Federated Ups Internet Investment

Carole Sloan, January 30, 2006

New York — With Internet sales of macys.com in the “several millions of dollars” and bloomingdales.com growing as well, Federated Department Stores last week announced a capital investment of $130 million for its direct-to-consumer businesses over the next two years.

The bridal segment of the business is the major driver of sales, said Terry Lundgren, Federated's chairman, president and ceo, at a session discussing Internet opportunities during the National Retail Federation's annual convention here earlier this month. As a part of that matrimonial sales engine, he added, “home furnishings as an extension is very important.”

And trailing both segments is apparel, “which is beginning to grow.”

The investment, according to Lundgren, will be used across all segments of the direct-to-consumer activities, including Bloomingdale's By Mail, macyweddingchannel.com, bloomingdalesweddingchannel.com. Federated also operates the Internet site ThisIt.com, which targets girls and women ages 15 to 25. Corporate direct-to-consumer sales are expected to grow to more than $750 million by 2008 from about $450 million in 2005, he said.

Of the nearly decade-old macys.com history, Lundgren said, “We used to look at it as a store, now it's a bigger store with perhaps the single largest potential [within the company] to grow.”

In his statement announcing the major investment, Lundgren said, “Online sales represent the fastest-growing part of our business, and an outstanding opportunity for continued progress as we serve millions of new customers nationwide through our acquisition of May Co.” He added, “This cross-channel integration is a vital component of our ability to maximize the potential of the nationwide Macy's and Bloomingdale's brands.”

About 15% to 20% of the macys.com assortment is different from the stores, Lundgren noted. Sales and marketing for the program is based in San Francisco, while New York is home to the merchandise group. Each segment has about 100 employees.

As for Bloomingdales.com, “it has trailed macys.com on purpose. Once the infrastructure is set for Macy's, Bloomingdale's will follow.”

Interestingly, Lundgren pointed out that 72% of the transactions for macys.com are within a 20-mile radius of the store. But in a further analysis, he said, “59% of customers are shopping online and then buying in the store; 20% bought on credit cards.” And perhaps more significant, multi-channel shoppers are spending 20% more than single-channel shoppers.

As for earlier concerns that the Internet will cannibalize store sales, Lundgren emphasized, “We have stopped worrying; it's what the customers want.”

But he cautioned, “It will be a while before online will be as profitable as a store. Clearly there will be double-digit growth, and improving profitability in the next few years.”

The direct-to-consumer investments will include a new 595,000-square-foot distribution center designed specifically to handle direct-to-consumer orders and supported by a tailored warehouse management system. Groundbreaking for the facility in Portland, Tenn. is expected in February with completion set for spring 2007. Currently, online orders are being fulfilled from several Federated distribution centers that primarily supply the company's stores.

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