Federated's proposed acquisition of May Department Stores not only would create the nation's largest department-store player, but potentially the largest advertising budget of a single retail brand-a whopping $1.1 billion.
With Federated expected to convert most of May's 484 stores to the Macy's banner starting in 2006, the end goal is clear: Combine the collective heft of two big media budgets and back a single, unifying brand.
"There will be an opportunity to have a national branding message," Federated CEO Terry Lundgren told analysts during a conference call announcing the merger. "Operating regional stores primarily under one brand means we can advertise nationally, unlike regional retailers, which is more cost-effective."
The move to a national branding strategy will benefit network TV and hurt an already-suffering newspaper sector. Combined, Federated and May bought $900 million in newspaper advertising last year, or 2% of the sector's total, according to a Deutsche Bank report, which predicted a $180 million cut in newspaper spending by Federated.
Analysts applauded the combo, saying it bolsters the survival chances of a retail format once deemed destined for obsolescence and gives Federated a fighting chance in a battle against discounters such as Target, Wal-Mart and Kohl's. But can a national branding campaign infuse Macy's red star with the iconic stature of Target's red bull's-eye or Wal-Mart's smiley face?
BRAND NOT THE ANSWER
"Building a brand is not the biggest challenge facing Federated; convincing shoppers to change where they shop is," according to Lois Huff, senior VP at Retail Forward, a Columbus, Ohio, retail-strategy firm. "People have abandoned department stores and an ad campaign isn't going to change that."
Ironically, the very survival of a 150-year-old retail format depends on a company that emerged from bankruptcy just 13 years ago and on a brand bought by Federated no more than a decade ago.
Despite changing consumer habits, Federated has found salvation in pinning its hopes on the Macy's brand. Under Mr. Lundgren's leadership, Federated began dismantling its longstanding dependence on newspaper advertising-down four percentage points to 81% of its total spending since 2000-shifting to spot TV. Now the move will be to network. "Absolutely, we are planning on doing network buys," said Carol Sanger, VP-corporate communications at Federated.
It's not just Federated moving away from newspaper advertising. Since 2000, May has slashed spending on newspaper advertising from 88% of the total budget to about 81%, according to TNS Media Intelligence.
In a post-May merger world, Federated changes the competitive game, but still must find a solution to the sector's growth enigma. After all, Federated's competitors spend much less on advertising. Target, the third-biggest retail advertiser in 2003, spent $573 million in media and logged three times more sales than Federated.
The merger stands to give Federated economies of scale on the advertising front. Once Federated converts May stores to the Macy's nameplate, it will operate in 64 of the nation's top 65 markets, making a network TV buy possible.
Recent organizational changes at Federated appear to support a shift. In May of 2003, CEO Lundgren created FCM (Federated Corporate Marketing) and appointed the company's first chief marketing officer, Peter Sachse. Also in 2003, after handling creative in-house, Federated hired Interpublic Group of Cos.' Lowe, New York, to help create a national image for Macy's.
Lowe created a series of vignette spots tagged "Way to Shop." In one, a driver waits for a spot in a crowded parking lot as a woman loads Macy's bags in a trunk. The shopper heads back inside, the driver throws up her hands.
As Federated shifts spending to the Macy's brand, Lowe stands to benefit. Whether the merger will prompt a review to outsource media buying and planning, now handled in-house among five regional divisions, is too early to tell, according to Federated's Ms. Sanger.
"My guess, is that they will keep it in house," said Linda Fidelman, CEO of Advice & Advisors, a New York search consultant. "Most clients don't do their own buying in-house for two reasons: They don't have the infrastructure or leverage. Federated has both."
The first agency casualty of the merger may be independent Doner. The Southfield, Mich.-based agency won an estimated $100 million chunk of May's $543 million budget in 2000, following a protracted review that consolidated media and creative duties once handled by three different agencies. Doner declined to comment on the merger's impact.