Is solution in the bag?

A larger Macy's will be challenged to cater to regional tastes, but its greater influence with more suppliers could help distinguish it from lesser rivals

Con

Critics say expansion may hinder ties, loyalty

June 18, 2006|By ANDREA K. WALKER | ANDREA K. WALKER,SUN REPORTER

At some point in the past two decades, department stores lost touch with shoppers.

Federated Department Stores' plans to create a national chain under the Macy's name are not likely to win them back, critics say.

Federated is in the process of turning 11 regional department stores, including Hecht's, that it acquired for $11 billion from May Department Stores into 800 Macy's across the country. While the concept may save marketing and merchandise costs, some say it will be hard for a national operation to meet the different tastes of people across the country.

National chains in retail and restaurants have become so ubiquitous that a shopping complex in Maryland doesn't look vastly different from one in Minnesota. But some experts think there is a reason regional differences have historically been vital in traditional department stores. What works in the Midwest won't necessarily pass muster in New York. Those in the Midwest tend to like more neutral colors and bigger sizes, one analyst said.

Macy's has established divisions to handle different parts of the country. But some still believe the new operation will lack the distinctiveness and flavor that regional department stores enjoyed in communities for a century or more. The traditional regional brands may have fallen on hard times, but they clearly enjoyed a visceral connection to their communities - evidenced by shoppers lamenting their passing - that many businesses only hope to achieve.

"You're no longer close to the customer," said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm in New York. "Federated had a bigger percentage of luxury than May. The problem is, will the luxury fly in Pennsylvania? I'm not so sure."

Even those who generally support the concept say that converting customers loyal to the regional brands and keeping in tune with local tastes will be the hardest thing for Federated to conquer.

"As a national player, they may not be viewed as a local store that is part of the community," said Larry Chiagouris, associate professor of marketing at Pace University in New York. "The one thing they will have to do is make sure there are people to address the local tastes of people who live in different parts of the country. That's the only fly in the ointment."

Federated is cognizant of the challenge. At a recent news conference outside the flagship Marshall Field's store, an icon in Chicago, Chief Executive Officer Terry J. Lundgren, who also holds the posts of chairman and president, assured the crowd that his company would maintain many of the staples that made the store so venerated, such as continuing to sell the beloved Frango mints.

Macy's will have to work to shed a stigma that has bedeviled department stores in recent years as second-tier places to shop. The company will have to improve customer service, prove it can provide fresh fashions and attract shoppers younger than 35. Consumers long ago began to trade department store shopping for specialty retailers such as Banana Republic and discounters, which had trendier merchandise and smaller, more manageable stores.

The department store industry has lost billions of dollars in sales in the past decade, analysts said. Davidowitz said department stores overall have lost market share over the past 15 years.

"They all pretty much look alike, even to the fancy kitchen equipment in the basement," said Joel Goldhar of the Stuart Graduate School of Business at Illinois Institute of Technology. "Mostly, they lack a truly compelling reason for a customer to seek them out, other than a convenient location.

"Perhaps [Macy's plan] is a good strategy for cost leadership and economy of scale, but not, in my humble opinion, one that will lead to sustained superior profitability," Goldhar said.

Exclusive offerings

The company is well aware of the problems and has a strategy to make the shopping experience more enjoyable, said Macy's spokesman Jim Sluzewski. The company will add services such as eyebrow waxing and increase the amount of exclusive merchandise, which makes up about one-third of its selection now.

Its capital budget to upgrade the stores is $1.6 billion, double or triple the amount in previous years. The goal is to make the stores brighter, cleaner and more open. Space between fixtures is being widened so a stroller can fit between more easily, and the home department will get upscale buggies to cart merchandise more easily.

Federated projects it will take three years to remodel 70 percent of the old May stores.

"Our goal is to provide newness and excitement for the customer that we haven't seen before," Sluzewski said.

Still, many malls no longer rely on department stores to fill key anchor positions. Instead, developers are turning to retailers such as Target, Wal-Mart and Best Buy.

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