Target Faces a Mixed Outcome In Selling Department Stores: Marshall Field’s may be an easier sell than Mervyn’s, which could end up being a real estate play

Given the tumultuous reshaping of American retailing, it’s hardly surprising that Target Corp. wants to be free of the two old-line department store chains that long ago were eclipsed as prominent players inside the giant discounter. But that leaves the question of who would like to own the fabled Marshall Field’s chain, with 64 stores across eight midwestern states, and Mervyn’s, a middle-market-oriented store network on the West Coast. The answer is a split decision, according to Andrew Rees, a Vice President and retailing expert at L.E.K. Consulting. Marshall Field’s, with its cache and its franchise, could be the centerpiece in a bidding slugfest while Mervyn’s, situated in one of the retailing segments most savaged by recent market convulsions, may wind up as a real estate play, sliced up among several merchants hankering for good locations. In many respects, Target’s disclosure in March that it is weighing the proverbial strategic alternatives for the two chains with advice from Goldman Sachs exemplifies the challenges facing diversified retailers that need to be pure plays in the most lucrative channel or at least quit the segments that are dragging down performance. The outcome projected by Rees suggests that in some cases they may have to go to great lengths to engineer an exit from the least desirable areas. Rees sees the prospect of a fight between Federated Department Stores Inc. and May Department Stores Co. over Marshall Field’s. “Both have a hole in their Midwest distribution,” he says. “Either of them would love to plug in Marshall Field’s. It has a good name, they would be leveraging synergies, and it’s reasonably well run. I anticipate a fairly spirited bidding war.” He says he doubts that a single buyer wants Mervyn’s “in its entirety” but that several established retailers probably like the locations they can convert to their own stores. “If Target does manage to sell to one buyer, it probably has already evaluated what it doesn’t want,” he says. With sales of $6.2 billion in 2003, the two chains nearing the block accounted for less than 13% of Target’s total volume of $48.2 billion last year, not enough to warrant keeping in the current turbulent climate, experts say. While their franchises are being chipped away by growth of low-priced mass merchants – what the trade calls the discounters – specialized merchants, and upscale chains in the bricks-and-mortar area, as well as increased traffic on the Internet, old-line department stores have been standing pat. As a result, they don’t offer anything unique to lure customers and the shopping experience is wanting, authorities say. “They offer the same merchandise at the same price point on the same displays in the same-looking stores,” says Steven Platt, the head of training and consulting firm Platt Retail Institute. “Customers can get merchandise cheaper in other venues.” Rees faults department stores for becoming “so risk averse” that they haven’t done anything to offer grabbers to customers. “They buy the same patterns every year,” he says. “They’ve become very formulaic, they are run by numbers, and the buyers don’t shop the market any more. They sit in front of their computers and crunch the spread sheets.” Debra Cohen of Deloitte & Touche points out that department stores “are struggling with differentiating themselves” and being further pinched by declines in traffic mall. “What seems to be really hot right now are the specialty stores,” she says. “They are fashion forward and on top of the trend. They are more nimble and quicker to react. It’s easier to catch the eye of the shopper when you’re not segmented by departments.” But while she agrees that department stores haven’t done a good job of selling themselves, she isn’t ready to concede their demise. Retailing trends run in cycles, she notes, and the chains with some oomph have a chance to regain their luster with innovation. “Federated, for one, has done a good job of differentiating its stores by price levels,” she says. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com