A Federated-May Deal Could Just Mean a Bigger Dinosaur

Would Macy’s tell Gimbel’s?

Maybe. Except, as New Yorkers well know, Gimbel’s isn’t around to listen anymore.

Neither, for that matter, is Bullock’s or Broadway in Los Angeles. Or Wanamaker’s in Philadelphia. Or J.L. Hudson in Detroit.

Heading into the weekend, Federated Department Stores Inc. -- owner of the Macy’s and Bloomingdale’s chains -- looked to be in the final stages of its mating dance with May Department Stores Co. If May accepts Federated’s bid, which is reportedly for more than $10 billion, it would create a retailing behemoth with 1,000 stores nationwide.

But make no mistake: This is the twilight of the department-store dinosaur -- a sector whose fall is a sobering reminder of just how fast consumer trends can change and seemingly sure-fire business bets can turn sour.

It was only 25 years ago that department stores bestrode the retailing universe. As one analyst put it at the time, in city after city, “you know which is THE store in town�: Rich’s in Atlanta, Garfinckel’s in Washington, Hochschild Kohn in Baltimore.

Vendors jostled to get inside. If Estee Lauder wanted to create buzz for its latest fragrance, it did so by introducing it at a particular chain. If Donna Karan wanted its new line to have some sizzle, it offered a one-year exclusive to, say, Burdine’s.

Department stores had the clout in those days -- and they weren’t afraid to use it. If a manufacturer tried to sell to one of the emerging class of discount stores, the rules were very clear: The label had to be different from the more alluring one displayed in department-store cases.

Throughout the 1970s, glossy magazine stories and television programs featured young people thronged in the housewares section of the Bloomingdale’s at 59th and Lexington in New York. In New Jersey, the president of the Abraham & Straus chain gushed over the crowds snapping up denim suits for $29.99 apiece.

“It’s a circus,� he proclaimed in 1975.

The tent, however, would soon begin to empty.

In the 1980s, specialty chains began to lure customers away. Columbus, Ohio, entrepreneur Leslie Wexner took public the Limited, which catered to young women. And then, in an inspired move, he launched Victoria’s Secret. That diverted highly profitable lingerie sales away from department-store aisles.

The concept of value pricing also began to gain momentum with the spread of discount stores, which filled their shelves with an abundance of merchandise imported and domestic.

The department stores tried to fight back.

Even with all the sheen, 80% of their merchandise traditionally was basic goods -- moderately priced dresses and accessories, lingerie, shoes and socks and some housewares. But the other 20% was real fashion -- something a little prettier and pricier that brought customers in the door and accounted for a major share of profits.

Beset by the burgeoning competition, the department stores decided to focus more on fashion as a way to increase earnings.

At Macy’s, for example, a new chief executive named Edward Finkelstein -- renowned as a “merchant,� the trade’s highest encomium -- created a stir by offering more stylish items in apparel and in housewares.

For a while, the strategy seemed to work. But over time, it backfired.

Finkelstein and fellow executives, backed by Wall Street’s Goldman, Sachs & Co. and other investors, acquired Macy’s in 1986 for $3.5 billion in a leveraged buyout. Their thinking was that department stores were a necessity -- like water or oxygen -- and customers would keep coming and plunking down their cash. With the money flowing in, the executives and their backers could pay down the company’s debt, sell the stock again and become fabulously rich.

The theory was infectious. A Montreal real estate developer named Robert Campeau took over two department store chains, including giant Federated, in 1988.

The trouble was, the customers didn’t keep coming. Instead, they turned increasingly to value chains such as Target Corp., which the Minnesota legislature had saved from a hostile raider’s LBO in 1988. Or they patronized specialty stores -- Bed Bath & Beyond Inc., Williams-Sonoma Inc., Gap Inc. and others -- that sprang up to become the new destinations in retail.

Macy’s and Federated filed for Chapter 11 bankruptcy protection in the early 1990s, and emerged eventually with Federated buying Macy’s as well as the Broadway chain. May stayed out of bankruptcy court but had to shutter stores and merge chains in the early ‘90s (which is how J.W. Robinson and May Co. became Robinson’s-May).

The department stores that survived this period, meanwhile, were no longer glamour spots.

In many respects, they’ve became purveyors of commodities -- “replenishment stores where you go if you need socks or underwear,� says Joshua Goldberg of Mercantile Capital Partners, a New York investment bank specializing in retail properties.

And, of course, there are a lot of cheaper places now to get socks and underwear. The king of cheap, Wal-Mart Stores Inc., last year posted $285 billion in sales and $10 billion in profit. It’s the biggest company in the world. And who knows? It may continue to be so for a long, long time.

But if history is any guide, consumers are a fickle lot. And just where they’ll choose to shop in the years ahead is anybody’s guess.

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James Flanigan can be reached at [email protected]