Too Much of a Good Thing? : Retailing: Broadway's troubles are not a sign of a renewed recession. Rather, the plethora of department store 'upstarts' has cut into sales of all the major chains, making the region a competitive threshing machine.

By James Flanigan

Aug. 9, 1995 12 AM PT

The renewed troubles at Broadway Stores are distressing to all who work for the company and depend on its business, but they are not a sign that Southern California is slipping back into recession.

Rather, the 83-store chain, with 41 stores in Southern California, is in difficulty because business is picking up and competition is raging as lustily as ever in the nation’s most competitive retail market.

Broadway has been fighting on, despite significant handicaps. But the strain of trailing traditional competitors, encountering new ones and being hampered by debt and history has taken its toll. Reports say that the company’s owners, officers and creditors, led by Chicago financier Sam Zell, will decide this week how Broadway will go forward from here.

Meanwhile, the Southern California market remains a competitive threshing machine. All the major chains have sales at or below average in this region. Robinsons-May, for example, averages about $180 in sales per square foot per year in its stores here compared to $212 per square foot in Washington, D.C., and $193 per square foot in St. Louis.

Other retailers experience similar comparisons. And that’s odd, because Los Angeles is the nation’s largest retail market and Southern California is second only to the combination of New York and New Jersey. Furthermore, local retailing has recovered from four years of recession; total sales this year will surpass those of 1990.

Usually big markets yield high returns, says analyst David Poneman of the Sanford C. Bernstein investment firm. “Store sales in New York are three times the national average because store space is restricted,” he says.

But in Southern California, “it was easy to develop real estate and build more malls,” he adds. So there were a lot of stores and then a long recession with all retailers scrambling to attract business.

And that resulted in a “flattening” of the retail market: Stores such as J.C. Penney, Sears and the Target and Mervyn’s divisions of Dayton-Hudson became direct competitors of the fancier department stores like Broadway, Bullock’s, Robinsons-May.

As a symbol of that trend, a two-story Target store now occupies Robinsons’ elegant old premises on Pasadena’s Colorado Boulevard. (The trend is national: A Kmart does brisk business in a vacated Bloomingdale’s in the New York borough of Queens.)

The upstarts are successful. Mervyn’s has higher sales per square foot than either Robinsons-May or Bullock’s--and much higher sales than Broadway’s $138 per square foot, down from $150 in 1989.

“Broadway did not respond to the incremental competition,” says investment analyst Edward Weller of San Francisco’s Robertson, Stephens & Co.

But others saw it coming. Chairman “David Farrell of May Department Stores saw back in the 1980s that his stores had to get costs down,” says analyst Joseph Ronning of Brown Bros. Harriman. “And [Chairman] Allen Questrom of Federated Department Stores is following that lead.”

Both May and Federated have become large. Federated is now at $16 billion in annual sales after last year’s acquisition of Macy’s, and May has just added to its $12 billion in sales with an agreement to acquire Woodward & Lothrop in Washington, D.C.

Size allows the companies to obtain volume discounts from suppliers and to spread operating costs. Even so, the traditional department store chains are relatively small compared to Sears at $55 billion, Wal-Mart at $84 billion and J.C. Penney at $20 billion.

Those big numbers cast a shadow on Broadway Stores, at $2 billion in annual sales. Broadway has struggled to revive its grand old franchise ever since October, 1992, when Zell’s Zell/Chilmark Fund and the company’s employee stock ownership plan brought it out of bankruptcy.

It had gone bankrupt in 1991 after repeated takeover raids in the 1980s left it stripped of its Neiman Marcus, Contempo Casuals and Bergdorf Goodman subsidiaries and burdened with debt taken on by incompetent former management.

Nevertheless, Zell and David Dworkin, Broadway’s president, came in with ambitions to spend $300 million to renew Broadway’s stores. But earnings didn’t materialize in Southern California’s lingering recession and the realities of debt and interest payments forced Broadway to trim back its plans.

Now Zell and the company’s officers and creditors are reportedly meeting in New York to deal with pressures from suppliers and short-term lenders.

Expectations are that the company will sell divisions, beginning with 11 non-California stores in Arizona, Nevada, New Mexico and Colorado. The 31 Emporium and Weinstocks stores in Northern and Central California could also be sold.

And in Southern California, advantageous locations and leases may be sold one store at a time. “There are bidders lining up for Broadway’s properties,” says analyst Thomas Friedberg of Genesis Merchant Group, a San Francisco investment company.

He cites Dillard Department Stores Inc., a Little Rock, Ark.-based chain that has been angling for years to get into the Southern California market.

Also, Friedberg predicts, May Department Stores would be a bidder for Northern California, where it has no stores now. And J.C. Penney would be a candidate to buy Broadway stores on Los Angeles’ Westside.

New owners able to renew the stores could be a boon for Broadway’s employees.

Or Zell and Dworkin could use proceeds from sales of stores elsewhere to mount a renewed effort in Southern California’s hot market, where competition is actually heating up as giant malls such as Anaheim Plaza, and the malls in Oxnard and Ventura, battle for prime retailers and new business.

When will the market settle down? Who knows? The nation’s top retailers aren’t enduring this competitive heat for nothing. It’s because each hopes to be a winner in Southern California, which has more buying power and competition than almost any market on Earth.

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Retail Struggle

The National Picture

Average national retail sales per square foot for department stores are on the rise again:

1994: $170

The Broadway

Broadway Stores Inc. has continually posted lower sales per square foot than the U.S. average:

1994*: $138

* Estimate

The Competition

Other stores have topped the national average in recent years:

Mervyn’s