Federated Department Stores, Inc.
Federated Department Stores, Inc.
Sales: $15.83 billion (1998)
Stock Exchanges: New York
Ticker Symbol: FD
NAIC: 45211 Department Stores; 45411 Electronic Shopping and Mail-Order Houses
With over 400 department stores in 33 states and a burgeoning direct-to-customer retail business, Federated Department Stores, Inc. is one of the largest retail store operators in the nation. Its department store divisions include some of the most venerable names in the industry: Macy’s East, Macy’s West, Rich’s/Lazarus/Goldsmith’s, Bloomingdale’s, Burdines, The Bon Marché, and Stern’s. Recognizing the success of catalogue retailers and Internet merchants, Federated has more recently aimed to build a competitive direct-to-consumer division. After launching Macys.Com and Macy’s By Mail, Federated subsequently acquired Fingerhut Companies, Inc., a leader in catalogue and e-commerce.
Prosperity During the 1930s
Federated Department Stores, Inc. was incorporated in Columbus, Ohio, in 1929 as a holding company for F&R Lazarus & Company, its subsidiary Shillito’s, and Abraham & Straus department stores. The Federated group was formed and led by Fred Lazarus, Jr., whose eponymous company was the dominant retail store in Columbus. F&R Lazarus was created by Fred’s grandfather, Simon. The elder Lazarus, a Jewish refugee who fled religious persecution in Germany, founded the men’s clothing store in 1851. Shillito’s, a Cincinnati-based store acquired by F&R Lazarus in 1928, was founded in 1830. While Shillito’s was the oldest store west of the Allegheny Mountains, it ranked only fourth among Cincinnati stores at the time it was purchased by Lazarus. Shillito’s sales grew by over 50 percent during its first year under the management of the Lazarus family, and within a decade, the store had regained the top spot in its urban market. The other founding member of Federated, Abraham & Straus (A&S), was founded in 1865 in Brooklyn, New York. It would grow to become the group’s sales and profits leader by the mid-20th century.
Bloomingdale’s joined the Federated group in 1930, a year after Federated was organized. This revered name in retail had been founded in 1872 by Lyman and Joseph Bloomingdale on New York’s east side. Although the brothers had chosen an area of the city that was underdeveloped at the time, Bloomingdale’s reputation for carrying unique merchandise brought more and more patrons to the store. The department store carried European imports as early as 1886 and quickly became a leader in home furnishings.
During the 1930s, Fred Lazarus, Jr., earned a reputation for innovation that made his family “the first name in retail,” according to a 1961 Forbes article. In the late 1920s, “Mr. Fred” instituted an administrative division of labor that placed department managers in charge of buying and selling all of the merchandise in their particular department. This brought a spirit of entrepreneurship to the individual departments in each store. In 1934, Lazarus revolutionized retail clothing sales when he adopted a French merchandising technique in which apparel was arranged according to size, rather than by color, price, or brand. The system became an industry standard. In 1939, Mr. Fred was a key figure in convincing President Roosevelt to move the Thanksgiving holiday to the fourth Thursday of November. The calendar change extended the Christmas shopping season, giving retailers more time to sell at their busiest time of year.
Federated stores helped their customers during the Great Depression by extending credit and establishing a reputation for community involvement in times of crisis. The Federated organization helped support its divisions throughout the Great Depression by sharing their risks and benefits. The loosely defined coalition worked so well that, by the end of World War II, the holding company was making more money than it could profitably reinvest in existing stores.
Federated’s Postwar Expansion
By the end of the war, Federated had reached a turning point. Faced with increasingly fierce competition from suburban shopping centers, the company had to decide whether to dissolve itself or form a central organization geared towards expansion. Chairperson Fred Lazarus, Jr., whose chain had contributed substantially to the success of Federated, pushed for a stronger organization, which he achieved in June 1945. Federated’s main office was moved to Cincinnati, and the central management team worked to capture a leading role in the retail revolution of the postwar era. Although the holding company’s leadership took a more aggressive role in corporate administration after 1945, divisional autonomy remained a hallmark of the Federated organization for decades.
Federated “boomed” along with the postwar population of the 1950s through expansion and acquisition. In 1956, Burdines, of Miami, became a division of Federated through an exchange of common stock. Rikes’ and Goldsmith’s, the largest department stores in Dayton, Ohio, and Memphis, Tennessee, respectively, were purchased in 1959. Over the course of the decade, sales at Federated’s 50 main stores and 32 branches increased over 100 percent, and the group became the United States’ largest and most profitable department store company. Its members included the most prestigious department store chains in almost any given metropolitan area: Foley’s of Houston, Sanger’s in Dallas, and Filene’s of Boston. The haute couture reputation of Federated’s stores carried a high price, which translated into the high profit margins that accounted for much of the corporation’s success.
Growth continued in the 1960s: by mid-decade, Federated’s annual sales topped the $1 billion mark. Sales increased 250 percent from 1960 to 1970, reaching $2 billion by 1970. Ralph Lazarus succeeded his father, Fred Lazarus, Jr., as chair and chief executive officer of Federated in 1967. He had worked his way up through the corporate ranks, from salesperson to general merchandise manager, vice-president for publicity, executive vice-president, and finally president by 1957. In 1965, Federated purchased Bullock’s and I. Magnin, two upscale department stores based in California. As a result of the antitrust concerns this acquisition generated, Federated was forced to enter into a consent decree with the Federal Trade Commission that prohibited the company from acquiring any more department stores until 1970.
Venturing into New Territory
Since Federated’s expansion by acquisition was limited, Ralph Lazarus led Federated into the supermarket industry in 1968 with the purchase of Ralph’s Industries, a West Coast supermarket chain that served upper-income markets. The chain had 65 stores that were accounting for ten percent of Federated’s total sales by the end of the decade. Federated also entered the mass merchandising segment during the 1960s, with the creation of Gold Circle discount stores in 1968. The small Gold Circle chain totaled five stores in Columbus and Dayton at the end of the decade.
However, Federated’s success was not uninterrupted. In 1971, the group sold its Fedway chain to a competitor, Dillard Department Stores, for $6 million in cash. Fedway had been created in 1951 to take advantage of southward population shifts. Its stores represented a new direction for Federated, a move into the small, but burgeoning markets of the “sunbelt”: Texas, Arizona, and southern California. Fedway peaked in the mid-1960s with 11 stores and over $30 million in annual sales. After that point, the chain was overcome by larger, more experienced retailers including Sears & Roebuck, Montgomery Ward, and J.C. Penney. By the time it was liquidated, Fedway’s sales volume had dwindled to $13 million, and the chain had shrunk to six stores.
Acquisitions of the 1970s
The Federated chain continued to expand in the 1970s. Net income increased from $91.1 million in 1970 to $277.7 million in 1979, and sales nearly tripled during that time to $6.3 billion. The growth was stimulated by a $2.2 billion acquisition spree that almost doubled the group’s number of stores to over 350 units. This growth was doubly astonishing in light of punishing recessions that cycled throughout the decade. Part of Federated’s enduring success stemmed from the fact that most of its upper-class clientele was not as badly affected by economic downturns as working class shoppers.
Federated clearly recognizes that the customer is paramount, and that all actions and strategies must be directed toward providing an enhanced merchandise offering and better service to targeted customers through dynamic department stores and direct-to-customer retail formats. Aggressive implementation of the company’s strategies, as well as careful and thorough planning, will provide Federated’s department stores with an important competitive edge. Federated is committed to open and honest communications with employees, shareholders, vendors, customers, analysts, and the news media. The company seeks to be proactive in sharing information and in keeping these key stakeholder groups up-to-date on important and material developments. At Federated Department Stores our greatest strength lies in the skill, judgment, and talent of our people. Every day a production of enormous magnitude takes place on our selling floors and behind the scenes, where our people bring the company’s strategic goals to life. Our priority on attracting, retaining, and growing the most talented people in the retail industry has been and will continue to be our greatest advantage.
The group made a pivotal acquisition in 1976 when the purchase of Rich’s Inc. gave it a foothold in southeastern retail. The $157 million stock swap gave Federated control of the 109-year-old, Atlanta-based institution with its 11 department stores, three Rich’s II boutiques, and 11 Richway discount stores in Atlanta, Birmingham, Alabama, and Charlotte, North Carolina. From this installed base, Federated hoped to expand its operations throughout the South.
Federated also expanded its established chains more aggressively. In 1976, Bloomingdale’s opened its first full-line store outside the New York market, in a suburb of Washington, D.C. Bullock’s, I. Magnin, Burdine’s, and other divisions were also planning regional and cross-country branches far from their traditional metropolitan markets. For example, Bullock’s, based in Los Angeles, moved into Arizona in 1977.1. Magnin planned to add five new stores and go national between 1976 and 1980. Filene’s, a Boston store, moved into New Hampshire, and Cincinnati-based Shillito’s had three stores in Kentucky by 1977. New stores were built 20 percent smaller than usual to squeeze more profits from less space. Federated’s tradition of divisional autonomy gave way to more centralized supervision.
Unsuccessful Efforts in the 1970s and 1980s
But Federated’s growth was countered by troubled divisions throughout the 1970s. In the early years of the decade, Federated’s biggest unit and dollar producer, the original Abraham & Straus store in Brooklyn, pulled the entire A&S division down. Some of the division’s problems were out of its control, like a demographic shift that eroded its traditionally affluent customer base. As middle-class Brooklyners escaped to the suburbs, they were replaced by an impoverished population with little interest in A&S’s pricey merchandise. Many of the new residents were also drawn to a large regional mall located just a few miles away. Furthermore, the chain’s management had neglected its 100-year-old, 1.5 million-square-foot Brooklyn store. By 1973, both sales and profits at A&S had leveled off, and two years later, A&S’s pretax profits slid a disturbing 45 percent. The chain launched a comprehensive remodeling effort in an attempt to recapture its middle-income shoppers.
Ralph’s, the 98-unit Los Angeles-based supermarket chain, faltered throughout most of the decade as well, as management made a lukewarm commitment to that competitive industry. Although Ralph’s was recognized as one of the country’s most productive, enterprising food stores, it fell victim to costly price wars in California in 1976 and 1977. The grocery chain eventually withdrew to its home region, closing 18 stores after failing in northern California.
Federated’s long-running attempts to diversify into mass merchandising, which began in the 1960s, reaped uninspiring results in the 1970s. Gold Circle, which was projected to grow into a 200-unit upscale discounter, had only 42 units by 1981. It had run into trouble after it expanded into California with seven stores in 1976 and 1977. Prior to the expansion, the chain had been limited to Cleveland, Columbus, Cincinnati, and Rochester, New York. High startup costs and no profits in the western units disappointed Federated officials, who had underestimated the competition that came from Kmart and Target. By the end of the decade, Gold Circle was slated to retreat from the California market entirely.
Two industry trends also threatened Federated’s dominant position in retail. Specialty stores started to broaden their appeal, attracting increasingly more upscale shoppers. At the same time, Sears, J.C. Penney, and other mass merchandisers were enhancing their stores to attract more affluent shoppers. Federated felt the squeeze between these two forces: the company’s 1979 profits stayed level at $179.9 million, even though sales had increased ten percent to $5.4 billion.
When Howard Goldfeder was elevated from president to CEO, succeeding Ralph Lazarus in 1981, he set demanding return-on-investment quotas as a prerequisite for further expansion. Furthermore, he instituted seven new strategies to induce Federated to retake its position as a retail innovator. These included: enlarging market share through more aggressive promotions and deeper inventories; renovating key units in major markets; expanding department stores into the high-growth sunbelt; cultivating new divisions; ensuring lower management turnover; repositioning and expanding Ralph’s supermarkets; and disposing of or merging less profitable units.
Nevertheless, some industry analysts criticized Federated, and especially Goldfeder, for attempting to dominate too many segments of the retail industry. While rivals Dayton-Hudson and R.H. Macy’s limited their focus to either mass merchandising or upscale retail, Federated spread its investments and profit margins among a wide range of concepts. As the decade wore on, Federated’s return-on-equity stagnated, and its stock price dwindled. By the late 1980s, the company was ripe for a hostile takeover; it was not strong enough to command a high stock price, yet it was not weak enough to be beyond help.
- F&R Lazarus men’s clothing store is founded by Fred Lazarus.
- Federated Department stores is launched as a holding company for F&R Lazarus, Shillito’s, and Abraham & Strauss department stores.
- Bloomingdale’s enters the Federated group.
- Federated acquires Burdines department stores.
- Federated is acquired by Campeau Corporation.
- Campeau files for bankruptcy and a major reorganization ensues.
- Federated emerges from bankruptcy protection.
- Federated acquires R.H. Macy & Co.
- Federated acquires Broadway Stores, Inc.
- Federated acquires Fingerhut Companies, Inc.
Tough Times for Federated
In 1988 Federated was acquired by Campeau Corporation. Subsequently, Federated’s Bullock’s and I. Magnin divisions were sold to competitor R.H. Macy, and the Foley’s and Filene’s divisions were sold to other retailers. Furthermore, the headquarters of Allied Stores Corporation was moved from New York to Cincinnati to be consolidated with Federated. Allied had been founded in 1935 to succeed Hahn Department Stores, Inc., a holding company that managed Boston’s Jordan Marsh stores, among others. Allied had been instrumental in the establishment of the United States’ first regional shopping center in 1950, and had acquired the Stern Brothers and Block’s department stores over the course of its history.
Campeau Corporation’s Robert Campeau had acquired Allied for $3.6 billion in a 1986 hostile, debt-financed takeover. Then he borrowed $6.5 billion—97 percent of the purchase price—to buy Federated in 1988. Campeau had scheduled his 1989 debt payments according to profit projections of $740 million. However, Federated only made $372 million that year, and Campeau’s creditors clamored for the $627 million that was due them. On January 15, Federated and Allied filed the second largest nonbank bankruptcy on record and entered the largest, most complex restructuring in the retail trade.
During the course of the two-year reorganization, Federated and Allied merged and cut all ties with Campeau Corporation. More than 40 stores were liquidated. Federated traded $8.2 billion in debt for $850 million in cash, plus $2.8 billion in new debt and 92 million shares of new stock valued at $2.3 billion. Over $2 billion of the debt was forgiven, but the new Federated was still stuck with $3.5 billion of debt on its balance sheet. The new entity boasted 220 department stores in 26 states and annual sales of about $7 billion. A new CEO, Allen Questrom, led the reorganization. He had been instrumental in the turnaround of Federated’s troubled Rich’s division in the 1980s and was hailed as one of the top leaders in retailing during the 1990s.
Together with Federated President James A. Zimmerman, Questrom instituted cost-cutting measures that benefited Federated and its customers in the first months after the reorganization. SABRE, a data processing system, and FACS, the credit services operation, helped centralize sales, credit, and inventory tracking while promoting economies of scale. The merger of the background operations of Abraham & Straus and Jordan Marsh saved Federated $25 million per year without disrupting either chain’s image. Part of the savings realized by these measures was passed on to the choosier shopper of the 1990s. Some industry observers cited Questrom’s commitment to GMROI (gross margin return on investment), a new, but reliable performance measurement for department stores, as another reason for high confidence in the new Federated.
Federated’s Resurgence in the 1990s
Buoyed by these improved perceptions of the company, Federated made one of Wall Street’s largest initial public offerings of 1992 within months of emerging from bankruptcy. The group had planned to offer 40 million shares and use the proceeds to prepay a chunk of its long-term debt, but was pleasantly surprised when applications for 50 million shares poured in, enabling the company to generate more than $500 million. In 1992, Federated prepaid almost $1 billion of its debt. During the first six months of 1993, the company was able to retire $355 million of its most expensive bonded debt. The interest savings permitted Federated to increase its 1993–96 budget for store renovations and openings by $461 million to $1.2 billion.
In 1994, Federated embarked on a series of acquisitions. Consolidation offered Federated a number of benefits as the department store industry encountered intense competition from both discount merchandisers such as Wal-Mart and specialty retailers like The Gap. “There are certain economies of scale that size gives you,” a retail analyst explained to the Tribune Review. By purchasing the Joseph Home Co. of Pittsburgh in 1994, Federated added ten Pennsylvania stores to its Lazarus division. Federated made a more substantial acquisition in December 1994, when it bought erstwhile rival R.H. Macy & Co. With this development, Federated became the largest department store company in the United States. But the company was not finished. In 1995, Federated purchased the 82-store Broadway Stores, Inc., which included Broadway, Emporium, and Weinstock’s department stores. The Broadway acquisition, given that chain’s strength on the West Coast, afforded Federated with much desired access to that part of the country—particularly the markets of populous and prosperous California.
Smoothly incorporating these diverse additions into the Federated fold presented its own challenges. As the Commercial Appeal explained, for Federated to benefit from its buying spree, it had to “trim costs and use its enormous buying clout to pare expenses and boost earnings.” In an effort to integrate Macy’s operations with its own, Federated launched its Federated Logistics Division in 1994, in an effort to coordinate distribution facilities and functions in the United States. Federated then consolidated its A&S/Jordan Marsh division into Macy’s East—creating a single 89-store division stretching across 15 eastern states. On the opposite side of the country, Federated folded its Bullock’s stores into a new Macy’s West division. Shortly thereafter, Federated dissolved the I. Magnin chain, converting some of the 13 I. Magnin stores into Macy’s or Bullock’s, and selling off the rest. In 1995, Macy’s followed suit by consolidating Rich’s/Goldsmith’s and Lazarus into a single operating unit—Rich’s/Lazarus’s/Goldsmith’s. After acquiring the Broadway Stores empire, Federated converted 56 of those stores to the Macy’s nameplate. Five others were slated to become Bloomingdale’s, which represented the first time that upscale department store had ventured into California. In 1996, the Jordan Marsh stores in the Northeast (already administered under the Macy’s East division) were renamed Macy’s.
Despite its bevy of new stores, Federated still needed to concentrate on boosting sales. In an effort to distinguish its stores from those of its competitors, Federated focused on developing its own brands of clothing and other merchandise, including Alfani, I.N.C., Charter Club, and Tools of the Trade. Since private brands essentially cut out all middlemen, Federated was able to generate higher profit margins on these in-house lines. Moreover, private labels could draw customers to Federated stores. According to Gannett News Service, labels such as Charter Club “built customer loyalty because they can only come back to [the store] for that brand.” Federated rapidly expanded its Federated Merchandising Group, which was responsible for designing, manufacturing, and marketing all its private labels. At the same time, Federated bolstered the presence of its unique brands by creating catchy vendor shops within its department stores. In 1997 alone, Federated built over 680 of these sub-units, which served to leverage its private labels.
While Federated worked to lure customers into its diverse department stores, the company also acknowledged that commerce was evolving, as Internet sales rose exponentially each year. Analysts forecast that by 2003, total Internet sales would exceed $108 billion. Like its competitors, Federated was “faced with a growing force of shoppers who opt to point and click to make their purchases from home rather than step inside a store,” as the Newark Star-Ledger noted. Moreover, younger consumers—who were in the process of building life-long loyalties to stores—were more likely to embrace Internet shopping. To adapt to these tectonic shifts, Federated launched Macys.Com in 1996. This online retail venue allowed Internet-savvy consumers to purchase many of the same items found in Macy’s department stores. In 1998, Federated also introduced Macy’s By Mail, a catalogue business.
James M. Zimmerman—who had replaced Allen Questrom as Federated’s chairman and chief executive officer in 1997—led the company to acquire Fingerhut Companies, Inc. for $1.5 billion in 1999. Federated planned to exploit Fingerhut’s considerable expertise in direct-to-customer and Internet retailing. In addition to its position as the second largest catalogue retailer in the United States, Fingerhut owned Arizona Mail Order (a catalogue apparel retailer), Bedford Fair Industries, Inc. (a women’s apparel catalogue retailer), Figi’s (a food and gift catalog company), and Popular Club (a membership-based cataloguer of general merchandise). Because Fingerhut had pioneered database marketing—and still maintained information on 30 million customers—Federated hoped to use its acquisition as a springboard into the realm of direct-to-customer retail. As the Cincinnati Courier noted, “Fingerhut provide[d] a platform for [Federated] to learn the e-commerce side of the business.”
Federated’s numerous acquisitions, consolidations, and strategy shifts proved tremendously successful. Sales increased from $8.31 billion in 1994 to $15.83 billion in 1998. As consumer confidence levels surged to a 30-year high in 1999, Federated’s sales in both its department stores and its direct-to-consumer operations were brisk.
Fingerhut Companies, Inc.; Arizona Mail Order Inc.; Old Pueblo Traders; Figi’s Inc.; FreeShop.com.
Macy’s East; Macy’s West; Rich’s/Lazarus/Goldsmith’s; Bloomingdale’s By Mail, Ltd.; Burdines; The Bon Marché; Stern’s; Federated Logistics and Operations; Federated Merchandising Group; Federated Systems Group; Financial and Credit Services; Federated Direct.
The May Department Store Company; Neiman Marcus, Inc.; Saks Incorporated; Dayton-Hudson Corporation; Nordstrom, Inc.; Dillard’s, Inc.
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—April S. Dougal
—updated by Rebecca Stanfel