New Retail Landscape Emerges

By ANNE D'INNOCENZIO (AP Business Writer)

NEW YORK - The shakeout from this year's frenzy of retail consolidation will become more visible to consumers next year, from local department stores disappearing into the Macy's chain to a better selection of store-owned labels on the racks.

But consolidation, particularly Federated Department Stores Inc.'s purchase of May Department Stores Co., means less competition, and less incentive for stores to keep discounting, which is bad news for shoppers. On the other hand, a bigger Federated will be able to negotiate lower prices from its suppliers and pass on those savings.

After last year's string of deals, capped by the Sears-Kmart marriage, there was plenty more transactions this year, fueled by merchants' need to keep growing amid sluggish apparel sales and higher costs. The latest was Saks Inc., which announced in late October that it was selling its Northern department store group for $1.1 billion in cash to Bon-Ton Stores Inc., bolstering Bon-Ton as a regional player in the Midwest. That followed Saks' announcement in April that it was selling its Proffitt's and McRae's department stores to privately held retailer Belk Inc. for $622 million in cash. That leaves Saks with Saks Fifth Avenue Enterprises and upscale Parisian department stores.

Meanwhile, luxury retailer Neiman Marcus Group Inc. was purchased by private-equity firms Texas Pacific Group and Warburg Pincus LLC for $5.1 billion, a transaction that was finalized in October.

But the $30 billion merger between Federated and May will have the most impact on shoppers, analysts say. The deal, finalized in late August, created a retail force with nearly 1,000 stores.

The most obvious change, of course, will be the disappearance of such May name plates as the storied Marshall Field's - as well as Hecht's, Filene's and Kauffmann's - and the expansion of Macy's to some 850 stores. These moves will take place in the third quarter of 2006. Federated is also studying strategic options for Lord & Taylor.

But, more importantly, given its increased clout, Federated is expected to redefine overall retailing.

"Federated will be resetting the table. They will have more opportunity to take more initiatives," said Allan J. Ellinger, senior managing director of M.M.G., an investment banking firm for retail vendors.

Ellinger noted that Federated could redefine when apparel is sold, timing shipments to the weather, which reflects how consumers really shop. Shoppers might see a plentiful selection of shorts and swimsuits in August, for example, instead of heavy sweaters.

A key challenge for the new Federated will be how to balance running an efficient operation while keeping the merchandise compelling. Overall sales at stores opened at least a year, known as same-store sales, have averaged a respectable 3.9 percent gain so far this year despite a multitude of challenges, from unseasonable weather to a spike in gasoline prices. But the department store sector's sales, whose same-store sales have averaged a modest 2.2 percent gain this year, still lags far behind discounters, warehouse clubs and luxury retailers.

Next year, stores face bigger challenges, including rising interest rates and a softening housing market, according to Philip Zahn, an analyst at Fitch Ratings. He expects a slowdown in same-store sales.

"In the first quarter, consumers will be faced with really high heating bills," he said.

The industry will be closely watching how the new Federated will fare. Jean Coggan, a spokeswoman at Federated, declined to give details about merchandise changes, but Federated officials have said they will expand their store labels to set the company apart from its competitors. About 40 percent of Federated's current apparel assortment and one-third of its overall assortment can not be found at other stores.

Industry executives speculate that some of the labels at May's stores that duplicate Federated's will be cut.

C. Britt Beemer, chairman of America's Research Group, based in Charleston, S.C., foresees that consumers will see an expansion of home furnishings throughout the new chain, and higher quality products at the stores.

At least one supplier, ABS by Allen Schwartz, believes it will be business as usual. Lloyd Singer, president of sales at ABS - which sells $300 trendy jeans to Bloomingdale's and Macy's, as well as Marshall Field's and Lord & Taylor - noted that he doesn't see ABS's business expanding or shrinking with the new Federated.

"Because of our high prices, there are only certain number of (stores) it can be sold," he said.