Department-Store Superstar

By Dody Tsiantar

For 127 years, shopping on Chicago's State Street meant one thing: Marshall Field's, the hallmark department store that has stood at that address since the White Sox were the White Stockings. Come September, the store's new parent, Federated Department Stores, will rechristen it Macy's, and loyal Marshall Field's customers are both angry and genuinely sad. "For some chain to come into Chicago and think we're New York is totally misguided," says June Cuci, 48, who has been shopping at Field's since her childhood. Even film critic Roger Ebert lamented the loss. "I thought the day would never come," he wrote. "I am looking at my Field's charge card, which I just cut up into tiny pieces. They look like little tears the color of money."

Sentimental shoppers will have a lot to cry about in the coming months. With the merger last year between department-store chains Federated and May, 78 stores are going to close. But Macy's, with its name attached to more than 800 stores, will soon expand as big as a balloon in its Thanksgiving Day parade. The majority of the hometown retailers owned by May, including Marshall Field's, will be converted to the Macy's nameplate this fall, among them Kaufmann's in Pittsburgh, Pa.; Filene's in Boston; Strawbridge's in Philadelphia; Foley's in Houston; Famous-Barr in St. Louis, Mo.; and Robinsons-May in Southern California. Federated has already renamed South Florida's Burdine's, Bon Marche in the Northwest, Rich's in Atlanta and Lazarus in Ohio. Only May's Lord & Taylor chain has retained its name--and it is up for sale.

It is all part of Federated CEO Terry Lundgren's plan to make Macy's a truly national department store. "This hasn't been done before," Lundgren told TIME. "Macy's is a great brand that has never been maximized to its full potential." After decades of bankruptcies, closings and consolidation in the industry, Macy's may soon be the last traditional, mid-priced mall-based American department store standing. Its future matters not just to Federated shareholders but also to a $100 billion chunk of the retail economy. Everyone from fashion designers to cosmetics companies to small-town malls is praying that Lundgren's strategy works. Department stores have struggled for years: they've cut service, cut prices, cut inventory and still lost customers to cheaper (Wal-Mart) or more stylish (Kohl's, Target) discounters and to specialty stores (Nordstrom) with top-end service. Millions of Americans, especially in the nation's midsection, will soon have their first chance to shop at Macy's. The company now has to give them a reason to do so.

In many ways, the $17 billion Federated-May merger is the logical evolution of decades in which the industry failed to respond to customer complaints that department stores were boring, the service nonexistent and the merchandise ubiquitous without being interesting. "Department stores have lost sight of their customer. It's that simple," says Janet Hoffman, a San Francisco--based retail strategist for Accenture. Sales tumbled, and chain after chain of historic, family-owned retailers--Gimbels, Woodward & Lothrop, Wanamaker's, Montgomery Ward--closed their doors or were swallowed up by stronger companies. In 1980, about 35 major department-store chains were in business; today there are only 13. The merger is the category's last-gasp effort to save itself. "It represents the best chance to stop the decline of the department-store channel," says Liz Claiborne CEO Paul Charron.

Macy's first advantage is size. "It's now got the potential to be a Godzilla," says David Wolfe, a fashion retail consultant for the Doneger Group in New York City. Like Wal-Mart in the discount world, Macy's will wield a big and powerful roar that gives it leverage to get the best prices and exclusive products from vendors. But the recent history of retail suggests that size alone may not work. The most successful retailers have found their footing by focusing on one slice of the market. Luxury purveyors like Neiman Marcus, Nordstrom and Bloomingdale's (the only other brand that will stay in Federated's portfolio) have boosted profit margins by catering to the affluent. Discounters like Wal-Mart and Target have captured the bargain hunters. The stores that tried to appeal to a broad middle-income audience, as Macy's hopes to, have struggled. Former No. 1 retailer Sears merged with former No. 1 discounter Kmart to try to right two listing ships. Saks, a luxury icon suffering from mismanagement, misfired in its attempt to go down-market and has put its more lowbrow 40-store Parisian chain on the block.

For a retail Godzilla to perform that delicate merchandising dance, Macy's must use its marketing skill and purchasing muscle to manage a distinctive yet reasonably priced line of products and sell it in stores that, well, aren't exactly famous for their excitement. "It's easy to put names on all those doors," says consultant Wendy Leibmann of WSL Strategic Retail. "But the big challenge is to create a compelling retail environment."

Lundgren, a retail veteran and onetime CEO of Neiman Marcus, wants to do that by changing the look and feel of department-store shopping. On his agenda: broader aisles (managers will be assigned 32-in. rulers or measuring tapes to make sure they leave at least that much space), less cluttered departments (15% of display racks will be removed), upgraded fitting rooms (with plasma-screen TVs in the waiting area), stores that are easier to navigate ("way finding" signs will guide shoppers) and more help looking up prices (at least 35 bar-code readers in every store). The changes may sound cosmetic, but Lundgren hopes they will distinguish Macy's from its competitors: Macy's would offer high fashion without high prices but in a more chic and comfortable setting than that typically found at a discounter.

The trickiest maneuver will be balancing fashion merchandising with regional tastes. Macy's needs to include national brands like Tommy Hilfiger and Ralph Lauren to pull in traffic but in a mix that will appeal to customers on a local level. "What fashion means in Miami is quite different from Atlanta," Lundgren says. Federated has set up seven new buying offices in different cities to merchandise locally and has installed a national logistics database that allows buyers to distribute merchandise more efficiently; slow sellers are marked down, and popular items are restocked faster.

The aim of having more of the hottest merchandise on hand, of course, is to convince shoppers used to a steady diet of Macy's one-day sales that there's value in paying full price too. "Will they be able to wean the customer off the sale heroin? It's not going to be easy," says retail consultant Cynthia Cohen, president of Strategic Mindshare. To earn that premium, retail consultants say Macy's has to offer more merchandise that shoppers can't get anywhere else. Private labels like Charter Club and INC already make up about 18% of Federated's sales. Deborah Weinswig, a financial analyst with Citigroup, says shoppers are likely to find more of that kind of merchandise in the months to come. The strategy has worked well for J.C. Penney. That chain, pegged to a slightly lower income demographic than Macy's, goosed its third-quarter profit 17% with lines that are only available at Penney, like Nicole Miller dressy-casual women's wear.

The danger is that Macy's will oversaturate its stores with merchandise that is exclusive but still unexciting. "Consumers don't want to go and find the same thing at every darn store," says Pam Danziger, president of Unity Marketing. Steven Keith Platt, head of a Hinsdale, Ill., retail think tank, the Platt Retail Institute, expects Federated to make deals with several well-known apparel and housewares makers to create products that consumers will find only at Macy's. Lundgren says he has already received at least half a dozen such offers but hasn't inked any deals yet.

With Macy's turning a more careful eye to fashion, fear is running rampant among suppliers. Those who filled the racks at the more down-market May department stores are in real danger of getting squeezed out of Federated's pool of thousands of suppliers altogether. Marshal Cohen of NPD Group, a marketing-research firm, anticipates that a vendor that sold only to May stores has a "1 in 100 chance" of being selected by Federated. Of course, the change will benefit the companies that fit into Federated's strategy. Barry Miller, president of sales for $50 million high-end hosiery maker Hot Sox, figures he will sell his products in 150 more stores than he did before the merger. Even the big guys are worried. Says Liz Claiborne's Charron: "I'm concerned too. I have to be." The CEO of the $4.6 billion company estimated $50 million in lost revenue annually from the stores that Federated will close. Charron says the uncertainty is "a bit like navigating the North Atlantic," but like many other companies, Liz Claiborne is shifting its focus away from department stores. It now sells its 40 brands overseas, has an online presence and runs its own stores.

Mall developers are also scrambling to figure out how to fill their big, empty boxes when the lights go out in those 78 stores. They have relied on department stores as anchor tenants to attract shopping-center customers. To replace their lost Federated-May stores, landlords are renegotiating leases with other department-store chains, national retailers like Barnes & Noble and Best Buy and even with cineplex owners and restaurateurs. "The definition of an anchor has gone well beyond the boundaries of what it used to be," says Ross Glickman, CEO of Urban Retail Properties, a Chicago real estate company that manages 50 million sq. ft. of retail space. One developer, the Gordon Group in Greenwich, Conn., wants to reshape empty department-store space into a mall-based bazaar, called Epicenter, for online and catalog retailers that otherwise have no physical stores.

Cosmetics companies such as Estee Lauder and L'Oreal, among the biggest suppliers to department stores, also see an upside to the merger. They may lose some of their sales volume from the closed stores, but they believe that Macy's new national marketing push will allow them to streamline their marketing messages. Macy's, for example, will for the first time be able to advertise its own stores during the nationally televised Thanksgiving Day parade. Cosmetics companies, in turn, can do national ad campaigns instead of running multiple promotions in multiple markets. Says Dan Brestle, Estee's chief operating officer: "The branding of Macy's can only help us." Edgar Huber, president of the luxury-products division of L'Oreal-USA, says, "Now that department stores have a clear strategy, they'll be able to bring magic back into their stores."

If only it were as easy as waving a wand. What Macy's is attempting is more than just a shift in strategy. The company is, in effect, trying to fix everything that's been wrong with department stores over the past 20 years, and it is trying to do it all at once, all over the country, without digging itself into debt. "It's quite a mountain climb," says fashion consultant Wolfe. If Macy's can get to the top, it may not matter what nameplate is above the door. [This article contains a table. Please see hardcopy of magazine.]

MINDING THE STORE Federated's growth has been relatively flat compared with most other retailers' Sales per square foot 2002 2003 2004 Nordstrom $337 $343 $370 Kohl's $247 $232 $221 Saks $172 $176 $190 Federated $185 $182 $188 J.C. Penney $136 $140 $148

Source: Company reports and Citigroup estimates

With reporting by Eric Ferkenhoff/Chicago