On sale this season: Retailers

Kmart and Sears. Federated Department Stores Inc. and the May Department Stores Co. Saks Inc.'s Proffitt's/McRae's department store chains and Belk. Neiman Marcus, Toys "R" Us, ShopKo and private investment firms. The list of recently consolidated companies—through mergers, acquisitions and sales—goes on and on, and industry analysts and participants each offer their own takes on this current buying frenzy.

Of course, not all mergers are created equal. "Federated and May, as well as Belk buying Proffitt's and McRae's, really reflects the state of the department store industry and how difficult it is for department stores to identify growth opportunities," said Lois Huff, senior vice president with Columbus, Ohio-based Retail Forward. Huff noted that department store retailing is a mature sector of the retail industry, making it difficult to grow these businesses. "There are not that many new malls [where department stores are traditionally located] being built. There's really no natural means of growth other than to enter new territory through acquisitions. One option is for department store companies to develop specialty stores, but in the past this has not been very successful," Huff said.

Convenience is one reason for the stiff competition department stores are facing, according to Susan Babinsky, senior vice president at Kline & Co., Little Falls, N.J., a management consulting and market research firm whose recently released study "Beauty Retailing U.S.A. 2004" offers insight into the department stores' struggles to win consumers' beauty dollars. "Consumers want an easy in-and-out shopping experience, and they're moving toward strip malls and freestanding stores where they can [drive] up, run into the store and quickly pick up what they need. Most malls and department stores make this impossible," Babinsky said. When shoppers do decide to visit malls, the study found, they are increasingly bypassing big department stores and favoring specialty stores like Victoria's Secret Beauty and Sephora to buy cosmetics. Specialty stores "offer a much more trendy and exciting shopping experience, which helps them attract younger consumers," Babinsky said. "The department stores need to take a more contemporary approach to compete for the teen and young adult demographic."

Though Neiman Marcus may be categorized as a department store, Retail Forward's Huff believes different market forces are at play with its sale to a private investment firm. "The luxury market has been doing really well, and Neiman Marcus is at the highest end of high-end department stores," Huff said. "The timing was right to sell; the previous owners were taking advantage of a market situation." However, Huff said it would be interesting to see how purchasers Texas Pacific Group and Warburg Pincus LLC, who paid a high premium for the chain, will recoup what they paid. "It may require Neiman's to enter new businesses or new markets," Huff said.

The other headlining merger—Kmart and Sears—can be interpreted in many different ways. "Kmart and Sears say it's about taking two struggling retailers, where the sum of the combined company will be greater than the sum of its parts, giving them a chance for survival. Some analysts say that this is a pure real estate play. I think this is a Sears play," Huff said. "This will allow Sears to move off mall, getting a more advantageous position against their competition, which is mainly off-mall retailers, such as Home Depot, Lowe's and Best Buy." But, Huff noted, there are some problems with the execution of this strategy. "Sears and Kmart do not seem to be doing what makes sense, which would be to clearly delineate the two nameplates. Instead, they're already starting to execute their crossover strategies, such as bringing [Sears] appliances into Kmart stores. If I was a supplier to Sears, I would pull my brand if I saw it was going into the Kmart. Or I'd create a new one for the combined Kmart-Sears store. Brand crossover will tarnish the equity of Sears," Huff said.

Brand crossover is not the only potential problem caused by recent consolidations. In May, The Wall Street Journal reported that an Accenture survey found that consumers are not optimistic about the mergers. The survey found that 42 percent said they think mergers result in higher prices for consumers, and 32 percent said mergers erode customer service. Lenka Contreras, vice president of Kline & Co., expressed a similar sentiment. "Most of the traditional department stores offer the same merchandise in an atmosphere that's just not as fun or convenient as specialty stores or other outlets. Now, with recent mergers and consolidations, there could be even less variety in the channel," Contreras said. Huff, however, disagreed. "Some say the scene will become more homogeneous, but that's been a problem we've had for more than a decade," Huff said. "I think it will be more differentiated, because it will give retailers, such as Federated, the leverage to get more exclusives."

The consolidations will also have an impact on retail industry jobs, with retail professionals leaving both voluntarily and involuntarily. Sears will reportedly lay off at least 500 workers from its Troy, Mich., headquarters due to the consolidation. At Hollywood Entertainment Corp., which was recently acquired by the Movie Gallery, Bruce Giesbrecht, CEO and president of Hollywood Entertainment Corp., and Randall Baumberger, president of Hollywood's Game Crazy stores, have stepped down. Other executive and retail design professionals have left recently merged retailers, citing regime changes. While the jury is still out on how all this change will affect the retail industry in the long-term, the short-run proves to be an interesting case study on the state of retailing today.



—Sree Roy, Associate Editor

ShopKo acquired by private equity firm

ShopKo Stores Inc., Green Bay, Wis., announced that it has signed a definitive merger agreement to be acquired by an affiliate of Minneapolis-based private equity investment firm Goldner Hawn Johnson & Morrison Inc. in a transaction valued at slightly more than $1 billion. ShopKo's current chairman of the board, Jack Eugster, has resigned his position, effective immediately. John Turner and Steve Watson, both members of ShopKo's board of directors, have been named as co-chairmen of the board. Eugster will remain on the board of directors of ShopKo while the transaction is pending. ShopKo's current president and CEO, Sam Duncan, has indicated that he will not remain with ShopKo following the transaction; however, other members of ShopKo's senior management team are expected to remain in place and may invest in the company.

Gamestop and EB to merge

GameStop Corp., Grapevine, Texas, and Electronics Boutique Holdings Corp. announced that they have entered into a definitive agreement and plan of merger. The combined company, to be named GameStop Corp., will have annual revenues of approximately $3.8 billion. Following completion of the merger, Fontaine and Daniel A. DeMatteo, GameStop's vice chairman and COO, will each serve in the same capacity for the combined company. Other key positions are under discussion and will be announced as the integration process moves forward.

Neiman Marcus acquired by investment group

The Neiman Marcus Group Inc., Dallas, announced that its board of directors has approved a definitive agreement to sell the company to an investment group consisting of Texas Pacific Group and Warburg Pincus LLC for about $5.1 billion. Jonathan Coslet, partner at TPG, said in a statement: "We are delighted to be partnering with Burt Tansky and the rest of the Neiman Marcus management team. Together, we hope to build on their exceptional track record of performance." TPG has investments in other retailers including Petco, J. Crew and Debenhams. Warburg Pincus LLC has investments in industries including healthcare, energy and real estate.



Saks sells Proffitt's and McRae's to Belk

Retailer Saks Inc., Birmingham, Ala., announced that it is selling its Proffitt's/McRae's business to Belk Inc., Charlotte, N.C., for $622 million. It also announced it is exploring strategic alternatives for its northern department store division and Club Libby Lu, which could include the sale of one or both; and retaining and continuing to operate the company's Parisian stores. The company also will continue to operate its Saks Fifth Avenue Enterprises business segment. The 47 Proffitt's/McRae's stores being sold are located throughout 11 Southeastern states and generated revenues of approximately $700 million in 2004. Saks also announced that it is exploring strategic alternatives for its northern department store division (as one entity), operating under the nameplates of Bergner's, Boston Store, Carson Pirie Scott, Herberger's, and Younkers, as well as its Club Libby Lu specialty store business. Also, the company will keep the McRae's stores in Tuscaloosa, Gadsden, and Dothan, Ala., as well as the McRae's store in the Riverchase Galleria in Birmingham. The company will convert the Tuscaloosa and Gadsden locations into Parisian stores and will explore options for the Dothan and Riverchase stores.



Gap reveals details of its fourth brand

Gap Inc., San Francisco, unveiled that Forth & Towne is the name of the company's new women's apparel retail concept. Forth & Towne is the newest concept in Gap Inc.'s family of brands, which includes Gap, Banana Republic and Old Navy. "Launching the brand Forth & Towne, which focuses on women over age 35, represents an important long-term growth opportunity for Gap Inc.," said Paul Pressler Gap Inc. president and CEO, at the company's investor update meeting. Forth & Towne will launch in four test stores in the Chicago market and one in New York in the fall of 2005.



Best Buy announces expansion plans

Best Buy Co. Inc., Minneapolis, raised its total potential for stores in North America by 20 percent, announced its expansion plans for its stand-alone Geek Squad stores and said it also intends to open lab stores in China in the next 12 to 18 months as part of its long-term growth strategy. The company now plans to operate at least 1,200 superstores in North America, up from its prior growth plan of 1,000 superstores, affording the company more than two years of additional organic growth from new store openings. The company also plans to expand its services offerings by opening 20 to 50 stand-alone Geek Squad stores in urban areas over the next 12 to 18 months.



Benjamin Moore opens color space

Benjamin Moore Paints and Henredon have joined forces to serve the design professional with a newly opened color resource center. Benjamin Moore Color Space has opened in the Henredon Showroom on the 16th floor of the New York Design Center at 200 Lexington Avenue. Color Space was created to help designers and architects select the right colors for their projects.

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James Mansour, executive vice president, visual merchandising for Macy's East, told DDI that he is leaving Macy's. "In light of the intended acquisition by Federated [which owns Macy's] of May Co., projects that influenced my decision to join Macy's will be reprioritized as the organization begins to focus on the critical tasks of the acquisition. Therefore, I have decided to pursue other opportunities in the near-term," Mansour said.



Wilsonart International, Temple, Texas, announced the appointment of Bill DiGaetano to the position of president, Wilsonart North America.



VIRA Manufacturing Inc., Perth Amboy, N.J., has named James C. Smith president and CEO.



Callison, Seattle, announced the addition of Christine Nakaoka as senior interior design director to the New York office. Callison also announced the addition of Norman Roberts as senior interior designer to the New York office.



Bookstore chain Borders Group Inc., Ann Arbor, Mich., announced a series of management reassignments to support the company's growth strategies. Vin Altruda has been named president, Borders Group U.S. Rick Vanzura has been appointed president, Borders Group International and Paperchase Worldwide. Mike Spinozzi has been named executive vice president and chief product officer.



Cowan & Associates, Worthington, Ohio, added Douglas Moody into its commercial architectural division and Jim Knochel, professional engineer, and Tim Kimble, electrical designer, into its M-E-P engineering division.

David Clary, RA, in the architectural division of Cowan & Associates, Worthington, Ohio, died unexpectedly due to complications in an emergency surgery in February. Clary was a talented store planner and registered architect who had been working in the retail arena since the '70s. Clary was 52.



Design firm Fitch has integrated its 18 studios in 11 countries under the Fitch name. The new consumer-centric approach will run through all of its core disciplines: consumer environments; brand identity and communications including live, digital and packaging; product development and future insight. To showcase the rebranding effort, Fitch has launched a new global Web site (www.fitch.com) in sync with the creation of a new corporate identity.



Marketing services and integrated communications provider MICE North America has opened a Minneapolis office lead by Teri Mascotti. The address is as follows: 725 Gilfillan Lane, North Oaks, MN 55127. Phone: (612) 670-5550.



Artitalia Group, Montreal, is expanding its manufacturing premises by another 100,000 sq.ft. By the end of the year, the Artitalia plant will cover a total of 600,000 sq.ft.



I am the President of Horton & Converse Pharmacies. We are an 11-store chain, located primarily in professional medical buildings adjacent to hospitals in the Los Angeles area. My family and I own the company.

I did not expect to see an editorial that is so insightful of our industry's predicament in DDI (April, page 3). You really understand our plight. Over the years, in a chase for market share and increasing dollars sales, the chains have signed third party contracts, abdicating their pricing power to the pharmacy benefit managers (PBM's). PBM did not exist 20 years ago. They now hold vast power over the way prescriptions are dispensed and how much the provider receives in reimbursement. Their business model of interjecting themselves between the pharmaceutical manufacturer, the payor, and retail pharmacy has been very lucrative, but also very secretive. PBM's operate in a very non-transparent way, hiding rebates and not fully disclosing from whom the revenues come. They are currently facing many legal probes by the government, even at a time when much of the new Medicare Prescription Drug benefit will be administered by them.

I wish I knew where and how this will all play out. Thanks for bringing our problems to your readership.

—Keith R. Lumpkin, president

Horton & Converse Pharmacies

DDI regrets to have incorrectly published the proper name and company information for Dalco Concept in the May issue, page 60. Please note the correct information below.



Dalco Concept

Curves and clean lines dominate the new models introduced by Dalco Concept at GlobalShop. Specializing in frameless glass displays, Dalco offers a wide variety of standard and highly customizable fixtures, incorporating the latest in lighting, finishes and hardware. Ontario, Canada. (888) 638-0973; www.dalcoconcept.com.

DDI regrets misspelling the name of one of Perennial Inc.'s, Toronto, leading retail clients in its Design 100 in the March issue, page 48. The correct spelling is Schnucks Supermarkets.