Consolidation Fever: Which Store Logos Could Vanish Next?

With earnings reports trickling in this month, rumors of retail consolidation have resurfaced. The latest: a merger of Federated and May Co.

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"I think we are still at a zero sum game," said Kathy Yohalem, principal of Tait Advisory Services LLC. "Retail just came off a year that was not that good. Secondary and tertiary stores in key cities are having a real tough go of it. What are their reasons for being? You are going to see more consolidation. They have got to be looking at their doors and seeing how profitable each is."

According to Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates: "Consumers are not being stimulated to buy enough to keep all the retail square footage and infrastructure costs manageable. Logically speaking, mergers and acquisitions is a rational vehicle for matching waning consumer demand with existing retail capacity, and the stock prices are fairly depressed, which might make things easier to buy. However, questions about who acquires who, who gets what job — those human things — sometimes create bottlenecks."

Aronson suggested a major merger is unlikely in the immediate future. "There will be more consolidation and major consolidations in the next two years. Most of the incremental profitability that department stores have comes from one-time, nonrecurring mergers, either acquiring outside companies or merging internal divisions. That path will probably be continued."

The most recent consolidations include Kaufmann’s into Filene’s at May Co., and Macy’s and Rich’s at Federated.

Dillard’s, which has been pruning locations, would be a good buy for Federated, considering there isn’t too much geographic overlap. Dillard’s strength is in Texas, Arkansas, Mississippi, Louisiana and Alabama, whereas Federated’s strengths are on the East and West Coasts.

However, at Dillard’s, a family-run business, pride runs high, lessening the possibility of a sale of the business. The same is true at Belk’s and Nordstrom. All three chains have recently been struggling with sagging sales and stock prices. "While their stocks are really low, they don’t want to capitulate," said one market observer. "And why would anyone want to take on their problems?"

Ross Nussbaum, retail real estate analyst for Salomon Smith Barney, gave another good reason for further consolidation. "Having four or five department stores at a mall that essentially sell the same thing, over time, they just will not be able to compete against each other and it’s survival of the fittest."
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