Bon-Ton doubles its size buying Carsons, 4 other chains from Saks. Now it has to secure shopper loyalty.
By Mary Ellen Podmolik
Special to the Chicago Tribune
CHICAGO - With its acquisition this week of Carson Pirie Scott & Co. and four other department store chains, Bon-Ton Stores Inc. finds itself sitting squarely in the middle.
The $1.05 billion deal more than doubled Bon-Ton's size and increased its name recognition on Wall Street as well as its negotiating leverage with vendors.
But on one side sits a competitor like Federated Department Stores, the parent of Marshall Field's, which will soon be renamed Macy's. And on the other side are such value-oriented retailers as J.C. Penney, Kohl's and Target, which are putting better merchandise and designer brands into their stores.
Still, Bud Bergren, Bon-Ton's president and chief executive officer, says his company is no sitting duck.
"The middle market is still very strong," Bergren said. "They always talk about the mass merchants and the luxury merchants. It's not a fast-growth story that a lot of people like to talk about. There's becoming fewer of us in that middle market, so the competition is shrinking."
There are fewer players but they are healthy, well-regarded chains. And while financial analysts like to talk about the potential cost reductions of the merger, industry observers say Bon-Ton's challenge will be to maintain the loyalty of existing Carsons customers and quickly reach out to new ones.
"The interesting story that may or may not unfold is whether as Federated upscales and homogenizes and Macy-izes, whether there is a window of opportunity for the regional department store that knows how to focus on the regional market," said Peter Siris of Guerilla Capital Management, which holds shares of Federated and Bon-Ton.
"There will be people who say I'm going to give my local store a shot. Then it's really a question of implementation. This will be a fascinating test to see whether people will give the No. 2 store who makes noises about being a local a shot," he said.
But no sales improvement is expected overnight. In announcing its fourth-quarter and annual earnings on Thursday, Bon-Ton executives said they expect sales for Carsons and the other chains acquired from Saks Inc.--Boston Store, Bergner's, Herberger's and Younkers--to be flat in 2006 as the chain tinkers with merchandising lines during the integration process.
For 2005's fourth quarter, Bon-Ton reported net income of $38.2 million, or $2.30 a share, compared with net income of $26.8 million, or $1.65 a share, in the prior year's period. For the year, net income totaled $26 million, or $1.57 a share, versus $20.2 million, or $1.24 a share, in net income in 2004. The results did not include financial data from the former Saks' stores.
Fourth-quarter sales rose 0.3 percent to $464.6 million while annual sales dropped 1.8 percent to $1.29 billion. Sales in stores open at least a year slipped 1.6 percent for the year, making 2004 the only year in the past five that comparable-store sales increased.
Much of Bon-Ton's competition last year came from fast-growing Kohl's, which opened 28 stores in markets where Bon-Ton operated either Bon-Ton or Elder-Beerman stores. Historically, Kohl's stores have been much more productive than Bon-Ton's. In 2004, sales per square foot totaled $255 at Kohl's and $135 at Bon-Ton.
Now with the acquisition of Carsons, Bon-Ton is propelled into its largest metropolitan market, one where consumers are more ethnically diverse, expect more updated merchandise and have a plethora of shopping choices. Carsons operates 25 department and furniture stores in the Chicago area.
This isn't the first time Bon-Ton has undertaken an integration. In 2003 the then-72-store chain completed the acquisition of Elder-Beerman, a Dayton, Ohio-based regional department store chain with 68 locations. Bon-Ton achieved a greater-than-expected $25 million in cost savings from the integration but acknowledged that its zeal to wrest savings cost it some sales.
"You have to count on the fact that they know what they're doing on an operational level," said Kurt Kroger, a portfolio manager at Sterling Johnston Capital Management Inc., which owns shares of Bon-Ton. "It's not risk-free but if they do it and it works right, it's the type of stock that can double."
Bergren's strategy is the same as other retailers: Set his stores apart from the pack. That means increasing the amount of private-label goods and working with vendors to obtain exclusive merchandise for the stores. "Not too long ago, you'd go into a mall in Chicago and you'd find the same product in all four stores," Bergren said.
Maureen Costello, a personal image consultant in Lake Forest, could not agree more. "There is room for a Carsons in the mix, but I don't see it as a top-of-mind selection. There's not much to distinguish them. ... The market is muddied and if it seems muddied to professionals like myself, it's going to be muddied to the consumer."
To also broaden its reach, Bon-Ton plans to expand its Internet strategy to the new nameplates under its tutelage. Since last fall, shoppers of Bon-Ton and Elder-Beerman have been able to make purchases online, but only of select items. For instance, women looking to buy a pair of jeans on Bon-Ton's Web site have eight choices. Meanwhile, the Penneys Web site lets women shop for jeans by fit, cut or style. Penneys' Internet sales rose 32 percent in 2004, the most recent year in which information is available.
Bon-Ton also will look at enhancements to Carsons' loyalty programs for its credit card holders. Currently, 45 percent of purchases at the former Saks' stores are made with the proprietary credit card. That compares with 52 percent at Bon-Ton.
Not only does it have more levels of perks, under Bon-Ton's program, credit card holders don't have to clip and bring in coupons featured in ads. Instead they are automatically deducted at cash registers.
The end of coupon cutting would be good news for Naperville resident Susan Pankow, a 10-year Carsons customer.
Pausing as she scoured the designer-apparel sales racks at the State Street store last week, Pankow said that while she likes the brands and products carried by Carsons, what keeps her coming back is the chain's community involvement via various partnerships with non-profit organizations.
But downstairs by the racks of purses, Diane Arends of Batavia admitted she was only in Carsons because she had a gift card. She's a loyal Field's and Nordstrom shopper and is keeping her mind open about Field's changeover to Macy's.
"I haven't found that the quality is up to snuff," she said of Carsons. "I would come here for generic things: a wallet, underwear maybe."
Still, Bon-Ton executives and industry analysts say Bon-Ton has a chance to change the minds of consumers like Arends. "The real business opportunities they have is the Federated integration is going to be difficult," said Marie Driscoll, a retail analyst for Standard & Poor's Corp.
Federated will rebrand some stores and alienate customers in the process, she said. "Those customers are going to be looking for someplace else to go."