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Merger Talks Worry Vendors

Vendors are on edge over the possibility of a merger between Federated Department Stores and May Department Stores.

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NEW YORK — Panic might not be the right word, but “on edge” is certainly an apt description of the mental state of vendors given the possibility of a merger between Federated Department Stores and May Department Stores.

The retailers were said to be in talks last week, discussions that have taken place several times before, but might be more successful given the recent departure of May’s chief executive officer, Gene Kahn.

Were it to come to fruition, the combination would create a $30 billion retailer with 1,000 department stores nationwide, possibly run by Terry Lundgren, chairman and ceo of Federated.

“It would be a loss to the industry for May Co., as we know it, to go away as an independent retail colossus,” said Hank Sinkel, executive vice president of sales and marketing at sweater firm Hampshire Designers.

“Federated, May, we really are positioned differently in those stores,” he said, noting Federated has higher prices, while May shoots for the more moderate customer. A merger could lead to more sameness at retail and lower sales for vendors.

“If all of a sudden there’s this consolidation, it’s possible for a player like us to lose some business,” said Sinkel. “It’s just a fact of the economics of today — bigger is better. We’re kind of used to all this consolidation and evolution.”

Another vendor executive, who spoke on the condition of anonymity, was somewhat skeptical of the deal. “We’re not sure it’s more than a lot of bankers trying to make big fees,” said the executive.

One big question on the minds of vendors is what shape the combined retailer would take.

“Would they go with a good, better, best strategy?” asked the vendor.

Under such a strategy, named for price points, May nameplates such as Hecht’s and Strawbridge’s would be in the good category, Macy’s would be in the better and higher-end stores such as Bloomingdale’s and Marshall Field’s would fill in the best slot.

This portfolio approach is popular, said the vendor, adding: “On the other hand, you could say May Co.’s not working because it’s ‘good.’”

A good, better, best positioning would basically be a continuation of the status quo.

The behemoth resulting from a merger of Federated and May might decide to cede more moderate ground to national chains such as Kohl’s and J.C. Penney and move more expensive goods into the May stores.

“Depending on whether they bring it more upscale, that could really affect more moderate apparel suppliers,” said Susan Ng, equity analyst for Sidoti & Co.

With nothing much to do but wait and see, moderate vendors are hoping the May stores retain their lower-priced stance.

“Terry Lundgren doesn’t impress me as the man who throws the baby out with the bath water,” said one executive.

For now, there are more questions than answers.

“It’s just too soon to know,” said Kellwood Co.’s chairman and ceo, Hal Upbin, through a spokeswoman.

Some are more sure than others, though.

Lazard Frères & Co. analyst Todd Slater last week downgraded Jones Apparel Group’s stock to “hold” from “buy,” noting the vendor derives 13 percent of its sales from Federated and 12 percent from May. Slater said a merger “would clearly put pressure on Jones’ revenues, especially in the moderate business — roughly 29 percent of Jones’ mix — since we believe it is likely that Federated would abandon some of the moderate businesses and upscale many of May department store brands.”

On a conference call last week, Jones’ ceo, Peter Boneparth, was able to see a silver lining should the two firms merge. A deal that would yield a more efficient retailer that disposed of or rationalized underperforming real estate could have a positive impact, he said.

“We need partners who want to invest in the store experience and certainly to date, Federated has done a better job at that,” said Boneparth. “Anything that makes it easier to shop, anything that makes our brand more presentable in the store, is going to be a win for us.”

At the same time, Boneparth noted, “it probably does objectively create more challenges top line than otherwise because you’re clearly going to go through this rationalization of real estate.”

A big player such as Jones, which has a multitude of brands from Anne Klein to the lower-priced Bandolino, also could make up some of those sales if the space goes to another apparel retailer, such as Nordstrom.

Consolidation in the industry would leave fewer, more profitable companies standing, said Boneparth.

An executive at another major vendor said of the possible merger: “It is not a good thing in the sense that it provides this monolithic retailer with unbelievable clout over vendors and mall owners.” The deal also could be detrimental for consumers by creating further homogenization at retail and causing higher prices by virtue of less competition, said the executive.

A retailer with the combined stores of Federated and May would have significantly enhanced sway over the vendor community, forcing larger players to be more agile and dangerously squeezing smaller firms.

“To be in the game, you better make sure you’re great,” said Robert Rosen, ceo of La Rose Inc., which produces the Bob Mackie Studio line.

“We must work at a much, much higher level of excellence and product development to sustain the competition,” said Rosen.

That competition would come not only from other outside vendors, but also from  private label programs, such as Federated’s successful INC line.

As to whether or not the merger will take place, Rosen noted: “These things are almost expectations. It’s just a matter of when it takes place. Each one wants to strategically grow within themselves, and each one wants to become a major powerhouse.”

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