IT’S MACY’S, BLOOMINGDALE’S AND STERN’S
Byline: David Moin
NEW YORK — It may be Federated buying Macy’s, but it looks like Macy’s will be the biggest star of the combined $14 billion giant.
Federated’s chairman and chief executive officer Allen I. Questrom, in a wide-ranging interview with WWD, declined to comment on market reports of numerous Federated units converting to Macy’s. But the most dramatic potential result of the merger appears to be a restructuring of the company around three key divisions: Macy’s, Bloomingdale’s and Stern’s.
Questrom, whose relaxed demeanor this week belied the fact that he’s sitting atop one of the biggest and most complicated mergers in retailing history, did say, “We see enormous
opportunity in Macy’s. There’s a warm feeling people have about the name. It’s not only national; it’s international.”
Federated Department Stores is now grabbing at major opportunities stemming from its impending merger with R.H. Macy & Co. However, Questrom emphasized that no decisions had been made on dropping nameplates in other units.
He told WWD that next year the company would be “planting seeds” to expand existing Federated/Macy businesses and possibly unveil new selling formats in 1996.
On Questrom’s drawing board:
TV Macy’s. “It’s in the future,” Questrom said. “We want to look at TV Macy’s, and how electronic retailing will evolve.”
A national mail-order catalog under the Macy’s name.
A rollout of Macy’s specialty stores, Aeropostale and Charter Club, currently just a $100 million business with about 100 stores. Bullock’s Women, the store for large sizes on the West Coast, is a potential expansion vehicle.
Becoming more important to a narrower vendor base. “We have to mean more to them,” Questrom said. “That’s something Federated really hadn’t done.”
A surge in Federated’s private label volume to 15 to 16 percent of the total business in three to five years, from a current 5 percent. New labels, said Questrom, could be developed in women’s and men’s wear.
“We need to find other brands, to create our own brands. It’s a great differentiator,” Questrom said. “The equation has shifted. There’s a quest for better values and manufacturers are moving into retailing.”
Questrom declined to comment on industry reports about three strategic divisions holding the key to Federated’s future. But he did describe Bloomingdale’s as “national in scope,” and said sites are planned or being scouted in major metropolitan areas in California — where he sees “a resurgence” coming — Georgia, Illinois and other states.
Bloomingdale’s, he said, has the potential to double its sales to almost $2.5 billion and Questrom is confident Bloomingdale’s is operating more cost-effectively than in the past.
He pegged Macy’s as “a traditional moderate to better department store with a stretch into bridge.” Other Federated divisions, such as Lazarus, Burdines and Rich’s, service the same markets. These divisions will continue to operate, but might eventually be run under the Macy’s name. Some, especially Burdines and Rich’s, have strong local identities and might have more difficulty converting to Macy’s.
Abraham & Straus will be consolidated into Macy’s East and The Bon probably will be renamed. That could provide enormous savings in advertising and marketing.
Stern’s will function as Federated’s value concept department store. A $675 million business last year, Stern’s has opportunities for growth in the New York metro area and in smaller markets, as well. Stern’s stores range from 60,000 square feet to 200,000 square feet.
Questrom, whose own sartorial statements go well beyond the staid ceo stereotype — he’s partial to European cuts, suspenders and fedoras — is enthusiastic about a rebound in the designer business.
The spring ’95 collections appeared more saleable than in past seasons, he observed, and the shift “from looser looks to more form-fitting styles, a focus on cleavage and classic form-accentuated suits will be good for business.” Women, he said, have been seeking “a changed silhouette.”
In a somewhat optimistic assessment of the overall business climate, Questrom projected comparable-store sales growth of 3 to 5 percent for the next four to five years. Last quarter, Federated’s comparable-store sales grew 3 percent.
Total Federated/Macy sales should reach $14 billion to $18 billion by 1998.
He projected EBITDA would exceed $2 billion by 1998 and described that as “a big cash flow.”
“We can do it, and unlike the Campeau experience, with a sound debt structure,” he said. Federated projects a debt-to-capitalization ratio of 40 percent from a current 56 percent, but that may require sales of assets or debt-into-equity conversions.
According to Federated/Macy’s pro forma combined balance sheet dated July 30, the company had long-term debt of $4.6 billion and shareholders’ equity of $3.5 billion.
“Debt is not an issue,” said Questrom.
Key strategic decisions will be made next year, as Macy’s and Federated integrate. The painful and disruptive merger process begins in January after shareholders approve the merger, which is expected to happen at a special meeting Nov. 29, and bankruptcy court approves the deal.
“We’ve got to assimilate the organizations and get the cultures together — get the systems together,” Questrom said.
Citing Macy’s tradition of innovative merchandising and store design, and Federated’s strength in operations and systems, he said, “It’s a matter of maximizing key successes, maximizing commonalities, yet there is still room for distinctions. The retail business will not be successful unless we make room for new ideas and strategies, but we don’t have to have everybody chasing all of it.”
And, he emphasized, “We need to understand that our biggest business is running stores.”
Questrom also spoke about the potential for other than department-store retailing. Judging from his tone, a Macy’s “big book” catalog seems inevitable.
“There is no national mail-order business other than upscale or downscale catalogs,” Questrom said, citing Bloomingdale’s and Neiman Marcus on the high end and J.C. Penney on the low end. He envisions a Macy book offering “the broad middle range” of prices and products. That’s something different, he suggested.
On the high-tech side, he said, interactive home shopping is five to 10 years away, adding, “It isn’t going to wipe out mail order or people shopping in stores.”
A noninteractive TV Macy’s home-shopping channel, competing with QVC, could be up and running after 1995. It’s a concept the previous Macy’s management hatched, but never got off the ground.
But Questrom, not surprisingly, hasn’t lost any zeal for department stores.
“During the Federated bankruptcy, we spent a lot of time thinking about the strategy of the future,” he said. “All the pundits were thinking of department stores as dinosaurs. But we did a lot of research, in the vendor community, talking to customers. Customers like the concept of one-stop shopping and the percolating of ideas presented by department stores.”
The negatives were that consumers felt department stores weren’t competitively priced, lacked service and didn’t provide “the ease of shopping” that many specialty stores provide.
“We had the [right] concept, but weren’t effectively executing,” he said.
Questrom began looking for ways to create a stronger business — in effect, a larger one with lower relative costs. He hunted for possible mergers with other chains, during and after Federated’s bankruptcy, which lasted from January 1990 to February 1992. Among the prospects was Dayton Hudson Corp.
“There was never a formal presentation to Ken Macke [then DH chairman]. That was out. We looked at some others, but there was little or no interest,” Questrom said.
“The most specific conversations” began with Macy’s in 1992, Questrom noted, but Macy’s didn’t bite, and Ronald Tysoe, Federated’s chief financial officer, came up with the idea of becoming part of the Macy’s reorganization by purchasing a major piece of Macy’s debt in January 1994.
A common problem for the two companies — a slumping Northeast economy — gave Questrom the notion that Federated and Macy’s might stand a better chance working as friends.
“We weren’t doing well. They [Macy’s] weren’t doing well,” Questrom said.
The merger was a way for Federated to double its size, cut monumental costs by eliminating one of the two central offices and seize what’s considered one of the golden names in retailing.
“The key to the whole thing,” Questrom said, “is how well we execute.”