Retail Opportunity Seen in Federated-May Deal

By Leslie Earnest and Roger Vincent

March 1, 2005 12 AM PT

Times Staff Writers

Southern California could be on the verge of becoming a big petri dish of retail experimentation.

To avoid buyer’s remorse, Federated Department Stores Inc., which announced its plans Monday to buy May Department Stores Co., would have to take a hard look at all of its real estate holdings and decide what to keep, what to switch and what to ditch.

And Southern California, where there are 28 shopping malls with stores owned by both companies, could be the ideal testing ground for the latest episode in the great department store industry consolidation.

In fact, in some ways it already is.

At South Coast Plaza alone, there are a Macy’s for women and children, which was once a Bullock’s; a Macy’s for men, also a former Bullock’s; and a Macy’s home furniture store, where there used to be a Broadway. There’s also a large Robinsons-May that was recently renovated.

What will happen at South Coast Plaza if the $11-billion acquisition goes through? Right now it’s anybody’s educated guess.

Unless shareholders or antitrust regulators object, Federated, parent of Macy’s and Bloomingdale’s, will also own the Lord & Taylor and Marshall Field’s brands and the Robinsons-May and other regional chains. Most of the stores in the latter would probably eventually be given the Macy’s name.

Some stores are bound to be closed, analysts said, which could help two Arkansas retailers that have been struggling to expand in Southern California: Bentonville behemoth Wal-Mart Stores Inc., which has found some parts of California about as welcoming as a brier patch, and Little Rock-based Dillards Inc., which has stores in Stockton, Palmdale and El Centro.

Dillards has been “blackballed” by Federated and May whenever it has tried to wedge itself into a Southern California mall, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. But if Robinsons-May or others are shuttered, Dillards may finally be able to swoop in.

Westfield Group of Australia -- which operates Westfield Shoppingtown West Covina and seven other Southland malls -- has the biggest exposure to big changes because 22% of its malls include stores owned by both Federated and May, said analyst Greg Andrews of Green Street Advisors in Newport Beach. Westfield executives couldn’t be reached for comment.

Santa Monica-based Macerich Co., which owns Santa Monica Place and the Oaks in Thousand Oaks, and Simon Property Group Inc. of Indianapolis, which owns eight malls in the region, including the Shops at Mission Viejo and Brea Mall, have both Federated and May stores at 18% of their properties.

“In most cases, the malls that have both a May and a Federated are high-quality malls,” Andrews said, “so there should be good potential for that real estate.”

A mall owner can respond to the loss of a department store tenant in a host of ways, including finding a new anchor and tearing down the vacated building to create outdoor main-street style additions focusing on restaurants and entertainment. Potential replacements include Sears, JCPenney, Nordstrom and Costco, said Art Coppola, Macerich’s president.

But at Santa Monica Place, where there is a Robinsons-May and a Macy’s, Macerich “would be better off” with one fewer department store, Coppola said. Last fall, Macerich announced plans to level that mall and rebuild an outdoor facility anchored by the two stores.

At Fashion Island in Newport Beach, the new Federated might close the Macy’s store and shift its operations into a larger Robinsons-May that is a short stroll away, Kyser speculated. (Fashion Island also has two Bloomingdale’s stores, one selling apparel and the other home goods.) Executives with Irvine Co., which owns Fashion Island, declined to comment.

Nordstrom Inc. has 18 stores in Southern California and plans to open one at the Irvine Spectrum this year. The firm’s primary barrier to further growth has been the availability of desirable locations, said President Blake Nordstrom in a recent conference call with analysts.

“We remain hopeful that ongoing industry consolidation will result in additional real estate opportunities,” he said at the time.

There’s already a Nordstrom at South Coast Plaza. So if Federated were to replace the Robinsons-May with a higher-end alternative -- a Bloomingdale’s, for example -- that might help South Coast Plaza rivet attention on its target customers: the well-heeled.

“That’s really an opportunity for the Segerstroms,” said shopping center consultant Gregory Stoffel, referring to the family that owns South Coast Plaza. “They’re just really zeroed in on that upper-end customer.”

South Coast Plaza executives declined to comment.

Federated said it expected to complete the May acquisition in the third quarter of this year. A challenge on antitrust grounds is unlikely, said Washington antitrust lawyer Marc Schildkraut of Howrey Simon Arnold & White.

A reduction in the number of department stores wouldn’t necessarily result in higher prices for consumers, he said. “Most people would be very skeptical that there is a department store market where they are competing [just] against each other and not a wide array of other retailers.”

Analysts said Federated would probably take the opportunity to expand its Bloomingdale’s chain.

Federated spokeswoman Carol Sanger would say only that the company would like to open more Bloomingdale’s, where appropriate.

That means “wherever there’s a lot of money,” Stoffel said. “The one constant is they’ve located in areas that had a lot of discretionary income.”

On Monday, the market digested the planned Federated-May combination -- and on a down day on Wall Street, it sent Federated shares 34 cents lower to $56.45 and May shares down 84 cents to $34.51 on the New York Stock Exchange. An index of 30 retail real estate investment trusts fell 1.2% on Monday, compared with a 0.8% loss in a general index of 100 large REITs. Simon’s shares fell 2% and Macerich’s were down 1%. Westfield is traded only in Australia.

Southern California shoppers digested the news too.

Lucine Avedikian, a Glendale resident who frequents Robinsons-May, said she would be willing to shop at Bloomingdale’s “but not as often, because I think the prices are higher.” About the prospect of the Robinsons-May name disappearing, she said, “That’s not good.”

That was a widely held sentiment. Patsy Chavez, a shopper at the Glendale Galleria mall, which has a Macy’s and a Robinsons-May, would like the Robinsons-May to stay open.

“I will be sad to see it close,” she said.

Times staff writer Ronald D. White contributed to this report.

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Overlap

Los Angeles and Orange county malls with both Federated and May stores

Southern California has 28 malls that contain a Robinsons-May (owned by May) and a Macy’s and/or Bloomingdale’s (both owned by Federated).

Los Angeles and Orange County malls with both Federated and May stores:

Brea Mall

Del Amo Fashion Center (Torrance)

Fashion Island (Newport Beach)

Glendale Galleria

Lakewood Center