No Holds Barred

By Janice Castro

This is a dangerous and potentially deadly time to be a retailer in America. The number of stores has grown at a rate far faster than the U.S. population, setting off a competitive battle as wild and unpredictable as a Wrestlemania spectacular. As the grappling gets rougher and tougher in an industry where takeovers and leveraged buyouts have become everyday events, some contestants are being tossed out of the ring and others are being dismembered or gobbled up by competitors.

The struggle has become more desperate than ever in 1988, with the five-year economic expansion losing momentum. Few economists predict an outright recession this year, but the long-running consumer spending spree is expected to taper off considerably. While consumers seem to have taken the stock-market crash in stride, they are becoming worried about the debt load they are carrying. Result: the overabundant department stores, discount outlets and specialty boutiques will be fighting ever more fiercely for consumer dollars. Says Bernard Brennan, chairman of the Montgomery Ward chain: "There's no question about the upheaval in the industry."

As sales level off, many contestants have concluded that the best way to thrive is to buy out some of the competition. For five weeks, Canadian Developer Robert Campeau engaged in a bidding battle with R.H. Macy for Federated Department Stores, a retail giant with 650 outlets, including such prestigious chains as Bloomingdale's, I. Magnin and Bullock's. Federated had tentatively agreed to a deal with Macy, which has 97 stores, but Campeau, who already owns the Allied Stores chain of 286 retail outlets in the U.S., hiked his offer. Tired of being tugged in two directions, Federated set last Wednesday as a deadline for final bids. But the two sides kept sweetening their offers even beyond the cutoff, and Federated flip-flopped between choosing Campeau or Macy.

On Friday, Federated finally announced a decision, and it was a surprise: Campeau won, but Macy came away with a consolation prize. The three companies signed an agreement in which Campeau will buy most of Federated for $6.6 billion and Macy will acquire the Bullock's and I. Magnin chains for $1.1 billion. Campeau plans to spin off parts of Federated. Filene's and Foley's, for example, have already been promised to May Department Stores. Retailing experts were relieved that the battle was over, but not altogether pleased with the outcome. Said Walter Loeb, an analyst at the investment firm Morgan Stanley: "I'm sad about the fact that a fine department-store company like Federated is being split up and decimated."

Both Campeau and Macy will now have more muscle to compete in the free-for- all engulfing U.S. retailing. The malling of America in recent years has created a glut of stores, which has been a delight to consumers but a nightmare to the shopkeepers. A study by Sears, Roebuck, the No. 1 U.S. retailer (1987 sales: $28.1 billion), showed that in the past twelve years the amount of store space in regional suburban malls has increased by 95%. During the same period, the population grew by 12.9% and disposable personal income by 40%. Management Horizons, the market-research subsidiary of Price Waterhouse, estimates that the U.S. has 40% more retail capacity than its population needs.

No wonder many store managers are forced to slash prices relentlessly. One private study indicates that 70% of all department-store sales are generated by price markdowns. Retailers generally like to sell merchandise for 40% more than its wholesale cost, but these days the margin has shrunk below 20% for many items. Says William Panschar, a professor of marketing at Indiana University: "I can't walk into a department store anywhere in the country and not feel that it's sale time all the time."

While retailers often have to cut prices to move merchandise, the cost of importing many of the products they sell, including apparel, has surged because of the fall in the value of the dollar. The result is a severe squeeze on profits. The industry benchmark for an acceptable annual profit is a 15% return on stockholders' equity. But a survey by Management Horizons of 300 large U.S. retailers showed that only 33 of them have met that minimum standard for the past three years. Some of the others may not be around a year from now. Warns K mart Chairman Joseph Antonini: "We are in a very, very overstored situation, whether in specialty shops, discount outlets or department stores. You are going to see shakeouts across the board."

Traditional department stores, in particular, are beset by big discounters like K mart on one side and specialty retailers on the other. Such large chains as the Limited clothing boutiques, Radio Shack electronics stores and Toys 'R' Us have all stolen substantial sales from department stores. At the same time, quality catalog retailers, including Land's End, the Sharper Image and Eddie Bauer, have captured a growing share of retail sales by catering to two-income couples with more money than time to spare. Foreign retailers have also entered the fray in a big way. Since 1980, for example, Benetton of Treviso, Italy, has opened more than 700 mid-priced fashion boutiques in the U.S.

Over the past few years, the competition has driven many department stores and general merchandisers out of business: Gimbels in New York City, Halle's in the Midwest, Livingston's in the West. Other retailers have been absorbed by competitors. Associated Dry Goods, for example, sold out to May Department Stores in 1986. That helped push May (1987 sales: $10.3 billion) from No. 9 to No. 7 in a ranking of the largest retailers compiled by the investment firm Bear, Stearns.

Spurred by the weak dollar, foreign companies have become some of the most aggressive acquisitors. After Campeau took over Allied in 1986, he spun off some of its divisions to other foreign firms. Australia's Hooker Corp. bought Bonwit Teller from Allied, and Britain's Marks & Spencer agreed to buy Brooks Brothers.

The tumult in the industry is beginning to change the standings of the largest retailers. Sears has held the top spot for 24 years, but K mart is gaining ground fast. Between 1983 and 1987, K mart's annual sales jumped 37%, to $25.6 billion, while Sears' volume increased only 12%, to $28.1 billion. At this rate, K mart could overtake Sears' merchandise group within two years.

It is a threat that Sears Chairman Edward Brennan, older brother of Montgomery Ward's Bernard, does not take lightly. Under Brennan, who took over in 1986, the company is beginning a major reorganization of the 8,200-member headquarters staff in Chicago. Layers of management are being reduced so that Sears can respond more quickly to changes in fashions and consumer tastes. Managers responsible for buying different kinds of products will be given more freedom to make swift decisions. Says Michael Bozic, who heads Sears' merchandise group: "We've empowered all of our managers to design the kind of organization they need to compete in their own industries." Sears says the headquarters staff will be streamlined through attrition and early retirement rather than layoffs.

Pestered by smaller specialty stores, Sears is buying up some of them. The company has taken over the Western Auto Supply chain and acquired small groups of women's boutiques and eye-care shops. Sears is also experimenting with different sales tactics in its main stores. Example: the company plans to break its custom of selling only appliances bearing its Kenmore brand name and test public reaction to the appearance of other nationally known brands at one of its stores.

Executives at K mart's Troy, Mich., headquarters are not complacent either. Though its sales have risen rapidly through the opening of new stores, profit margins have been tight. Says Art Eden, manager of a K mart in Sterling Heights, Mich.: "Every corner has a shopping center, and it's all your competition. They are up the street and down the street. If you just take a nap, you've lost it. It's as tough as I've ever seen." The company is looking for ways to lure customers into the stores. Some K marts have installed branches of First Nationwide bank. In an effort to change its cut-rate image, K mart has been refurbishing many of its stores to give them a glitzier look.

The fastest growing of all the large retailers is Wal-Mart, the discount empire built by Billionaire Sam Walton from his Bentonville, Ark., home base. Between 1983 and 1987, its annual sales increased by a phenomenal 240%, to $16 billion. That surge lifted Wal-Mart to the No. 3 spot among retailers, ahead of J.C. Penney (1987 sales: $15.3 billion), Federated ($11.1 billion) and Dayton Hudson ($10.7 billion). In the past, Wal-Mart has concentrated on rural areas and not posed much of a threat to Sears, K mart or other established chains. But now Wal-Mart is expanding menacingly into several larger cities, including a few choice locations in K mart's home state of Michigan. At the same time, Wal-Mart has opened European-style hypermarkets in Garland, Texas, and Topeka, Kans. These gargantuan stores, covering some 220,000 sq. ft., sell everything from clothing to car supplies to groceries under one roof. In response, K mart plans to open some hypermarkets of its own.

While Wal-Mart was going big-time, Montgomery Ward was taking a tumble. Bought by Mobil for $1 billion in 1976, Ward saddled the oil company with losses that exceeded $100 million a year in the early 1980s. From 1983 to 1987 Ward fell from No. 6 to No. 12 in the retail rankings as its sales declined 30%, to $4.6 billion. But in 1985 Mobil brought in Bernard Brennan to turn things around. Brennan slimmed down the company, selling its catalog operation and a troubled discount division. He transformed many of the remaining stores, filling them with attractive specialty departments. When Ward returned to profitability, achieving record earnings last year of $130 million, Mobil moved to get out of the retailing business while it could demand a good price. The buyer: none other than Bernard Brennan, who headed an investor group that agreed last month to pay $3.8 billion to take the company private.

Many smaller chains are going on expansion binges to hold their own with the big boys. Zayre, with 362 department stores, has bought or opened 750 specialty outlets, including such chains as HomeClub and T.J. Maxx. Woolworth has moved into higher-priced markets by buying such specialty chains as Foot Locker and Tennis Lady. Says Joseph Carroll, a Woolworth vice president: "We're no longer just a five-and-ten-cent store."

Many companies are enlisting technology to get a jump on competitors. To bring inventories closer into line with sales, a growing number of retailers are using the bar-code system pioneered more than a decade ago by the grocery industry. As each item is rung up on the cash register, a company computer reads the product bar code and makes a change in its inventory records. In addition, several chains, including J.C. Penney and May Department Stores, now use private satellite television networks to link their outlets so that individual stores can exchange sales and inventory data with headquarters.

While many retailers focus on keeping prices low, others concentrate on providing good service. Sales at Nordstrom, a Western chain with an exceptional reputation for attentiveness to customer needs, rose 18% last year, while profits surged 26%. Noting that success, a host of companies are making fresh efforts to upgrade service. Neiman-Marcus will spend $20 million this year to improve its gift-wrapping and other customer-service operations. Castner Knott, a Nashville-based chain, has deployed "sales specialists," who are trained to be familiar with the merchandise in large areas of a store rather than just small sections. They roam the departments looking for customers who need help. Caught in one of the worst competitive crunches in their history, at least some department stores seem to be rediscovering a time-honored truth: treat people well, and chances are they will come back for more.

With reporting by Thomas McCarroll/New York and William McWhirter/Chicago