Regionals search for survival
July 7, 2003,
Forget any lofty ideas about health and growth. Most regional department store operators today are mainly seeking ways to survive — halting the all too frequent hemorrhaging of sales and profits and struggling against the perception that, like some extinct species, they've outlived their usefulness.
The business model of the traditional department store simply "doesn't work anymore," said Robin Lewis, president, Robin Lewis, a consulting and strategic information firm here. Regional department stores "have niche potential, though they lack economy of scale." Over the next five to 10 years they will either change that model or go out of business, he predicted.
Indeed, that's precisely the exercise many regional merchants are engaged in at this very moment — finding or shifting to a new business plan.
They may not have much time. Market by overstored market, competition from across all channels is chipping away at what remains of their base. It is complex. It's intense and unforgiving. Worse, it's coming at them from all sides.
Ask regional department store merchants what their competition is and you're likely to get a list of the usual suspects — Federated, May, JCPenney, or even super regional Dillard's. Press the issue and they'll mention Kohl's; press a bit harder still and you'll get Target and, even Wal-Mart. Throw in the home textiles category and you can add the likes of Bed Bath & Beyond, Linens 'n Things, T.J. Maxx and HomeGoods.
They are subtracting more dollars than most growing markets are adding.
Explained Bernard Sosnick, retail analyst for Fahnestock & Co.: "Kohl's, target and Bed Bath have effectively taken market share from department stores. Kohl's and Target attract young families with a casual urban lifestyle, many of whom would have shopped at department stores for basics."
It's not so much that the stores have been forced out of the bread-and-butter side of the business as it is that they've lost the frequency of customer visits. That hits home particularly hard for the regionals.
Couple that with stunted economic growth, Lewis noted, and "the oversaturation in the industry is staggering, and adding fuel to the fire in that growth in retail space continues unabated." The real estate has grown at twice the rate of the population, and there is not sufficient demand to justify it, which will result in a number of retail "losers," he said.
There was, perhaps, no greater acknowledgement of the pressures faced by the regionals than Federated's decision to finally begin co-branding its regional portfolio. A short test with the Rich's-Macy's moniker sealed the deal for the rest of the company's nameplates.
It also may have sealed the fate of the remaining independent regionals. Not to hear them tell it, though. Whether merely putting a happy face on it or simply expressing blind faith, the retailers themselves said that their smallness allows them to do great things — like turn on a dime with the absence of a cumbersome corporate structure and truly be able to focus on their core customers.
"We're able to bob and weave through the competition," said Bart Litvin, senior vp, gmm, Boscov's, Reading, PA, which has 39 stores. "Vendor after vendor tells us that we make decisions on the spot."
Companies like Federated or May have "big national clout," but there's a side of the customer that leans toward a smaller retailer that represents them more, said Jim Famalette, president and ceo, Gottschalks. Unlike Federated and May, generally located in major metro markets, Gottschalks places its stores in second- and third-tier markets.
"It's like David vs. Goliath; we can be more nimble and quick" Famalette added. "We're looked at as the home-town store."
Hometown store or not, Gottschalks peered into the future sometime ago and didn't like what it saw. So it brought in consultants to come up with a new strategic plan and ultimately adopted a five-point program to strengthen its financial structure and, hopefully, position it for long-term growth.
Among its key components were stores closings, selling off its proprietary credit card business and a greater focus on private label, all while paring expenses.
It has since expanded its private label assortment to 9 percent of assortments, and that may go up to 12 or 13 percent over three years. However, Gottschalks' main merchandise thrust will remain on national brands, since that is what the customer want, Famalette added.
Even Kohl's, which opened up stores within several Gottschalks' trading areas in California several months ago, has been "far less taxing to us than if it were another department store," he said.
Half of Elder-Beerman's 68 stores overlap with Kohl's, said Byron Bergren, president and ceo. However, when the two chains are in the same center, they mix well because about half of Elder-Beerman's merchandise — for example, cosmetics — is not carried by Kohl's, he argued.
About a fifth of Elder-Beerman stores overlap a May or Federated store, said Bergren, and its markets are in communities of 50,000 people within a 10-mile primary trading area. The retailer, which was recently bought by Wright Holdings Inc. and will become private, "is more flexible and not as bureaucratic" because of its size., Bergren said. "We're the community department store."
Admittedly, that claim has not played well enough on Wall Street, perhaps contributing to the decision to go private. Small companies "are never in favor with the investment community. It's very hard to get our voice out. We're never targeted as a high-growth company," Bergren said.
True enough. But for the last three years, at least, those same voices have been raised internally as Elder-Beerman's board members and executives slugged it out on more than one occasion — and sometimes publicly — as they actively debated the company's future as a merchant or as an investment vehicle. To date, the merchants have prevailed..
One regional with good survival odds according to Lewis, was Boscov's because of its strong persona and brand differentiation, Lewis said, as well as its loyal customer base. "If they can focus on the customer and provide localized value that the customer wants and maintain loyalty, they can survive."
In a world of conglomerates, Boscov's Litvin explained, regionals can operate well on a small scale. The merchant also concentrates on core category strengths, such as draperies and curtains. "It's a terrific business, with excellent margins and excellent sales; we've almost doubled that business in three years," Litvin said.
A large part of what Boscov's brings to the party lies in its ability to change quickly and easily, he suggested. "We're not a homogeneous 'build it and they will come' environment. We react to the customer, instead," Litvin said. "We build each store a little bit better than the last one."
Though making the aisles wider or bringing in new shopping carts are tactics the department stores are now incorporating, Robin Lewis added, they are "missing the whole point." Department stores continue to target so many types of customers, while Kohl's success is due in part because it focuses on one customer — the working mom — and locates its stores near where she lives.
"Local companies can serve a regional/local customer, but because they lack buying power, they are no longer as viable," said Walter Loeb. Most department stores today are struggling, though the ones that are creating exclusive and unique brands are having some success. "The customer recognizes when the department store tries to do special things."