Biggest Stores Evolve Back to Survival of the Fittest

In a merger that is either the mating of dinosaurs or the creation of a new force in American retailing, the once-elegant department store chains of Federated Department Stores and R.H. Macy & Co. took business cues from J.C. Penney, Sears Roebuck and Wal-Mart when they agreed last week to unite their companies.

Private-label merchandise was a big reason behind the merger, which would create one of the nation’s largest store groups at $13.5 billion in annual sales. The combined company would increase the use of store brands--similar to Penney’s Stafford label and Sears’ Kenmore and Sears brands--in its roughly 340 stores, which include Bloomingdale’s, Bullock’s, Lazarus and other historic names.

Merchandise in the big department stores would be cheaper and more uniform across the country. “The new company will have the sales volume to make its own store labels profitable,” says a retail expert.

But whether trying to be a more expensive Wal-Mart is the wisest long-term strategy remains to be seen. In the meantime, there will be a lot of disruption in the apparel and retail businesses--companies failing, jobs disappearing. That’s because the department store business has become a metaphor for the exacting, efficient U.S. economy in which some things have been lost and others gained.

We should understand that behind the bargain outfit or low-priced shirt we see in the mall this weekend stand the rough realities of a very tough business that has been tempered by bankruptcy.

Federated came out of Chapter 11 bankruptcy reorganization in 1992; Macy is scheduled to emerge in January, after settling $6 billion in debts at roughly 66 cents on the dollar.

Life was gentler in former days. Department stores had touches of elegance and fashionable merchandise--and lots of salespeople to serve customers--because retailers earned higher profits on the dresses and suits, household items and perfumes they sold.

Then came the 1980s, and junk-bond, bust-up takeovers loaded debt on a fragile business. Campeau Corp. of Canada sank Federated and the old Allied Stores; Macy’s own executives wrecked the company in a leveraged buyout. Stores had to move merchandise just to pay the interest; markdown sales became permanent, but stores failed anyway.

Now retailers have emerged as grind-it-out competitors, prepared to emulate Wal-Mart and other discounters.

Federated and Macy are merging to increase size and muscle so they can beat down suppliers for lower prices on merchandise and concessionary terms on credit--apparel makers wait 90 days and longer to get paid.

Today’s retailers command supplies and pricing from apparel firms here and abroad and from a world of developing nations. “They’re going beyond China for clothing; Indonesia and Zimbabwe are cheaper,” says a U.S. garment maker.

Stores will continue to have constant sales, with suppliers eating the cost of the markdowns. Federated has narrowed the number of its suppliers for big-volume orders, using a concept Sears pioneered decades ago.

One result of this merger and the trend it sets in motion will be consolidation among the hosts of smallish companies that make up the U.S. apparel business. “The weak ones will go out of business,” says analyst Lee Backus of Buckingham Research, a New York investment firm.

Another result will be a shakeout in retailing. The Federated-Macy merger alone will close hundreds of duplicate departments in stores across the country.

The business will be run on tight financial controls with little margin for fashion. And that’s a loss. Imaginative merchants used to encourage fashion. In the 1960s, Geraldine Stutz, who ran the Henri Bendel store in New York, gave floor space for young designers to try out their wares and launched the careers of Ralph Lauren and Calvin Klein. Georges Marciano and Guess jeans originated at Marvin Traub’s Bloomingdale’s.

Still, department stores in the old days weren’t all glamour. “In the old days, you could hire women cheap to staff your stores because they didn’t have many other opportunities. Now they do,” remarks George Rudes, head of St. Germain Inc., a Los Angeles apparel firm.

In fact, says Rudes, smart women are finding opportunity today in the garment business, which, like the retailers it serves, is being transformed by technology.

U.S. retailing is a business that uses supercomputers to bring customers an incredible variety of merchandise at reasonable prices. There is little wasted motion or wasted capital.

And there is constant change. The Federated-Macy merger no doubt will be initially successful. With Macy’s coming out of bankruptcy, economies are in place to produce profits.

But questions linger long-term. Young people tend not to shop in department stores, reports Stillerman, Jones & Co., an Indianapolis firm that does research on shopping malls. The young favor specialty stores and outlets, while department stores attract an older clientele, from their 30s to 65 and older.

Older people like service, which is why Nordstrom, the elegant but higher-priced department store chain, does well.

Interestingly, the stock market gives the highest price-to-earnings valuations in retailing to the stocks of Nordstrom at one end of the spectrum and to Wal-Mart and Dollar General, a fast-rising discounter out of Nashville, Tenn., at the other.

In the middle range, which includes May Department Stores, Federated-Macy and Broadway Stores, along with Dillard’s and Dayton-Hudson, stock valuations are lower. The market is saying that fierce competition will restrain profitability and that a shakeout is coming.

And the Federated-Macy merger brings that shakeout closer. It marks another stage in retailing’s evolution from a business of peacocks to one of velociraptors.