Monday, February 28, 2005

Dinosaurs Mating

It's common in declining industries for large companies to merge with one another. The CEOs cannot think of truly productive or creative uses for their still-considerable financial capabilities, so they "grow" by gobbling up the competition.

Of course, this isn't real growth at all. If company A's shareholders wanted to own shares of company B, they could easily do so by calling a broker. Merging companies just forces the shareholders to own both companies; nothing new is created. Don't listen to the "synergies" nonsense. CEOs always drag out "synergy" to explain how the merger will payoff. A couple years later they always have to explain that the combination of the two corporate "cultures" didn't go as smoothly as hoped and synergies were not realized.

Mergers in declining industries are like dinosaur sex. It may seem productive in the short-term, but it won't change fate.

What does this have to do with retailing? Federated Department Stores and May Department Stores Company have announced a merger. Federated operates more than 450 stores under the names of Macy's, Bloomingdale's, Bon-Macy's, Burdines-Macy's, Goldsmith's-Macy's, Lazarus-Macy's and Rich's-Macy's (all those tortured regional department store names will finally be changed to the Macy's brand effective March 6, 2005). At the end of the fiscal 2004, May operated 491 department stores under the names of Famous-Barr, Filene's, Foley's, Hecht's, Kaufmann's, Lord & Taylor, L.S. Ayres, Marshall Field's, Meier & Frank, Robinsons-May, Strawbridge's, and The Jones Store.

All those department stores occupy the vast middle-ground of retailing ... which the American shopper has left for dead. Mass discounters on one end of the retail spectrum and high-end specialty shops on the other have effectively shrunken the market in the middle; leaving far too much capacity for the dwindling demand. The profits in retailing are at the edges. Hecht's, Macy's, Sears and Penny's can't beat the values at Wal-Mart or Target, and they can't match the exclusivity or fashion of Gucci, Prada, Dior, Hermes, Mikimoto or Jimmy Choo boutiques.

Can these dinosaurs beat their fate? Marshall Field's recent transformation of the State Street Store was promising. It became a market of brand boutiques with 350 new brands (many unavailable elsewhere in the U.S.) and lots of special events. They borrowed that formula from Selfridges in London, but there's no shame in that. Borrowing good ideas beats the heck out of quietly going broke. Will Federated keep the changes, let along spread them to the other stores in the new mega-corporation? Unlikely. The "not invented here" stigma will probably doom any innovative ideas from the May side of the merger.


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