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The Top 10 Stories of 2004: 4. Retail Tectonics

Can you say earthquake? <BR><BR>The retail landscape shook mightily this year, with a number of deals cracking the billion-dollar mark. But the biggest was a deal shrouded in mystery. In a surprise move, Kmart Holding Co. said it would pay $11 billion...

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Can you say earthquake?

The retail landscape shook mightily this year, with a number of deals cracking the billion-dollar mark. But the biggest was a deal shrouded in mystery. In a surprise move, Kmart Holding Co. said it would pay $11 billion to buy Sears, Roebuck & Co., creating the nation’s third largest retailer with $55 billion in sales. Edward Lampert, the financier behind it, said the best of both chains will be blended to create a strong retail entity, but he’s kept specific plans secret so far. Cynics said putting two struggling companies together is a formula for failure, and Lampert really intends to sell off the real estate, brands and other assets from the chains, in what could ultimately become one big liquidation.

In another high-profile, controversial but far smaller deal, Jones Apparel Group decided to spend $400 million for Barneys New York. It seemed like a stretch with few, if any, apparent synergies, but Jones said it could build Barneys into a $1 billion business and get a head start learning about luxury looks that could be interpreted to its more moderate business.

On the mall front clear across the country, major properties changed hands like there was no tomorrow, through single- and multiproperty deals. The biggest saw General Growth Properties Inc. purchase The Rouse Co. for $12.6 billion and pick up 40 million square feet of space.

Besides GGP’s big acquisition of Rouse, Simon Property Group, still the nation’s largest developer, bought Chelsea Properties, the largest outlet mall operator, for $4.8 billion; Mills Corp. decided to spend more than $1 billion for a 50 percent stake in nine shopping centers, and GGP also paid $766 million for the Grand Canal Shoppes at The Venetian in Las Vegas.

There was plenty of retail m&a activity, too. Some of the more dramatic deals were Target Corp. selling its Marshall Field’s division to May Co. for $3.24 billion and its Mervyn’s stores to an investment group for $1.2 billion, enabling the corporation to focus on its core Target discount division.

J.C. Penney Co. Inc. sold off its lagging Eckerd drugstore chain to CVS Corp. and the Jean Coutu Group for $4.5 billion, enabling the Dallas-based chain to shore up its balance sheet.

This story first appeared in the December 7, 2004 issue of WWD.  Subscribe Today.

Some other venerable retail names were also put on the block, including the Casual Corner division of Retail Brand Alliance, while Eddie Bauer and Wet Seal Inc. were shedding weak locations.

“Consolidation, involving financial buyers as well as strategic players, has really been the theme of the year,” said William S. Susman, president and chief operating officer of Financo Inc. “We’ve also been seeing new growth formats seeking capital.”

He’s referring to the year’s unprecedented level of creativity and flexibility in rolling out prototype store concepts and product categories demonstrated by a host of established retailers. Bloomingdale’s, for example, opened its highly focused SoHo branch skewed to contemporary sportswear, advanced denims, accessories and cosmetics. Limited Brands Inc. decided to recast Henri Bendel on Fifth Avenue as a cosmetics and lingerie specialty retailer and began testing a Bendel’s branch. Limited also unveiled a new concept, C.O. Bigelow, modernizing the old-fashioned apothecary and inspired by the 166-year-old Greenwich Village institution filled with everything from homeopathic remedies to niche beauty products.

One of the most watched retail experiments was Abercrombie & Fitch’s new Ruehl division for the 22- to 30-year-old set — a new demographic for the specialty retailer — while Gap Inc. also decided it was time to appeal to an even older crowd by targeting women aged 35 and up with a yet-to-be-named division that will bow with up to 10 stores next fall in two regions.

As General Growth chief executive John Bucksbaum said, “That’s the beauty of the business: Retailers are creating more concepts today than they ever have, and it’s wonderful that established retailers are doing it. It means there’s an ability to roll out the new concepts faster. Some are showing real creativity.”

The year was also marked by sustained strength in same-store sales and inventory control, but even more significantly, long-standing perceptions about various retail sectors seemed to fade. The giant discounters, thought to be invincible, started showing a few cracks in their armor, and department stores, for decades considered a dying breed, showed new life. The rate of sales gains at Wal-Mart, Kohl’s and Target slipped, while Federated Department Stores Inc. and Saks Inc. showed that they are trying to attract younger customers with urban brands, private label and exclusive merchandise.

In one big consolidation, Federated announced it’s getting rid of all its remaining regional nameplates — Burdine’s, Bon Marche, Rich’s, Lazarus, and Goldsmith’s — and replacing them with the Macy’s logo, thereby truly establishing Macy’s as a national chain and beginning to market the brand as “America’s department store.”

Among the newsiest developments on the personnel front, Allen Questrom, one of the giants in the industry, made his retirement official and named Myron Ullman 3rd, a former executive at LVMH Moët Hennessy Louis Vuitton and Macy’s, as his successor at J.C. Penney.

Also, Hal Kahn decided to call it quits at Macy’s East, and Ron Klein succeeded him as chairman and ceo. But the revolving door kept swinging with Louis Padilla, the merchant star who made his name at Target Corp., defecting to Sears, where his help is sorely needed, as president of merchandising.

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