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Retailing tumult.

The revolution in retailing continues. Campeau Corporation's Federated and Allied) slide towards economic collapse is only the latest example of radical change, and comes on the heels of B. Altman's closing in the wake of the L.J. Hooker expansion debacle.

During the last decade, divisions, mergers, consolidations, and failures have eliminated such old retail names as Gimbel's, Bamberger's, Ohrbach's, Davison's, J. Magnin's, and Robinson's of Florida, to name a few. All were institutions in their markets. Few department store companies have escaped the turmoil, as they either have become victims of recent takeovers or have restructured to avoid becoming targets.

The tumult is largely the outgrowth of a decade in which the department stores struggled, most unsuccessfully, with changing demographics, shrinking profit margins, and pressures from Wall Street to boost short-term profits.

The traditional long-term view of department stores-looking to maintain and steadily expand market share-was swept aside by the need to show strong immediate improvement in return on equity. Slowing market growth and fewer takeover opportunities meant trying to create internal growth with new businesses and improved profits.

During the 1980s, some department store companies tried to expand into non-department store retailing like discounts, furniture outlets, Off-price stores, specialty stores, and supermarkets. Most of these experiments and expansions failed-putting more pressure on the bottom line rather than more profits.

Most department stores became expense-control driven, cutting back on service and just plain cutting corners. To reduce labor costs, many chains pared employees and curtailed the commission system, which had been the underpinning of their service-oriented business. Maintenance was often deferred, and stores showed it.

As department stores focused their buying power to improve gross margins, suppliers were winnowed. Many were forced out of business. Bean counters eliminated departments with the lowest sales productivity or margins. As a result, merchandise became more redundant and less varied. Consumers began shifting their attention to specialty retailers who were interested in selection and customer service. Sales growth for department stores flattened.

With the troubled 1980S now over, the department store landscape looks much different than it did 10 years ago. The old concentrations of Associated, Allied, and Federated are gone or held by new non-retailer owners. Macy's and Carter Hawley Hale, struggling under a heavy debt load, do not have the capital for many market expansions. Campeau and Hooker (Bonwit Teller, Parisian, B. Altman) are in bankruptcy. Both Batus (Saks, Ivey) and Campeau have plans to sell all or most department store divisions.

This is the largest number of department stores on the market at one time in retailing history. It is doubtful that other companies can absorb the number of units that are or will be available.

Certainly, players like Dillard's May Co. and Crown American are potential buyers of department store groups that fill voids in their markets. However, the need to attract new buyers, perhaps japanese or European, is likely to depress the price of department stores on the market. In early 1989, Taubman pulled john Wanamaker and Woodward & Lothrop off the sales block when he was unable to achieve his price objective.

Those department stores that have remained on the sidelines of merger-restructuring activity have not stood still either. Nordstrom, the current industry star, is rapidly expanding to the East Coast from its West Coast base. Giant Sears continues to experience lackluster sales and profits despite its system-wide conversion to an everyday-low-price strategy.

Nordstrom is still controlled by the founding family and has been widely acclaimed for its high level of customer service and a tremendous selection of merchandise. Its rapid expansion plans raise questions about whether it will be able to retain this reputation for customer coddling in so many markets. The entrenched local competition is gearing up to meet the challenge.

Most department store operators are focusing more on the customer. Firms like Rich's, Burdines, and Dayton-Hudson are re-instituting commission programs to stimulate salesmanship on the floor. The quality of sales help and training are also better. Cost efficiency is improving through consolidations of backroom functions like credit and distribution.

The shopping center development industry has also been re-ordered. The independent, entrepreneurial developer haS largely been replaced by the corporate developer/manager. With few opportunities for new mall development, the emphasis now is very definitely on management and renovation.

This concentration on asset management is illustrated by Des Moines based General Growth Properties' acquisition of Center Companies of Minneapolis, creating an entity that dominates mall management in much of the upper Midwest. The importance of size to asset value enhancement, cost efficiency, and negotiating leverage with retailers is likely to result in a continued concentration of mall management capability.

The full impact of the continuing department store turmoil cannot be fully predicted. However, the outlook remains that well-located, well-maintained, and well-merchandised regional shopping centers will perform well as investments-their franchises intact, helped by limited new development.
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Title Annotation:Investment Corner; restructuring of department stores
Author:Mangan, Daryl K.
Publication:Journal of Property Management
Article Type:column
Date:Sep 1, 1990
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