
Termination notices should reach many Macy corporate workers this week, while possible antitrust problems continue to be thrashed out between Federated and government officials, and bankruptcy lawyers are hustling to put the finishing touches on Macy's disclosure statement, due in court Aug. 31.
As Allen I. Questrom, Federated's
chairman and chief executive officer, and Terry Lundgren, chairman of Federated Merchandising prepare to "cherry pick" from the ranks of senior Macy executives this month, crucial issues need to be resolved. Among them:
Which buying approach--Macy's buyer/planner system or Federated's centralized team process--will drive the combined $13.5 billion retailer.
A resolution of the antitrust problem. Senator Howard Metzenbaum, Antitrust Subcommittee chairman, has stated his opposition to the merger and last week formally requested information on the Federal Trade Commission's continuing investigation into the deal.
Difficult decisions on consolidations and sell-offs. These decisions won't be easy, especially in markets where there are key, high volume branches. Some sell-offs, in fact, could open the door for heavyweight competitors such as May Co., Dillard's, J.C. Penney and Sears.
Employee angst. Executives and workers, especially at Macy's East, A&S and I. Magnin are justifiably worried about their jobs.
Federated is expected to make a sweeping reorganization at the highest rungs of Macy's management. Cuts will be made as the Macy corporate office is dismantled this month, while cuts at the divisions should come this fall.
There's a more hopeful note for certain senior merchants at Macy's, though search executives say there's been a steady stream of résumés from the company.
Questrom and Lundgren apparently have not yet decided which senior Macy execs will make the new team.
Questrom is said to have a few favorites in mind, but is not acquainted with all of Macy's top merchants, including some Macy's East merchandising presidents. Luncheon invitations might be sent to Richard Crystal, chairman, product development and specialty stores; Rhonda Brown, who supervises accessories, shoes and dresses; Rick Leto, for children's, coats and juniors; Edward Brennan, men's wear; Charles Chinni, home goods, and David Suliteanu, president of stores. They all have strong reputations.
Questrom also is said to have his eye on some Macy corporate workers, including a few in store construction and design. Macy's has built units with more architectural and visual impact--and higher costs--than Federated's.
Questrom could not be reached for comment.
Previously, there's been speculation that A&S chairman Hal Kahn will run a combined Macy/A&S chain. He's spent most of his career at Macy's and could choose Macy executives over those from A&S.
Other speculation focuses on Lundgren leading a Federated corporate merchandising team beefed up by some Macy talent. Myron E. Ullman, Macy chairman and ceo, may bow out in a few months from his new post as Federated vice chairman, and Roger N. Farah, Macy's president and former head of Federated Merchandising--in Questrom's dog house since he left Federated to join Macy's--will most likely move on and open his $10 million parachute.
Farah and Ullman reportedly have been eyed for top posts at major chains, including Kmart Corp.
Even though the merger has not been completed, lawyers from both companies said Federated is free to juggle executives, offer jobs and exchange financial information with Macy's officials.
"There's been a lot of information exchanged between the two companies as they work toward finalizing the merger agreement," said David Heiman, of Jones, Day, Reavis & Pogue, counsel to Federated.
By the end of August, a revised plan of reorganization is likely to be filed. The merger agreement is nearer to completion, as details on personnel matters are getting resolved.
In the coming weeks, Federated will also be taking a close look at Macy's product development program, considered far more advanced than Federated's private label operation.
And a reexamination of the Federated team buying system is expected. It's considered to be more cumbersome than Macy's buyer/planner system, and a concern for some Federated principals. Some have felt that the centralized approach has reduced their buying autonomy. Lundgren's team does over 70 percent of the buying for Federated and advises buyers at the stores, as well.
"Even Farah wasn't convinced that was the way to go," said a market source. "He became impatient."
While Federated officials are circumspect about their system, Macy's executives are dead certain that their system is the way to go. Ullman has touted it several times on video broadcasts to employees. Under Macy's system, buyers shop the markets and select merchandise while planners determine the amount of the buy and how it should be distributed to the stores.
"The problem with Federated is it was always a very uneven approach," said the president of a major fragrance firm. "You had Burdine's and Bloomingdale's doing whatever they felt like doing, having no regard for what the other divisions were doing. They put in a buying group, but I don't think they've been as effective as they'd hoped."
The problem with Macy's system is it's new and really hasn't had a chance to get tested.
Retail experts see Federated developing some compromise approach, with Lundgren moving his cadre from Federated Merchandising's mundane offices here at 1440 Broadway to the considerably more posh executive suites at Macy's Herald Square.
Also in the works: Final decisions on closing the underperforming Macy's units in the Washington, Atlanta and New York markets, and A&S and Jordan Marsh units in the New York and New England markets.
Speculation persists that Federated will convert the A&S/Jordan Marsh division to Macy's, sell off others and shut most I. Magnin stores but possibly convert a couple to Bloomingdale's. Spinoffs could spark a bidding war among May Department Stores, Dillard Department Stores, J.C. Penney Co. and Sears Roebuck, the most likely takers.
"Federated will do anything it can to keep May Co. out of New York," said Philip G. Barach, a director of Bernard Chaus and former chairman of U.S. Shoe. "They're too strong a competitor. If Federated is forced to sell off stores in New York, they'd probably go to a less direct competitor, to Sears or Penney's."
In Atlanta, Federated would prefer Dillard's over May Co. Dillard's has a bigger, better business and an everyday low pricing strategy, while May Co. has a strong moderate business and strong price promotions.
But it's not only the dogs, such as Macy's sagging downtown Atlanta unit, that are likely to be dropped.
Top branches, including units in Roosevelt Field Shopping Center, Garden City, N.Y., where A&S and Macy have large, expensive and highly productive stores could be affected. Antitrust officials might force Federated to shed one or the other, and the decision will be a tough one: They're among the top one or two branches at both chains that fight bitterly in the Northeast for market share. Macy's wins in home goods, gifts, cosmetics, better apparel and private label, and A&S snags commodities and promotional items, such as socks, lingerie and moderate sportswear.
"That's where they hit us," said the Macy's executive. "A&S is a great promoter, but they don't have a better business."
"For the past year, Macy's has been improving their moderate departments, relocating them and expanding them, but I think Federated will really help them accelerate this push," said Norty Sperling, president and owner of Norton McNaughton Inc., a moderate women's career clothing firm, a big label in both stores. "Federated has a great brand awareness in moderate, but Macy's for a long time just stuck with mostly private label."
Barry Cohen, executive vice president at Ellen Figg Inc., another moderate house, said, "If you go to a typical Macy's floor, it was a like a Baskin Robbins of ready-to-wear. They didn't focus on their vendor structure assertively enough."
"The Macy's shopping environment is too cluttered, sales people are scarce and housekeeping is poor," said another industry source. "Federated is going to add more discipline."
Other areas could benefit.
"Macy's has a weak store sales force, and their training needs to be improved," said Harry Bernard, executive vice president at Colton Bernard Inc., a San Francisco-based consultant. "I think Macy's will benefit from Federated's expertise in sales training."
All these potential changes have sparked "a lot of anxiety in both camps," said a former Macy's official.
Yet the two retail operations are not completely different animals, which should ease the transition.
"There are enough differences along the line that have to be reconciled, but this is not a culture clash," said Arnold Aronson, the retail consultant and a former retail ceo.
"Many people at Macy's are close to the Federated mold," added Isaac Lagnado, Tactical Retail Solutions. "They're aggressive, independent, creative people. Their cultures are far more similar than May Co. or Dillard's." Another source said, "If Macy's merged with Dillard's or May Co., it would really be a problem. They're more regimented and by-the-book."
He added, "Historically, there's been a lot more cross-pollination between Macy's and Federated." Such key players as Frank Doroff, Bloomingdale's executive vice president; Michael Steinberg, Macy's West chairman, as well as Ullman, Kahn and Questrom, have had stints at divisions from both companies.
Another uniting factor, Macy's and Federated use the same information system, SABRE.
Past Macy consolidations involved a systems changeover that led to confusion as buyers got stuck without current sales data. "Monday's results would come on Thursday. There were always mistakes during these conversions."
While having technical similarities, the merchandising approach varies between the two companies. Macy's doesn't merchandise its stores uniformly and tries to cater to the varying tastes of consumers in different areas, and it takes risks to get hot items on the selling floor quickly.
According to R. Fulton Macdonald, president of International Business Development, a retail consultant, "Macy's is more youthful and style-driven. The specialty arm of Macy's [Aeropostale] shows some of Macy's very sophisticated merchandising and marketing capability."
Questrom's credo, on the other hand, has been to deliberately come in a close second on fashion trends, with Bloomingdale's an exception in the Federated stable.
Stephen Weiser, director of sales for Harwill Belts, said he doesn't feel Macy's will lose either its identity or its main strengths--marketing and merchandising--due to the merger.
"Federated executives are smart enough to see what they've got and not force Macy's into some kind of a mold that it doesn't belong in," he noted.
"I think we'll finally be dealing with merchants again," said Elaine Gold, owner of scarf company Collection XIIX. "I think the combination of Questrom, Ullman and Lundgren will be superb for everyone involved." The one drawback, she noted, is that there will be fewer doors to which to sell.
In the fragrance business, some of the larger manufacturers have used the competitive nature of the business to their advantage in recent years to extract commitments from retailers for elaborate launches.
Fragrance manufacturers worry that simultaneous launches would increase the demands from the retailer to the vendor. For example, retailers would want more money for fragrance rotators, gifts with purchase, and advertising.
Prior to the Donna Karan New York fragrance launch in 1992, there was a bidding war. The company got competitive bids from three stores in New York and finally went with Bloomingdale's.
In recent years, Bloomingdale's, Macy's and Saks Fifth Avenue have been vying for top fragrance introductions.
In 1991, Macy's launched Calvin Klein's Escape and Elizabeth Taylor's White Diamonds. In 1992, Bloomingdale's had a string of hits with Dune, Donna Karan New York and Safari for Men. Saks came back with Giorgio Armani's Gio, Issye Miyaki L'eau D'Issey and Casmir.
Exclusivity is another sensitive spot, where retailers place a high premium. "If Federated and Macy's demand exclusivity, manufacturers could find themselves caught between two giants--May Co. and Federated," said an industry source. "The retailers with clout are demanding more and more for exclusivity."
A vendor in the junior market said, "We're terrified Macy's will go into the Federated complex and [make large buys with core resources] and that will be its fashion statement."
"What made Macy's what it was its flexibility and its ability to respond quickly to consumer demand," he added. "Who needs another vanilla retailer? Of course, it's wonderful if you're a core vendor."
Macy's "power merchants," nurtured under former Macy chairman Edward Finkelstein, took lots of risks and heavy positions in inventory and have been close to the market.
"The heritage wasn't killed under Ullman, just put under proper controls," Aronson said. "The challenge is to combine an aggressive approach with intelligent restraints of systems and controls."

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