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Big changes are coming to a department store near you. Whether the $27-billion buyout offer for department store king Macy's is consummated this summer or topped by a richer one later, the chain's days as a mega-national merchant are numbered, as are those of many of its competitors and many specialty stores, too.
For consumers, that will ultimately mean higher prices as scores of stores close and competition falls.
Odds are that Macy's will accept a $52-a-share offer, a 30% premium over its current stock price, by a group headed by Kohlberg Kravis Roberts & Co.'s private equity and real estate divisions. A formal offer is expected by month's end. The retailer has been searching for a way forward for nearly two years since buying out its longtime competitor May Co. Efforts to turn around flagging sales at May's Marshall Field's, Filene's and Lord & Taylor stores -- mainly by rebranding them with the Macy's name -- have flopped. It was no fluke when June sales dropped nearly 3%, far worse than the 0.9% decline posted by the overall retail sector.
That will be the catalyst for a wave of buyouts that will reshape U.S. retailing over the next year or so, just as it has in the steel, automotive and food sectors, where investor groups went after ailing enterprises -- buying, selling and shuffling operations to turn them around.
Retailing is ripe for carving. "There's been a huge proliferation of retail outlets selling very similar merchandise, cannibalizing sales from each other, making it tough for them to make profits, or survive long-term," says Leon Nicholas, a principal, consumer goods and retail, with Global Insight, an economic consultancy.
Since the late 1990s, the retail building boom has boosted the retail real estate portfolio 50%, to about 9 billion square feet.
Macy's, JCPenney, Dillard's, Belk and even Kohl's are all moving somewhat upscale in their merchandise, duking it out with each other for the same dwindling number of customers who don't shop at Target or Wal-Mart. Sears and Kmart continue to see sales ebb with no end in sight. The consumer electronics sector is glutted with cutthroat competitors such as Best Buy, Circuit City and RadioShack. "It's hard to see where three national office supply chains, Office Depot, OfficeMax and Staples, can compete -- often in the same neighborhoods -- and make money, when two big chains would make for tough competition," says Nicholas.
It's no coincidence that the looming Macy's buyout offer comes in the same month that The Limited sold off its once ballyhooed Limited chain for a measly $50 million. The Gap's future also is a question mark.
Over the next 12 months or so, look for a wave of buyouts by private investor groups that will look to right the ship by buying up ailing retailers and combining their operations to ease sales cannibalization. There will be federal antitrust review of some proposals, but most will pass muster, given the large number of distressed merchants just barely hanging on. The antitrust concerns are nowhere as great as they were with Procter & Gamble's bid to buy Gillette, or with Nestlé's bid for Gerber, and those were approved quickly.
When the dust clears within a year or so, it's likely that there will be three or four national department store and specialty store chains and just a pair left standing in the consumer electronics and office supply sectors.
A commercial real estate shuffle, if not a sell-off, is on the horizon, too. Buyers of big chains are sure to shut poorly performing stores that are a drag on sales and profits. Some are likely to be snatched up by Target and Best Buy, two of the better-performing retailers that are eager to expand. Especially in the Southeast, Northeast and West, where there has been a proliferation of retail outlets, stores will be subdivided for other retailers, made available for offices or demolished for commercial or residential construction.
The looming buyout-led consolidation may see new retail executives looking to succeed by going back to retailing roots, reviving storied names such as Marshall Field's and Filene's, which were buried under the Macy's banner. Many shoppers deserted these stores after the name change. "There's nothing wrong with [Macy's decision] to centralize buying, but it may well have miscalculated the degree of equity and value these names had with legions of customers," says Nicholas.
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POSTED BY: Pericles Georgopoulo (July 20, 2007 06:22 PM)
If there is a buyout of the new macy group, I do wish that the new parent company, and even the present macy's management, would take the time to read through the files of the Chicago newspapers regarding the mothballed Marshall Field & Company. I think they should pay particular attention to the letters to the various papers. Almost a year after the name change people are still compelled to write about their frustations over losing their store, and the type of retail experience for which it stood.
POSTED BY: Jim Ostroff (August 01, 2007 02:28 PM)
Hi, Jim Ostroff here, author of the article. Macy's management is well aware that many long-time Marshall Field shoppers feel that "their store" was taken away from them; that these consumers now shop little, if any at the re-branded store. Whether Macy's ownership changes hands, or not, it certainly is possible that the Marshall Field name will be put back on one or more Chicago area stores. This may well bring back some or even many shoppers, at least for a while. The bigger issue is whether Macy's will change these stores' merchandising strategy, as well, to bring back the kinds of products that kept people coming back to Marshall Field for generations.
POSTED BY: Chauncy (June 25, 2008 05:27 PM)
anyone hear of a buyout of Belk by Macy's. Heard some rumors and am trying to find out if there is any credence to them. Thanks in advance on the update
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