Colorado malls feel the pinch as big chains consolidate

Janet Forgrieve, Rocky Mountain News

Published September 2, 2006 at midnight

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In Colorado, Foley's red apples officially become Macy's red stars in a week, the latest evidence of the current wave of department store consolidation.

It's a wave some believe finally has crested.

"I think for the next five years it'll be more stable - we've taken out a lot of players since the mid-'80s," said Willard Ander Jr., a senior partner of Chicago-based retail consultancy McMillan Doolittle LLP.

The wave began building in the mid-1980s as more discount retailers started catering to the midpriced department stores' target customers, Ander said.

As it gathered strength, the wave washed away some well- known names, including Montgomery Ward and, more recently, Lord & Taylor in Colorado.

Less than two years ago, Federated Department Stores Co. transformed 13 of the regional brands it had acquired over the years - including Burdines, Lazarus and Bon Marche - to the Macy's name.

Now it will do the same with the 11 brands it picked up in last year's acquisition of May Department Stores.

Department stores have been changing since shortly after the concept of providing more and fancier products in one place grew out of smaller dry goods stores in the mid-19th century.

In Colorado, Denver Dry stores became May D&F in 1966, then Foley's in 1993.

On Sept. 9, the state's 12 Foley's locations will change again, as 400 stores with 11 different names become Macy's.

Denver-based Joslins was acquired by Dillard's in the 1990s, a temporary blow to Park Meadows mall in Lone Tree, which already had a Dillard's and had to contend with an empty store until Lord & Taylor moved in.

The space is empty again, as are former Lord & Taylor spaces at Cherry Creek Shopping Center in Denver and Broomfield's FlatIron Crossing.

This time around, though, there aren't other department stores clamoring to move in.

Twenty years ago, the three largest department store companies accounted for 40 percent of total department store sales. That jumped to 60 percent 10 years later and to 86 percent by 2004, Ander said.

During those same years the pie got smaller, as department stores' share of general merchandise sales fell from 70 percent to 25 percent, with discounters now commanding three-quarters of the sales.

In their heyday, it was OK to be third or fourth behind more popular players, Ander said. But when discounters and specialty stores pulled more customers away, less-popular chains such as Montgomery Ward fell by the wayside.

"Wards was just a continuation of the same process - it wasn't the best or greatest for anybody," Ander said.

As the number of chains fell, empty department store space got harder to fill.

Nationally, that's a bigger problem in some markets, where Macy's already competed with some of the names it now owns and needed to weed out duplicate locations.

Since Macy's parent Federated Department Stores acquired May Department Stores Co. last year, it has sold or announced plans to sell locations in 80 malls nationwide.

Still, Colorado centers have felt the pinch.

While the exit of Lord & Taylor turned out to be good news for Cherry Creek Shopping Center, which will add to its luxury lineup next fall with Nordstrom, Park Meadows and FlatIron Crossing will have to get more creative.

It's likely both centers eventually will redevelop the space for other uses.

At Park Meadows it's expected to be smaller retail and restaurant tenants, but the center hasn't announced anything concrete.

FlatIron Crossing has explored possibilities including retail, hotel, office and condo space, marketing director Heather Drake said.

At Westminster Mall, the former Montgomery Ward has stood vacant for five years since the retailer closed all its stores.

Reinvention equals survival

The department store chains still around are seeing healthy bottom lines, Ander said, but some must do some revamping to increase sales.

Two that could be at risk if they don't are Dillard's and J.C. Penney, he said.

Dillard's, which saw sales drop 13 percent between 2001 and 2005, has said it will introduce more upscale fashions as a way to boost sales and customer counts.

J.C. Penney, which sold its Eckerd Drug division last year to focus on reinvigorating its department store chain, plans to expand through building off-mall stores, both in new open-air centers and strip malls with empty space to fill.

Experts also say that the biggest retail trend of the past decade, e-commerce, hasn't been fully embraced by department store chains that still invest more heavily in their bricks-and-mortar stores.

Only a handful of department stores make the list of top 100 e-tailers, a list issued by Internet Retailer, a publication that has been tracking online sales since March 1999.

"Department stores just haven't had the orientation to sell online," said editor Kurt Peters.

Macy's has done a consistent but small 2 percent of its sales online, Peters said. Sears reports 4.4 percent and J.C. Penney 5.5 percent.

Higher-end fashion-intensive stores do better; Neiman Marcus had the largest portion from online sales at 8.2 percent, while Nordstrom reported 3.8 percent, Peters said.

Part of the reason for the higher numbers is that upscale department stores tend to have fewer stores and are still scarce in some markets, he said.

At the same time, luxury retail continues to grow.

The number of American households with $1 million or more in liquid assets stands at about 2.9 million, according to Greg Furman, chairman and founder of the Luxury Marketing Council.

Luxury department stores haven't faced the same pressure as their midprice sisters when it comes to competition from discounters, but they do face a challenge from the growing number of luxury specialty stores, Furman said.

Traditionally, upscale designers become known by being featured first in department stores.

"If you go back 15 years, for example, Armani started at Bergdorf Goodman," he said. "Lots of them would get their bragging rights by aligning with top stores."

Today, a walk through any upper-end mall shows many have matured - Coach, Louis Vuitton, Burberry and a slew of others may have a presence at Saks or Neiman Marcus, but they also are just as likely to have their own stand-alone stores.

Like the more midpriced Macy's, luxury department stores are also starting to develop their own private label brands as a way to combat growing specialty competition, Furman said.

Private label pinch

The increase in private labels, along with the consolidation, also is being felt among suppliers.

Companies including Jones Apparel and Kellwood recently have cited department store consolidation as the main reason for sales drops, as stores such as Macy's decrease their brands' floor space in favor of the retailer's own brands.

Macy's has long pushed to distinguish itself by selling private label brands that no other store can offer. Fashion labels including I.N.C. and Charter Club take prime places in the apparel displays.

Hotel Collection sheets and towels displace other name brands - and the bigger Macy's gets, the more name brand suppliers are feeling the pinch, according to a new analyst report by Todd Slater, managing director and retail and apparel analyst at Lazard Capital Markets.

"To survive, companies either need to have compelling national brands that resonate with consumers or be dominant and vertical with scale (e.g., Phillips Van Heusen in shirts). Tertiary brands will continue to be acquired or disappear," the report says.

forgrievej@RockyMountainNews.com or 303-954-5191

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