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Federated’s Future: Lundgren Sets Blueprint for Faster Growth

Federated's Terry Lundgren has a plan that includes a simpler pricing strategy and turning all regional stores into Macy's and Bloomingdale's.

NEW YORK — Terry Lundgren revealed his mantra on Wednesday: “I am about sales. I am about growing comp-store sales.”

As May Department Stores Co. searches for a new chief executive officer after the resignation of Gene Kahn last week, and other chains struggle with poor sales, Lundgren, the chairman, ceo and president of Federated Department Stores indicated his company plans to sustain its momentum with a simplified pricing strategy, focus on boosting the home-furnishings business, shed all regional nameplates to concentrate on Macy’s and Bloomingdale’s and launch corporately developed national advertising.

Dismissing contentions that department stores are losing their steam, Lundgren acknowledged Wednesday in a speech at the National Retail Federation convention here that the sector “has been a challenging business for as long as I’ve been in it. Trying to break away from the pack is a challenge every day.”

To figure out what to do, Federated, he said, conducted “a tremendous amount of research. We talked to thousands of customers beginning about three years ago. It was not a part of our culture. The reality of the customer changed and we had to change with her.”

Critics contend that consumers are abandoning the malls and department stores in favor of downtown shopping, lifestyle and power centers. But Lundgren asserted, “That’s not true. So many customers are in our stores and in the malls. But there are so many customers that we’re not completely satisfying….She’s looking for affordable fashion. She’s looking for newness, and something that fits her lifestyle.”

Lundgren said Federated developed four priorities. One was differentiating the assortment and sharpening the editing, which has involved intensifying the private label business. “Private brands have been the most successful business in our stores” — including INC, Alfani and Charter Club — which does more volume than any other brand sold at Macy’s, ahead of such powerhouses as Estée Lauder and Ralph Lauren.

The second priority has been to revamp the pricing. While Federated will maintain a “regular and on-sale strategy beat” to its business, everyday low pricing will be linked to about 5 percent of the merchandise this year compared with about 3 percent last year, he said.

This story first appeared in the January 20, 2005 issue of WWD.  Subscribe Today.

What’s probably more significant is that the pricing will become clearer to shoppers, who get confused by coupons, newspaper ads and point-of-sale price adjustments. “Consumers have said, ‘Make it clearer for me. I don’t know what the price is before I get to the register,’” Lundgren said, citing the research.

Federated is using technology to help set prices on certain goods. Automated markdown systems such as ProfitLogic, which is used at Federated’s Bloomingdale’s division in certain categories, utilize historical data, projections and trend information to suggest markdown schedules and yield better margins. “We are really thinking through what is the real need in terms of price elasticity,” Lundgren said.

He spoke of simplifying the in-store experience, as the third priority. It’s an initiative that took off in late 2003 and through 2004. By removing some fixtures and merchandise, aisles were opened up and sight lines were extended. “It was a big deal to take 20 percent of the fixtures off the floor in the last 18 months,” Lundgren said.

Also, fitting rooms are becoming more accessible. In the past, “wherever we had a nook or a cranny, we put a fitting room, but we took selling space away and created banks of 12 to 14 fitting rooms….When you get [the customer] in a fitting room, it’s almost a sure sale. I learned that from Stanley Marcus,” the late chairman of Neiman Marcus.

Federated is adopting “line-buster technology,” enabling sales associates to conduct transactions right in the middle of the floor with hand-held portable scanners. “Way-finding” signage that’s as easy to read as street signs also is being adopted, reducing the overall amount of signage that stores would require.

The entire focus of all the initiatives is to generate sales increases to drive profits.

“Every single day I look at sales from every division,” Lundgren said. “I look at overall sales, and then home-furnishings sales. I’m very focused on home furnishings,” which is where he acknowledged Federated has some catching up to do.

“We have failed in this business,” he said bluntly, noting that, in spite of same-store gains in the 2 to 3 percent range for 2004, “we were negative in the home-furnishing business.”

Lundgren and other Federated officials have stated that, with low-single-digit comp-store gains, the company can generate good profits. But there’s no doubt that Lundgren, who has emerged as one of retailing’s stars in his short tenure as Federated’s ceo, wants more. He said he could even monitor sales on an hourly basis, instead of just reviewing the daily sheets, but chooses to be less compulsive.

He said the problem with the home business was that Federated stores carried the same merchandise as everyone else. “We had the same blenders, the same dinnerwear. There wasn’t any reason to come to us. Anyone doing a good job in home furnishings, we promoted them to ready-to-wear.” He also put some of the blame on vendors. “There was no creativity.”

To rectify the situation, Federated last year eliminated the home store buying at the divisional level, retained “the best and the brightest” of the buyers and consolidated down to one division in New York. The ready-to-wear buying, unlike the home store buying, is still done regionally.

In February, the first home catalogue by the new central organization will be distributed. It will be “dramatically different” than previous home catalogues, Lundgren promised. “We are going to make a difference in the home-furnishings business.” 

If that’s accomplished, Federated no doubt will continue to outperform the department store sector and widen the gap. The $14 billion company is expected to issue strong results for 2004, with low-single-digit comp gains of around 3 percent.

On March 6, all regional nameplates will be dropped and all non-Bloomingdale’s stores will carry just the Macy’s name. That will enable the corporation to save money and leverage the Macy’s name via national advertising. Macy’s accounts for about $12 billion in sales, while Bloomingdale’s generates about $2 billion.

“There will be a new commercial campaign for the spring season. We will really get the branding message out,” Lundgren said. A video of a couple of the new ads was showing, including one depicting aggravated and tired male shoppers, and the tag line: “Golfers bring caddies. Shoppers bring husbands.”

Lundgren noted that, in the past, “95 percent of our advertising was to promote our sales” and that the company was not leveraging its Bloomingdale’s and Macy’s brands. While the new advertising and marketing strategies get formulated at the corporate level, they will still be executed at the divisional level. Before Federated decided to abandon all of its regional nameplates, the company asked consumers for their opinions on the change. According to Lundgren, 70 percent of those surveyed said they would still shop the stores adopting the Macy’s name; 10 percent said they would shop more often; 10 percent were not sure, and 10 percent had a negative reaction.

While Lundgren has brought greater focus to the Federated operations, there’s been speculation the retailer might pursue an acquisition. Its arch-rival, May, which has been losing market share to Federated and other retailers for years, would be a prime target, and talks between the two retailers have been held in the past.

“We can’t and don’t respond to speculation” about acquisitions, Lundgren said in response to this question.

Aside from the speculation about May Co. possibly getting sold, there have been rumors that Saks Inc. could spin off its department store group and retain the Saks Fifth Avenue chain. Saks Inc. previously declined to comment on that speculation. While SFA has been showing improved sales, the department store group, which includes Proffitt’s, Carson Pirie Scott, Parisian and McRae’s, reportedly had a difficult 2004. Retailers issue their year-end results in late February and early March, and generally conclude fiscal years at the end of January.

After his presentation, Lundgren responded to some questions submitted by the audience. On merchandise that’s not moving, he said: “If it doesn’t sell in the first two weeks, get it out of there. Mark it down. Don’t think it will age beautifully like a great wine. We have a real strict policy. We do not let it age.”

On the Internet business: “We have been very successful in the gift and bridal, which is already a couple of hundred million-dollar business. We have not put our foot on the accelerator here.”

On the SoHo Bloomingdale’s that opened in  April: “There has been virtually no transfer of sales from the 59th Street unit to the downtown unit, which is doing very well. We have not said that we are going to expand the SoHo concept, but my guess is that is an option for the future.”

On radio frequency identification: “It will become an important part of retailers’ future. I do not intend to be in the leading [wave of adopters]. Ceo’s need to be in the technology loop and understand it. I spend a significant part of my time with our chief technology officer. I am extremely involved in the decision-making.”

In other news, Lundgren officially pulled himself off the market and got engaged on New Year’s Eve. He plans to marry Tina Stephan. The two, spotted at a party Sunday night, disclosed their plans to wed. Asked for her reaction when he popped the question, Stephan replied, “I was completely surprised.”