No Holds Barred: Retailers Battling for Profits

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This is a dangerous and potentially deadly time to be a retailer in America. The number of stores has grown at a rate far faster than the U.S. population, setting off a competitive battle as wild and unpredictable as a Wrestlemania spectacular. As the grappling gets rougher and tougher in an industry where takeovers and leveraged buyouts have become everyday events, some contestants are being tossed out of the ring and others are being dismembered or gobbled up by competitors.

The struggle has become more desperate than ever in 1988, with the five-year economic expansion losing momentum. Few economists predict an outright recession this year, but the long-running consumer spending spree is expected to taper off considerably. While consumers seem to have taken the stock-market crash in stride, they are becoming worried about the debt load they are carrying. Result: the overabundant department stores, discount outlets and specialty boutiques will be fighting ever more fiercely for consumer dollars. Says Bernard Brennan, chairman of the Montgomery Ward chain: "There's no question about the upheaval in the industry."

As sales level off, many contestants have concluded that the best way to thrive is to buy out some of the competition. For five weeks, Canadian Developer Robert Campeau engaged in a bidding battle with R.H. Macy for Federated Department Stores, a retail giant with 650 outlets, including such prestigious chains as Bloomingdale's, I. Magnin and Bullock's. Federated had tentatively agreed to a deal with Macy, which has 97 stores, but Campeau, who already owns the Allied Stores chain of 286 retail outlets in the U.S., hiked his offer. Tired of being tugged in two directions, Federated set last Wednesday as a deadline for final bids. But the two sides kept sweetening their offers even beyond the cutoff, and Federated flip-flopped between choosing Campeau or Macy.

On Friday, Federated finally announced a decision, and it was a surprise: Campeau won, but Macy came away with a consolation prize. The three companies signed an agreement in which Campeau will buy most of Federated for $6.6 billion and Macy will acquire the Bullock's and I. Magnin chains for $1.1 billion. Campeau plans to spin off parts of Federated. Filene's and Foley's, for example, have already been promised to May Department Stores. Retailing experts were relieved that the battle was over, but not altogether pleased with the outcome. Said Walter Loeb, an analyst at the investment firm Morgan Stanley: "I'm sad about the fact that a fine department-store company like Federated is being split up and decimated."

Both Campeau and Macy will now have more muscle to compete in the free-for- all engulfing U.S. retailing. The malling of America in recent years has created a glut of stores, which has been a delight to consumers but a nightmare to the shopkeepers. A study by Sears, Roebuck, the No. 1 U.S. retailer (1987 sales: $28.1 billion), showed that in the past twelve years the amount of store space in regional suburban malls has increased by 95%. During the same period, the population grew by 12.9% and disposable personal income by 40%. Management Horizons, the market-research subsidiary of Price Waterhouse, estimates that the U.S. has 40% more retail capacity than its population needs.