More Muscle for Macy’s: Federated Rebranding Builds $13.5B Chain

NEW YORK — Macy’s is about to become a $13.5 billion, 423-unit national chain — and, if Federated has its way, it will become known as “America’s department store.”

In one of the biggest reshapings of the U.S. department store landscape in years, Federated Department Stores Inc. said Monday that it will convert all of its units — save Bloomingdale’s — to the Macy’s nameplate in January 2005, eliminating such venerable retail logos as Rich’s, founded in 1867; Lazarus, since 1851; Burdines, 1898, and The Bon Marche, which dates back to 1890.

The 184 stores converting to Macy’s will join the 239 department stores already operating under that name in the U.S., as well as in Guam and Puerto Rico.

The move is primarily geared toward strengthening marketing and cutting some of those costs. But the rebranding should give Macy’s significant added muscle in buying, building exclusive merchandising arrangements with vendors and private label development. Federated’s private brands include labels such as I.N.C., Tasso Elba, the Hotel Collection, Alfani and Charter Club, already sold in different divisions.

The Macy’s switchover will not lead to any layoffs or organizational changes, and the fashion buying would continue to be done regionally to ensure the assortments are tailored to regional and climactic differences, said Terry Lundgren, Federated’s chairman and chief executive. He added that each division still has to execute its own marketing calendars, requiring regional teams to stay in place.

Federated already has centralized its home buying operation by assembling an organization of just fewer than 300 people at 11 Penn Plaza, which buys home products for all of Federated stores, except Bloomingdale’s.

“There are unique reasons for doing this in home,” Lundgren said. “The product is not differentiated in the home. It’s the same product in Macy’s and Rich’s and Burdines. Basically, we buy the same product and we were competing against national chains in home furnishings. The only way to have differentiated product is to step up to the plate and buy a substantial amount of units, so it works favorably for the manufacturer, and retailer, as well.”

But Lundgren said that the fashion buying would not be centralized. “We buy apparel products very differently by market.” It’s something that traditionally has distinguished Federated from other department stores, and that “represents a clear, competitive advantage for us,” Lundgren added.

Federated has a track record of converting regional operations into Macy’s. During the past two decades, Bamberger’s, Abraham & Straus and, more recently, Stern’s, all were largely changed to Macy’s, with a few of those sites becoming Bloomingdale’s. With its 423 units, Macy’s is still far smaller than the nation’s three largest department store chains, Sears, Roebuck, with 870 department stores; J.C. Penney, with more than 1,000, and May Department Stores, with 497.

About a year-and-a-half ago, Federated started to phase in hyphenated logos in its three regional operations, beginning with the Rich’s/Lazarus/Goldsmith’s division based in Atlanta, then the Seattle-based Bon Marche division a year ago and the Miami-based Burdines chain six months ago. Currently, the stores are called Rich’s-Macy’s, Burdines-Macy’s, Lazarus-Macy’s, Goldsmith’s-Macy’s and The Bon-Macy’s. Those nameplate extensions, while cumbersome, were geared to get shoppers around the country accustomed to the Macy’s name and ease into the transition.

While those changes have been widely regarded as a prelude to dropping the regional names entirely in favor of Macy’s, which was founded in 1858, Lundgren said Monday, “This absolutely was not planned.

“In fact, I said from the very beginning that I would let the customers decide. This was done through research and not arbitrary decision-making. We hired research agencies to help us to talk to consumers about this, and tested for a year-and-a-half” in the Atlanta, Memphis, Florida and Seattle markets.

“There was a point where I was strongly considering that the hyphen strategy would be enough, and take us the distance and, frankly, we had some reaction,” Lundgren said. “There was a percentage that was against and a percentage that was supportive.

“But we later went back into those markets and retested the name change. In this case, the very large percentage was either neutral or in favor of the idea.”

In January 2003, when Federated said it would use the Rich’s-Macy’s logo, Lundgren acknowledged some customers would be sad, at least temporarily, to see the Rich’s nameplate disappear. “We’re being sensitive to that,” Lundgren said then. “Change for people is a little uncomfortable. The real test is in terms of consumer response and we’ll understand that a year from now.”

“We view this as the natural progression in a process Federated started in late 2002 when it began hyphenating its regional nameplates,” said Shari Schwartzman Eberts, an analyst with J.P. Morgan Securities, in a research note. “We see the announcement as a positive as Federated continues to leverage its strong brand names nationwide; the move is likely to result in minor cost savings over time, but the real upside could be on the top line as marketing and the power of its exclusive merchandising improves.”

With the switchover, Bloomingdale’s and Macy’s become the only retail nameplates under Federated’s wing, unless the company decides to buy another retailer. Lundgren reiterated the Federated stance that the company is open-minded about exploring acquisitions and does that on a regular basis.

“We look at everything,” he said. “We are very disciplined in our approach. We walk away from substantially more than we transact. Obviously, we have been an acquirer in the last several years, with the acquisitions of Macy’s and Broadway, in 1994 and 1995, and Liberty House, in 2001.” Federated also bought Fingerhut in 1999, but ultimately sold off its assets, in the end losing millions on the deal.

As a result of the Fingerhut debacle, the company is very cautious with acquisitions. As Lundgren said, any acquisition “has to be a good fit, must add value to Federated and must make financial sense….When that all comes together, we certainly become interested.

“But we are also in a position where we really don’t have to buy anything,” Lundgren added. “We have got a very solid business plan,” which he said largely revolves around “the headquarters strategy” to maximize the Macy’s brand.

With Macy’s as well as Bloomingdale’s, Federated has been trading up and dominates the better department niche on the East and West Coasts. However, the company lacks stores in much of the Midwest, and does not operate in the discount or luxury arena, though Bloomingdale’s does sell some designer goods in a handful of markets.

Federated was an active player in the bidding for Marshall Field’s earlier this year, but lost out to May Department Stores, which purchased Field’s for $3.2 billion from Target Corp.

Federated also has reportedly examined Barneys New York, but its interest is said to be in a couple of Barneys locations, such as in Beverly Hills and Chicago, for Bloomingdale’s rather than in the Barneys name itself. However, Barneys is not looking to be sold off in pieces.

Federated and May Department Stores have held merger talks from time to time, though price and leadership questions reportedly have been stumbling blocks. There also has been speculation that Federated is interested in acquiring Dillard’s, but there is no indication the Dillard family is interested in selling its controlling interest.

Other regional department store chains could be targeted, such as Bon-Ton or Boscov’s, but those stores operate in smaller or secondary markets, whereas Federated units tend to anchor major urban areas.

With only Macy’s and Bloomingdale’s left in the Federated fold, the corporation could decide to move into a different retail sector, such as the specialty arena, or a different price zone by seeking a higher-end chain or a discount chain that would not overlap with existing operations. In a sense, Federated already is getting more specialized by recently opening Bloomingdale’s Home stores, and earlier this year, Bloomingdale’s SoHo, where the assortment is skewed to contemporary and bridge offerings. Both formats are considered roll out vehicles.

As far as going lower priced, Lundgren responded: “We had the discount model in the past with Stern’s, but we didn’t view that as an opportunity for growth. We felt that lane was fairly crowded.” In the Eighties, Federated also operated the Gold Circle discount chain which was discontinued and started up an off-priced chain called Main Street, which Kohl’s took over.

With Macy’s and Bloomingdale’s, “We have two lanes covered that we believe represent the core of the department store business. Bloomingdale’s is positioned solidly well above Macy’s and intentionally positioned below Neiman Marcus.” Bloomingdale’s does just over $2 billion in sales, and operates 33 stores, including the home units.

“Macy’s has been gradually trading up to higher quality products to position ourselves as America’s department store. We think we can accomplish that.”

By focusing on Macy’s and Bloomingdale’s, two of the world’s best-known retailers, Lundgren said the corporation will deliver “distinctive, consistent and far-reaching marketing initiatives blending the national reach of Macy’s with the hometown values and service for which its regional stores are known. This is what we mean by bringing our customers the best of both worlds.”

Specifically, he said that by extending the Macy’s name, Federated will be able to launch a new national Macy’s customer loyalty program with new offers for more consumers, but he declined to give any details.

He also said that more customers will have access to “an enhanced” national Macy’s gift and bridal registry, and that Federated will accelerate next year its “reinvent” initiatives which entail renovations and adding amenities and technologies for faster and easier shopping, including automated price-check devices and shopping carriers, enhanced fitting room environments with lounges and bigger, easier-to-read signs and directories, lounges, and livelier sections for juniors and other youth-oriented categories.

Shopping bags, packaging, and signage will be enhanced by the Macy’s strategy, since the buy for such collateral materials in marketing, visual and credit will be grouped together enabling cost savings and product upgrades.

Lundgren also said that the look of advertising will be cleaner, with a shorter tag line. No longer will the company have to list all of the regional names in its ads, which blocked much of the photography.

“There are a lot of positives that will come to the consumer,” Lundgren said.

The company expects to install new Macy’s signs on the exterior of its stores beginning in January, a process seen taking several months. The Macy’s logo will begin appearing in store advertising in late January, while internal store signage and shopping bags, customer credit cards and employee nametags may begin displaying the Macy’s nameplate somewhat earlier, the company said. Expenditures for these changes will be absorbed by Federated’s annual $600 million capital budget. The company expects that incremental transition expense will be immaterial.

Lundgren cited another key advantage to the Macy’s change over. When stores open in new markets, outside the reach of the regional operations, it makes sense to utilize the more widely recognized Macy’s name than any of the other names. “We really couldn’t grow Rich’s and Burdines,” outside their existing markets, Lundgren observed.

He said the strategy is to open between three and six department stores annually for the foreseeable future, and close a couple of stores each year.

A few years ago, Macy’s dropped its national catalogue. Asked if Federated might revisit the strategy now with the name getting rolled out, Lundgren flatly said, “No. [Catalogues] is not a growing channel for distribution. Consumers are more apt to respond to the macys.com business that has been growing nicely for us. That’s where I think the future is.”

In its second quarter ended July 31, Federated’s income dropped 35 percent to $78 million while there was a 3.3 percent sales gain. The company was cited by analysts as being a very well run, strategic company that takes market share from the competition, in part by elevating the merchandise with somewhat higher prices and more full-price selling, boosting private labels, and managing inventories well.

As Robert Buchanan of A.G. Edwards, wrote in his note at the time, “We like the job being done these days by Federated ceo Terry Lundgren.”