Wednesday, September 21, 2005

goodbye bloomingdale's

Get ready to say goodbye to Bloomingdale’s.

Although the headlines on September 20th stated that the ongoing Federated Department Stores / May Company merger would result in the loss of the Marshall Field’s nameplate on May’s Midwestern stores, the news couldn’t be worse for Bloomingdale’s, the one Federated division that survived the massive rebranding of the company’s regional department store chains to Macy’s.

While Marshall Field’s dissolution was widely expected by retail analysts, as is that of the struggling Lord & Taylor division, Bloomingdale’s has always been considered the “sacred cow” of Federated’s divisions. In fact, some of the stores from May’s former operations are expected to reopen as Bloomingdale’s over the next several years.

While Bloomingdale’s fortunes look rosy at the outset, the lifespan of the division as part of Federated are bleak at best.

The reason Bloomingdale’s may die sooner than later goes back to the assertion of Federated CEO Terry Lundgren in his efforts to justify the merger with May Company and the elimination of both Federated and May’s historic regional nameplates.

"To better serve our customers in this highly competitive retailing environment, we must concentrate on our best national brands and reduce costs so we can deliver outstanding value to shoppers," said Lundgren, Federated's chairman, president and chief executive officer in a recent press release. "We believe that continuing to build Macy's and Bloomingdale's aggressively across America will accelerate our comp store sales performance and increase profitability, thereby driving shareholder value."

Is Bloomingdale’s worth saving? Not when you think about it.

In terms of history, Bloomingdale’s is tied most strongly to New York City’s modern era, but holds little historical sway in the other cities in which it operates in the Midwest and on the East and West Coasts. The loss of Bloomingdale’s in metro Los Angeles, Minneapolis or Atlanta would be of little to no impact to the local history or retail market, for example.

Compare the power of the Bloomingdale’s name to that of Marshall Field’s, Hecht’s, Rich’s and The Bon Marché, all of which are names removed or scheduled to be removed from Federated stores . All four of the names above, as well as countless others purged from Federated’s divisional lists, were identifiable icons of their respective communities with strong local and regional consumer attachment. None of these chains were deemed important enough to preserve under their historic names because they were not differentiated from the core Macy’s operation enough to justify the extra costs involved in their operation

Outside of its flirtation with national popular culture in the 1970s and 1980s when it was being led by CEO Marvin Traub, who helped innovate the franchise with spectacular marketing and merchandising, Bloomingdale’s started as and remains a relatively small, somewhat undifferentiated regional department store chain, with limited national appeal.

From a merchandising standpoint, all but a handful of Bloomingdale’s 40 stores are more similar than different than their mass-market sister chain Macy’s. The stores appeal to a niche of customer that is more affluent than the typical Macy’s customer, but less affluent than the typical Nordstrom shopper, that chain being its nearest natural competitor. The limited appeal is a liability as stores like Nordstrom, Neiman-Marcus and Saks Fifth Avenue push a higher level of service and more exclusive brands than a typical Bloomingdale’s location.

Expansion potential
In terms of potential expansion, Bloomingdale’s has limited options. One of the things that has held up Bloomingdale’s national reputation is its selectiveness in choosing new store locations. Only communities with excellent upscale demographics and a taste for contemporary fashion have deemed worthy of the chain.

While the preservation of standards is important to the survival of any enterprise, the strict standards exacted by Federated limit Bloomingdale’s growth to roughly the 50 to 60 top market areas in the United States, with a potential build-out of approximately 80 stores.

While a conservative growth strategy to those selected markets would certainly work on paper, the distance between desirable markets would be overwhelming from a transportation and servicing standpoint, as well as the costs involved in constructing stores to fit Bloomingdale’s full-line, upscale image all across the country. With Bloomingdale’s primary market shrinking as the American middle-class decreases, and those that remain shop increasingly at big-box and luxury stores, the costs to construct a nationwide network of stores do not justify the returns.

The alternative would be a more aggressive expansion strategy to smaller markets, which may necessitate smaller, less upscale locations in the top 100 U.S. markets. While upping Bloomingdale’s profile, the addition of cheaper brands and elimination of high-expense departments like furniture pushes the store closer in character to Macy’s and may result in sales cannibalization from both its larger stores and from adjacent Macy’s locations. The loss of credibility on high-fashion merchandise and cheapening of the store experience will hurt more than it will help.

The future
The smartest thing for Federated Department Stores to do is to close out its Bloomingdale’s division and merge it into Macy’s. This scenario creates a retail operation under a single unified name all over the country, with the greatest savings coming from elimination of duplicate facilities and nameplates. Bloomingdale’s strengths in merchandising and design could be integrated into Macy’s, thereby consolidating the company’s best talents in one place.

As retail analyst Howard Davidowitz recently told Minnesota Public Radio, department stores have the highest costs in the retail industry, and Federated knows centralization works for the bottom line.

"If you've got one name, Macy's, you can save a tremendous amount of money in supplies, marketing cost, advertising umbrella, promotions. You enhance your margin because you're buying more. It's just a fantastic way to do things," according to Davidowitz.

While some in retail circles and in New York especially will lament the loss of Bloomingdale’s, the change will be for the better. By eliminating what’s not needed from a store operations standpoint, the store is more efficient, and in the parlance of Federated CEO Lundgren, the move will increase shareholder value and help produce outstanding value for consumers.

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