FEDERATED TO SUPPLY GOODS FOR BON-TON

Byline: Vicki M. Young / With contributions from Jennifer Weitzman

NEW YORK — In a first for Federated Department Stores Inc. and a further redefinition of the lines that once separated competing stores, the Federated Merchandising Group will become an additional sourcing arm for private label merchandise at Bon-Ton Stores Inc.
The agreement hasn’t yet been signed and terms of the deal weren’t disclosed. However, a Federated spokeswoman confirmed to WWD that the arrangement does not provide for the sale of Federated’s own private label brands — including Charter Club, Alfani and INC — in the Bon-Ton stores. The sourcing assistance would be for Bon-Ton’s own private label goods, she said.
FMG is responsible for the development, sourcing and marketing of private label and private branded goods across all divisions of Federated.
The arrangement with another department store is the first of its kind for Federated, according to the spokeswoman. She added that FMG does have a similar arrangement with specialty retailer Aeropostale. Aeropostale was started by Macy’s, now a Federated division.
FMG has a network of full-service and quality-control offices in 17 countries. The breadth of FMG’s network was one attractive factor in Bon-Ton’s choice of FMG, according to Michael L. Gleim, vice chairman and chief operating officer of Bon-Ton.
Gleim told WWD Monday that the agreement replaces the arrangement Bon-Ton had with the now defunct Frederick Atkins Inc., a retail buying office that closed its doors last month.
“We believe that Federated has done an excellent job in their private label products,” he noted. Gleim, who declined to provide financial details while the terms are still being negotiated, pointed out that Bon-Ton and Federated do not compete in any markets. He added that while there is no targeted closing date on the signing of the agreement, one should be finalized by yearend, since the company is aiming for deliveries to begin in fall 2001.
How the two parties will work together is still being discussed. Gleim did not rule out the possibility of either FMG providing sourcing assistance or Bon-Ton actually purchasing FMG-manufactured private label products in the future. Gleim also did not rule out the possibility of FMG helping Bon-Ton to develop new private label brands for its stores.
According to Gleim, some of Bon-Ton’s private label brands include Susquehana Trails Outfitters for men’s and women’s casualwear and Andrea Vaccario for women’s better dresses and sportswear. Modern Elements is another private label for women’s apparel and accessories.
Bon-Ton targets customers between ages 25 and 55, with an annual income of between $35,000 and $55,000. Private label, which Gleim said accounts for about 13 percent of Bon-Ton’s business, is an area that the 72-unit department store chain would like to expand further. Bon-Ton last year had net profits of $9.7 million on revenues of $713.6 million.
The private labels for which Federated is best known today — Charter Club, Alfani and INC — began in Macy’s in the mid-Eighties, prior to its days as a Federated unit, although the retailer has long been involved in private label development.
The latest arrangement is another sign that Federated is looking outside the box for private label development. In June, the company said it would send one of its in-house brands — INC International Concepts — on a journey to Japan. In a licensing arrangement with Japan’s Kosugi Sangyo Co., INC is expected to be sold in more than 30 department stores in Japan by 2003. Deliveries to some of those stores are expected to begin in February 2001. INC includes a wide range of women’s wear, including sportswear, accessories, intimate apparel, sleepwear and swimwear in women’s, misses’ and petite sizes. Shops in Japan will be exact replicas of INC shops in the U.S., including the same fixtures, floor layouts and shop graphics.
Federated’s 1999 sales totaled $18.2 billion, with earnings of $795 million.
Industry experts described the work of FMG as a “well-developed” private label program.
Marvin Traub, president of Marvin Traub Associates, senior adviser to Financo Inc. and the former chief executive officer of Federated’s Bloomingdale’s division, said: “This is a good arrangement for both, with Federated acting as manufacturer in the development of private label merchandise. Federated has said in the past that it would consider just such opportunities.” Traub noted that the arrangement would be a source of revenue production for Federated and provide expertise that Bon-Ton currently lacks.
According to Emanuel Weintraub, president of Emanuel Weintraub Associates Inc., a management consulting firm, “Federated has an exceptionally good sourcing group. Bon-Ton will do very well with it. This is a natural extension of what FMG is good at, and the combination makes for more purchasing power.”
The consultant pointed out that the deal is a reflection of how companies are starting to look at their core competencies and how those skills fit in with strategies going forward. “Federated can look at this [deal] as an extension of what they do well, while at the same time generate income with little overhead. It can be highly profitable for them.”
Steven Kernkraut, analyst at Bear, Stearns & Co. Inc., said that the deal is an interesting alternative to working with another retailer outside its own market. For now, Kernkraut described the relationship as experimental: “This is a baby set to see how working with other retailers works.”
Still he said the pact is a positive step for Federated, but not a meaningful financial step. He said Federated is not looking to make up losses in other areas by expanding its income potential.
Separately, Moody’s Investors Service on Monday placed the long-term and short-term ratings of Federated Department Stores on review for a possible downgrade. The ratings agency said the move was in response to the “asset quality and business challenges that [Federated] faces in its Fingerhut division.” As reported, Federated said last week that its Fingerhut subsidiary will downsize by cutting 550 jobs, including 350 layoffs and the nonreplacement of 200 vacancies.
The Bon-Ton stores operate primarily in secondary markets in Pennsylvania, New York, New Jersey, Maryland, Connecticut, Massachusetts, New Hampshire, Vermont and West Virginia.
As one of several regional retailers struggling with disappointing results this year, Bon Ton is considered a potential takeover target. After a first-quarter loss of $5.1 million, the company cut 137 jobs and eliminated 50 unfilled positions in its corporate office and at stores. For the six months, losses were $10.6 million. Sales for the half rose 5.7 percent to $308.5 million; comp-store sales fell 1.6 percent.

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