Department-Store Superstar

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In many ways, the $17 billion Federated-May merger is the logical evolution of decades in which the industry failed to respond to customer complaints that department stores were boring, the service nonexistent and the merchandise ubiquitous without being interesting. "Department stores have lost sight of their customer. It's that simple," says Janet Hoffman, a San Francisco--based retail strategist for Accenture. Sales tumbled, and chain after chain of historic, family-owned retailers--Gimbels, Woodward & Lothrop, Wanamaker's, Montgomery Ward--closed their doors or were swallowed up by stronger companies. In 1980, about 35 major department-store chains were in business; today there are only 13. The merger is the category's last-gasp effort to save itself. "It represents the best chance to stop the decline of the department-store channel," says Liz Claiborne CEO Paul Charron.

Macy's first advantage is size. "It's now got the potential to be a Godzilla," says David Wolfe, a fashion retail consultant for the Doneger Group in New York City. Like Wal-Mart in the discount world, Macy's will wield a big and powerful roar that gives it leverage to get the best prices and exclusive products from vendors. But the recent history of retail suggests that size alone may not work. The most successful retailers have found their footing by focusing on one slice of the market. Luxury purveyors like Neiman Marcus, Nordstrom and Bloomingdale's (the only other brand that will stay in Federated's portfolio) have boosted profit margins by catering to the affluent. Discounters like Wal-Mart and Target have captured the bargain hunters. The stores that tried to appeal to a broad middle-income audience, as Macy's hopes to, have struggled. Former No. 1 retailer Sears merged with former No. 1 discounter Kmart to try to right two listing ships. Saks, a luxury icon suffering from mismanagement, misfired in its attempt to go down-market and has put its more lowbrow 40-store Parisian chain on the block.

For a retail Godzilla to perform that delicate merchandising dance, Macy's must use its marketing skill and purchasing muscle to manage a distinctive yet reasonably priced line of products and sell it in stores that, well, aren't exactly famous for their excitement. "It's easy to put names on all those doors," says consultant Wendy Leibmann of WSL Strategic Retail. "But the big challenge is to create a compelling retail environment."

Lundgren, a retail veteran and onetime CEO of Neiman Marcus, wants to do that by changing the look and feel of department-store shopping. On his agenda: broader aisles (managers will be assigned 32-in. rulers or measuring tapes to make sure they leave at least that much space), less cluttered departments (15% of display racks will be removed), upgraded fitting rooms (with plasma-screen TVs in the waiting area), stores that are easier to navigate ("way finding" signs will guide shoppers) and more help looking up prices (at least 35 bar-code readers in every store). The changes may sound cosmetic, but Lundgren hopes they will distinguish Macy's from its competitors: Macy's would offer high fashion without high prices but in a more chic and comfortable setting than that typically found at a discounter.