California Apparel News

Possible merger sparks industry speculation and concern

Retailers, manufacturers and mall operators have been trying to gauge how a possible merger between Federated Department Stores Inc. and The May Department Stores Co. would change their businesses since the news broke on Jan. 20 that the two department stores were said to be in talks.

Representatives from both companies had no comment on the possible merger. Robert Buchanan, a retail analyst with A.G. Edwards & Sons in St. Louis, where May maintains its headquarters, said he doubted a merger would take place. He wrote in a Jan. 21 research note that his sources at May said talks were not serious and a merger would not happen in the near future.

The Wall Street Journal, however, reported that executives from both companies had discussed the possibility of a merger and, if a deal between them were reached, the landscape of America’s department stores would be greatly changed.

If Federated purchased May, the deal would create the second- largest department store chain in the United States, with slightly fewer than 1,000 locations spread across the country. The new company could earn more than $28 billion in sales revenue annually. California’s shopping centers and apparel manufacturers could be faced with new opportunities and challenges when dealing with this new company.

Opening up the shopping center

Federated and May stores do business in the same shopping malls. In Costa Mesa, Calif.–based South Coast Plaza, for instance, Macy’s and Robinsons-May are both part of the tenant mix.

If the companies consolidated their real estate, mall owners and operators would have to find new directions for their shopping centers, according to Larry Kosmont, president and chief executive officer of Los Angeles–based Lee Kosmont Advisory Services.

“Many enclosed malls may look at this as an opportunity to open up one end of the mall and do more of the Main Street design,” Kosmont said. “That brings a whole different cadre of tenants. I think you’ll see a lot of repositioning and recapitalization.”

Rethinking the design of centers is nothing new. Beginning Oct. 1, 2004, the Westfield Corp. tore a roof off a section of its Westfield Shoppingtown Santa Anita mall in Arcadia, Calif., replaced it with a skylight atrium, and created a new retail area and food court. The Del Amo Fashion Center in Torrance, Calif., plans to make a new identity for itself when it turns a section of its enclosed mall into an open-air entertainment district in 2006.

Other mall owners might seek less drastic ways to freshen their tenant mix if a Robinsons-May or Macy’s closes.

Kosmont said anchor stores in their lease agreements typically demand that a specific number of parking spaces be reserved for their customers. If these tenants left, their parking spaces could be used for new retail such as big-box stores or specialty shops.

But the look of malls might not change much if the companies merged, according to George Whalin, president of Retail Management Consultants in San Marcos, Calif.

Because Federated has been phasing out many of its regional nameplates, Whalin said the merged entity might limit the transportation of other store concepts, such as May’s luxury store Marshall Field’s, to California. Instead, the company might concentrate on boosting its bottom line by maintaining much of its current retail operations and by extricating itself from the leases of the worst-performing stores.

Vacancies could benefit large discounters such as Target Corp. or Wal-Mart Stores Inc., which could easily move a Supercenter operation into an empty department store space, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. The extra real estate could also present opportunities to open more California markets to department store companies such as Little Rock, Ark.–based Dillard’s Inc., which operates many stores in the South but has only a few outlets in California.

Kyser said the closure of any store would hurt. But he said the pain felt in Southern California would be short-lived because the region’s economy is growing. “Nature abhors a vacuum, especially a rich vacuum,” he noted.

Kyser predicted retail workers laid off by closures would likely be hired quickly by other retailers angling to take the market share of the closed stores. Most shopping centers would soon bounce back from closures because of new tenants, he added.

Those absorbing the most pain from store closures would be local governments and consumer newspapers. Local governments would have to contend with a loss of sales tax, and consumer newspapers would have to deal with the loss of advertising dollars from department stores.

Challenges for manufacturers

A merger between the two retail chains could open up several opportunities for shopping centers, but many manufacturers are wary that a merger would limit their opportunities within those distribution channels, said Mary Wilberding, principal of Los Angeles–based One World Apparel.

She said vendors are particularly concerned about the shrinking marketplace, in which retail is being consolidated among fewer and fewer companies. Her 4-year-old company sells knits to both Federated and May. While she said she is confident her business would remain the same or grow, she noted many manufacturers would not benefit from the buying operations potentially used by the merged company.

“If I didn’t have a business with Federated, I’d have to work on getting my product in the stores all over again,” Wilberding said. “With these companies, it takes a lot of effort and time to get on their matrix, and it’s not guaranteed that if you sell in May Co., you’ll sell in Federated.”

Retail management consultant Whalin agreed that the consolidated retail marketplace has made business tougher for manufacturers.

He said manufacturers such as Ralph Lauren have opened their own stores specifically to access new revenue streams in a tighter retail environment.

Every market change creates winners, and according to Ilse Metchek, executive director of the Los Angeles–based California Fashion Association, manufacturers favored by a merged Federated-May company could experience an increase in sales because the bigger store would demand more product from them.

“The bad news is that they’d be more dependent on one client,” Metchek said. “But it’s a two-edged sword. There are a lot of people who would welcome the opportunity to increase their volume.”