Tuesday, February 14, 2006

In retooling May, Federated could reinvent a retail genre

Lisa Biank Fasig
Cincinnati Business Courier

Federated Department Stores, in a bid to improve colorless sales at the roughly 375 locations acquired from May Co., will spend well north of $100 million to shift inventories, expand private labels and renovate those stores.

The strategy, detailed in a recent conference call with analysts, will involve the rollout of an estimated $2 billion worth of Macy's private labels to all May stores, as well as the introduction of some of May's brands to Macy's stores. Tens of millions of dollars will be invested in store improvements, including a complete "reinvention" of 45 May stores this year to include the addition of price checkers, shopping buggies and more spacious dressing rooms.

In the end, Federated will operate more than 810 Macy's stores, all of similar design and content. In essence, it is practically inheriting the entire category.

But the main goal is not simply to make the May acquisition a success, observers said. The objective is to keep Federated alive while it literally changes, as a coast-to-coast chain, our long-held expectations of what a department store is.

"It's a question of getting market share back for every single department store that they own," said Cynthia Cohen, president of Strategic Mindshare Consulting, a Miami-based consumer marketing adviser. "Because if you look at the history over the last decade, certainly over the last five years, they've lost share."

And for what, if not snappy INC sweaters and select Tommy Hilfiger jackets, will shoppers come into the door? Lower costs can improve profit, but top-line growth -- the value of the receipts in the register -- are what drive it.

This became clear Jan. 26 when Karen Hoguet, Federated's chief financial officer, outlined in detail plans for merchandising and reinventing the stores Federated has acquired from May.

"One of the biggest opportunities of this acquisition is to accelerate the sales performance in the former May Co. stores," Hoguet told analysts. "To do this, we are making significant changes to the assortment, and we are trying to make the changes as quickly as practicable."

Federated declined to be specific about the cost of the programs. But spokesman Jim Sluzewski said a "significant" portion of the $1 billion to merge the companies over the next three years will be earmarked for merchandising and store reinvention -- it is safe to estimate more than 10 percent.

A key part of the plan is an extension of Federated's "reinvent" strategy, a program to improve the shopping experience at Macy's that began its rollout in 2002. Key factors of the plan include wider aisles, wands that can check prices, improved store signage and waiting areas with televisions outside the dressing rooms.

Federated reinvented more than 250 Macy's stores and plans to do the same at May stores. In the next three years, Federated expects to reinvent enough May stores to represent 70 percent of its total sales volume.

But that might not be enough. While the reinvent strategy has been a success in improving the shopping experience, it has not distinguished Macy's as a brand among shoppers, said Mike Bills, managing director at Fitch, a global retail consulting and design firm.

"What does the brand stand for emotionally, what is it about that brand that makes me want to adopt it as a lifestyle?" Bills said.

This emotional tie is especially important, he said, because along with inheriting the department store category via May, Macy's also inherited diminished expectations among consumers.

Federated is loathe to share any measures of the reinvent strategy's performance. But the company has said that from 2002 to 2004, it slotted about $100 million annually for the reinvent initiatives.

"We know that there is a return on investment, otherwise we wouldn't be investing in reinvent," Sluzewski said.

The single most important factor of reinvent is Federated's merchandise, an increasing amount of which is one-of-a-kind. About one-third of Macy's 2004 sales of $13.6 billion was generated from merchandise that is exclusive or of limited distribution. That's up from about 25 percent in 2003.

Private label goods, such as INC, Alfani and Charter Club, make up 18 percent of that figure, or $2.3 billion. The balance is exclusive merchandise provided by national vendors such as Tommy Hilfiger.

By adding the May stores, Federated expects in the next year or two to nearly double sales of its private labels and to increase their percentage of total sales to 20 percent. Those goods will replace much of May's private label products. Only two of May's private label brands -- John Ashford and Karen Scott -- will be introduced to Macy's stores, and they are not as strong performers as Federated private labels, observers said.

"They certainly don't have the reputation in private label that Federated and Macy's have," said Annette McEvoy, president of A. McEvoy Specialists, a New York retail consultant. INC, for instance, is the largest private label in the world, she said.

And if Federated puts the marketing force behind Karen Scott and John Ashford that it has behind its own brands, sales should grow exponentially, sources said.

Meanwhile, Federated expects to forge more exclusive deals with merchandise vendors. Macy's will be so big that it could buy a full run of product, Sluzewski said.

"We're in a position," he said, "to take a vendor's entire volume."

That is certainly a new model for a department store.

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