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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Consolidation ruled in retail market


Retailers cash in as consumers flock to the malls during the holiday shopping season.
 (The Spokesman-Review)
Associated Press

NEW YORK – The shakeout from last year’s frenzy of retail consolidation will become more visible to consumers this year, from local department stores disappearing into the Macy’s chain to a better selection of store-owned labels on the racks.

But consolidation, particularly Federated Department Stores Inc.’s purchase of May Department Stores Co., means less competition, and less incentive for stores to keep discounting, which is bad news for shoppers. On the other hand, a bigger Federated will be able to negotiate lower prices from its suppliers and pass on those savings.

After 2004’s string of deals, capped by the Sears-Kmart marriage, there were plenty more transactions in 2005, fueled by merchants’ need to keep growing amid sluggish apparel sales and higher costs. The latest was Saks Inc., which announced in late October that it was selling its Northern department store group for $1.1 billion in cash to Bon-Ton Stores Inc. Meanwhile, luxury retailer Neiman Marcus Group Inc. was purchased by private-equity firms Texas Pacific Group and Warburg Pincus LLC for $5.1 billion, a transaction that was finalized in October.

But the $30 billion merger between Federated and May will have the most impact on shoppers, analysts say. The deal, finalized in late August, created a retail force with nearly 1,000 stores.

The most obvious change, of course, will be the disappearance of such May name plates as the storied Marshall Field’s — as well as Hecht’s, Filene’s and Kauffmann’s — and the expansion of Macy’s to some 850 stores. These moves will take place in the third quarter of 2006. Federated is also studying strategic options for Lord & Taylor.

But, more importantly, given its increased clout, Federated is expected to redefine overall retailing.

“Federated will be resetting the table. They will have more opportunity to take more initiatives,” said Allan J. Ellinger, senior managing director of M.M.G., an investment banking firm for retail vendors.

Ellinger noted that Federated could redefine when apparel is sold, timing shipments to the weather, which reflects how consumers really shop. Shoppers might see a plentiful selection of shorts and swimsuits in August, for example, instead of heavy sweaters.

A key challenge for the new Federated will be how to balance running an efficient operation while keeping the merchandise compelling. This year, stores face bigger challenges, including rising interest rates and a softening housing market, according to Philip Zahn, an analyst at Fitch Ratings. He expects a slowdown in sales at stores open at least a year, known as same-store sales.

“In the first quarter, consumers will be faced with really high heating bills,” he said.

The industry will be closely watching how the new Federated will fare. Jean Coggan, a spokeswoman at Federated, declined to give details about merchandise changes, but Federated officials have said they will expand their store labels to set the company apart from its competitors. About 40 percent of Federated’s current apparel assortment and one-third of its overall assortment can not be found at other stores.