Malls Fear a Retail Upheaval

There was a lot of hand-wringing at the mall Thursday.

Macy’s parent, Federated Department Stores Inc., reportedly is in talks to buy May Department Stores Co. -- a deal that, if completed, could wind up squeezing the wallets of Southland shopping-center owners, some apparel manufacturers and many media outlets.

Cincinnati-based Federated has opened preliminary talks with executives at St. Louis-based May, the Wall Street Journal reported Thursday, citing unnamed sources. The newspaper said there was no guarantee a deal would result. Neither Federated nor May executives would comment on the report.

If it were to come to fruition, a Federated acquisition of May would create the nation’s second-largest department-store chain with nearly 1,000 locations. Annual revenue would reach about $30 billion.

Only the combination of Kmart Holding Corp. and Sears, Roebuck & Co., which two months ago announced an $11.5-billion union, would be bigger.

Industry experts said the region’s mall owners had the most to lose from a Federated-May deal. The two chains have overlapping stores at 28 malls in Southern California, including several of the region’s biggest: South Coast Plaza in Costa Mesa, Del Amo Fashion Center in Torrance, Northridge Fashion Center and the Glendale Galleria.

Analyst Robert Buchanan, who follows both companies for A.G. Edwards & Sons Inc., is skeptical that a deal will happen anytime soon, if ever. But if such a marriage does result, he believes it would spell the end for one of the oldest and best-known names in Southland retailing.

“If Federated buys May, the Rob-May name is gone,” Buchanan said, referring to May’s 47-store Robinsons-May chain. “Everything’s going to be called either Macy’s or Bloomingdale’s.”

Indeed, Federated announced in September that it would change the names of all 184 of its regional department stores, such as Rich’s and Burdine’s, to Macy’s. The company did the same in Southern California, phasing out such stalwart brands as Bullock’s and Broadway.

Santa Monica-based Macerich Co. has the most exposure among the nation’s major mall owners, with an overlap at 13 properties, or 19% of its portfolio, according to a Smith Barney report published Thursday.

Macerich President Art Coppola said a Federated-May combination could help his company in the long run.

“I can’t imagine, if it were to happen, that it would be anything but a positive for us as time went on,” said Coppola, noting that Macerich has benefited from such closures in the past. “As one department store leaves, 90% of the time it is replaced by a store that does better.”

Investors appeared more worried about the short term, pushing Macerich shares down 1%, or 64 cents, to $59.25 in Thursday trading.

Shares of several other big companies that own malls with both May and Federated stores fell on the news.

General Growth Properties Inc., which owns 10 Southland malls including the ones in Northridge and Glendale, lost 47 cents, or 1.4%, to $33.54. Simon Property Group Inc., which owns eight malls in the region, was off 32 cents, or 0.5%, to $62.58. Taubman Centers Inc., which owns the Beverly Center, fell 31 cents, or 1.1%, to $27.90.

Australia-based Westfield Group owns eight Southland malls with both chains as anchors. Westfield executives couldn’t be reached for comment Thursday.

Mall owners get about 10% of their net operating income from department store rents, and a shuttered anchor store is obviously bad for business.

Because of industry consolidation over the last decade, landlords have become fairly adept at finding new tenants for the large spaces or converting them to other uses such as movie theaters, food courts and outdoor entertainment areas with restaurants.

Malls that have recently completed such makeovers, however, may be hard-pressed to do another anytime soon, Smith Barney noted.

A Federated acquisition of May also probably would be hard on many apparel manufacturers, especially those that supply goods to both chains.

“I think a lot of the smaller companies that make up the creative force in Los Angeles could eventually get hurt,” said Lonnie Kane, president of Vernon-based Karen Kane Inc., which supplies women’s sportswear to May’s Marshall Field’s and Lord & Taylor chains, as well as Federated’s Macy’s and Bloomingdale’s units. “I can’t imagine anybody in the manufacturing sector who’s overly thrilled with the prospect.”

Among other things, acquiring May would allow Federated to leverage its buying power so it could better compete with discounters such as Target Corp. and Wal-Mart Stores Inc., which have been picking off customers at the lower end of the market. “It will give Federated an awful lot of clout in negotiating prices on products and will pit manufacturer against manufacturer,” Kane said.

Television, radio stations and newspapers -- including the Los Angeles Times -- also could see a loss of revenue if Robinsons-May were to disappear. The chain is the largest department-store advertiser in Southern California, regularly touting its specials on the airwaves and in multi-page advertisements.

Federated and May are facing increasing pressure on two fronts: Besides getting hit by the discount chains and so-called category killers such as Bed Bath & Beyond Inc., they are also under assault from luxury merchants such as Neiman Marcus Group Inc. and Saks Inc. that have been winning shoppers with higher-quality merchandise and better service.

Although Federated has improved its merchandise mix and done away with heavy discounting, May has continued to struggle.

“Federated has been the best-run department-store chain over the last two or three years,” said Jeff Stinson, an analyst with FTN Midwest Research. By contrast, May “is in need of change of direction and some positive outside influence.”

Rumblings of a possible acquisition follow last month’s resignation of May Department Stores Chief Executive Gene Kahn, who seven months earlier helped lead a $3.24-billion acquisition of the Marshall Field’s department store group and some Mervyn’s stores from Target.

May operates 501 department stores nationwide, as well as hundreds of bridal and formalwear stores. Its sales in fiscal 2003 topped $13 billion. Federated has 459 stores under such flags as Macy’s and Bloomingdale’s and rang up 2003 sales of more than $15 billion.

News of a possible deal cheered May investors, who bid the company’s stock up 9.2%, or $2.88, to $34.25 on the New York Stock Exchange after trading as high as $35.95. That values May at $10 billion. Federated’s stock slid 3.1%, or $1.77, to $55.31, also on the NYSE.