NEWS ANALYSIS : Can the Department Store Survive?
Behind Monday’s announcement that once-venerable Broadway Stores will be acquired by Federated Department Stores looms a question that has vexed the retail world for the last five years: Can the full-scale department store survive?
The answer, industry analysts and executives say, depends on a simple premise: Department stores must persuade women shoppers to once again buy the merchandise that they have for sale.
The issue goes to the heart of the retailing business nationwide in an era of intensifying competition, shrinking incomes and changing customer tastes. Apparel sales, especially women’s apparel, provide a very high percentage--typically 65%--of department stores’ business.
But apparel purchases have been declining as a percentage of family budgets for more than a decade, and the decline has steepened in the 1990s. People are not buying less clothing, but they are paying less for it. And that means they’re buying less from Federated--owner of Bullock’s, Macy’s, Bloomingdale’s and other stores--or from Broadway.
Where there is growth in apparel sales, it has been coming from Sears and J.C. Penney, Wal-Mart and Target--so-called general merchandise retailers. These stores have increased their share of the total apparel market to the point where they now sell as much as the department stores.
Department stores, meanwhile, have emerged from their spectacular bankruptcies of the 1980s to discover a dramatically rearranged retail landscape. Robinsons-May and Federated are now the two largest department store chains in the United States. But they are pitted against far larger companies, such as the awesomely successful Wal-Mart and the resurgent Sears, which are going after traditional department store customers.
And the momentum is with the general retailers. Target now occupies the old Robinsons store in Pasadena; Ross Dress for Less occupies the Long Beach Plaza store that once was the flagship of the Buffums chain.
The shift reflects a fundamental miscalculation by department stores that Federated and others are struggling to recover from--trying to force customers to buy merchandise they didn’t want.
The women’s apparel racks traditionally contained about 80% basic goods, sensibly priced everyday outfits, said Robert Breese, a retired industry executive.
Along with everyday clothes, stores sold about 20% in fashion goods at higher prices. But straining to increase profits in the 1980s, stores began to carry more fashion goods and fewer basics.
The trick didn’t work. Women found the fashions ugly and expensive, and particularly unsuited to a time of tightening household budgets. They shopped for value elsewhere and found it. The average quality level of apparel has never been higher amid a glut of merchandise in the stores, industry analysts say.
“Apparel is like produce, it begins to go bad soon after its arrival in the store,” said analyst David Poneman, of Sanford C. Bernstein, an investment research firm. He’s referring to the widespread practice of constant markdowns and promotional sales that have characterized retailing in recent years.
That led the stores to push merchandise even as profits declined. The retail buyouts and bankruptcies--Allied Stores, Federated, Macy’s and Broadway, under its old name of Carter Hawley Hale Inc.--followed.
All emerged from bankruptcy in the 1990s but continued to struggle. Cincinnati-based Federated’s acquisition of the 83-store Broadway chain, for example, is a defensive move. If Federated, a 355-store chain, had not stretched itself to pony up $373 million in stock and assume Broadway’s debt of $1.3 billion, it would have left openings for its rivals in California.
Robinsons-May might have bought Broadway’s Emporium and Weinstocks stores in Northern California inexpensively, arraying new competition against Federated’s Macy’s stores. In Southern California, Federated might have left openings for Dillard Department Stores, based in Little Rock, Ark., to enter the market cheaply, further complicating the nation’s most competitive retail market.
But the race is far from over. Federated will have to spend on remodeling as it looks forward to a year of choosing where to substitute a Bullock’s or a Bloomingdale’s for a Broadway store.
And like all department stores, it will have to watch the competition and constantly bring effort and ingenuity to the way it does business.
One reason that general retailers, especially Wal-Mart, have lower prices than department stores is that they have lower costs. Because it moves so much merchandise--almost $100 billion worth a year--suppliers deliver to Wal-Mart’s distribution warehouses well ahead of time and wait months for payment, thus absorbing the costs of inventory.
Still, when all is said, the retail business is a simple one of selling customers what they want. The revival of Sears, written off by experts years ago as headed for extinction, offers a practical lesson, analysts say.
In 1992, the company recruited Arthur Martinez, an executive with Saks Fifth Avenue, to be head of Sears’ merchandise group. This month Martinez, acclaimed for his success, became chairman and chief executive of the $60-billion company.
But, industry observers note, he didn’t succeed by trying to push Saks merchandise on Sears customers. He went out to Sears stores and asked the customers what they wanted. Then he stocked it.
As the classic retailers have always done, Martinez walked the stores. Sam Walton, the late founder of Wal-Mart, spent his life visiting stores. So did Stanley Marcus, founder of Neiman Marcus.
But generations of Carter Hawley Hale managers did not visit the stores to talk to customers or employees, critics say. “They liked to eat at the California Club,” reports an executive who worked for them. So, he says, the business declined.
And despite fresh financing in 1993, Broadway’s new management, led by Chairman David Dworkin, did not improve performance, for customers or employees.
Can Federated hope to reverse this trend? Industry observers note approvingly that its chairman, Allen Questrom, walks the stores meeting customers, as did Simon and Fred Lazarus, the father and son founders of the Federated chain.
Paying attention to the customer is what all department stores must do, say analysts. One industry veteran says: “They must get back to the ancient art of merchandising.”
* STORE SALE: Significant number of Broadway stores to be sold. D1.
* RELATED STORIES: D1, D13
* GOOD DEAL FOR O.C.: Broadway buyout could be a boon to mall operators seeking cachet of Federated stores. D1
