Macy's seeks national spotlight

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Imagine department store brands as a line of kindergarten boys endlessly jockeying for position. Let the wise teacher be a stand-in for the fickle consumer. She sometimes gives the last a pass to the front-just like the category's luxury to value cycle does for the sector's brands.

In 2004, luxury fought its way to first in line, with Nordstrom, the Neiman Marcus/Bergdorff Goodman division of Neiman Marcus Group and high-end Saks Fifth Ave. Enterprise division logging double-digit sales increases, the latter despite overall corporate woes at Saks Inc.

But what happens to the middle in this endless cycle of boom and bust, especially for a retail form that has been losing share every year for the last 15 years? It's an even tougher question in the aftermath of current merger mania linking Federated Department Stores with May Department Stores Co., Sears, Roebuck & Co. with Kmart Corp. and Neiman Marcus with Texas Pacific Group, an investment company.


Add in the looming reality of an over-stored retail environment and fashion trends that leave the affluent and the middle class mixing a Prada bag with flip-flops, and it's a downright confusing time to be a department store, especially a midrange one.

Federated is positioning to be just that, but on a national scale, as it adds May's 490 department stores in 15 largely heartland states in 2006. Some analysts describe this positioning as more necessity than strategy. By late January, Federated completed its conversion of 184 stores to the Macy's nameplate, bringing the brand's total store count to 432.

Federated's bet is that the midrange to upscale Macy's brand is the sweet spot in a shrinking retail category analysts say might be doomed in the long run.

But can a midrange department store be a national player? It's only been done at the lower range-Sears, J.C. Penney and Kohl's. This trio spends big on network TV buys to back their brands. And then there's Target Corp., a formidable competitor for the sector, stealing share in home goods/furnishings and apparel, not to mention Wal-Mart Stores and its latest target: upscale shoppers.

Federated's move is more about controlling media costs than brand positioning, says Phil Rist, VP-strategy at BIGresearch, a Columbus, Ohio-based consumer research company. He notes Federated is "losing all the local brands that gave people familiarity."


This reality begs the question whether Macy's with its upscale pretentions can go mass without falling a rung on the department store brand hierarchy. Consider the penetration of upscale brands: Neimens has 34 stores; Nordstrom, 151. Eventually, Macy's will have 951.

David Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking company, sees the biggest threat facing Federated as the tendency to commoditize. "As they combine and have fewer [store] brands and as they move by necessity to centralization, whether they want to or not, they will have to commoditize," he says.

For instance, instead of an existing decentralized buying model, Federated will likely create a centralized one, especially considering most of the regional brands, such as Lazarus and Rich's, are now part of the Macy's brand.

"Look for a lot less creativity," Mr. Davidowitz adds. "If you are in the fashion business, you have to be very careful. Size can work against you. When Federated breaks up all these divisions, you don't have all these executives close to the customer. There's a big risk to that."

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