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Here's Mr. Macy
Federated CEO Terry Lundgren believes there's still a place for department stores.
November 18, 2005: 5:09 PM EST

NEW YORK (FORTUNE) - Even in the world of J. Crew and Target, Terry Lundgren believes there's a place for the good old department store.

Earlier this year the Federated Department Stores CEO purchased May Department Stores for about $17 billion; as he points out, the combined companies produced sales of more than $30 billion in 2004. That's a lot of customers who don't yet know they're supposed to be shopping someplace else.

But growing is another thing. Lundgren's plan is to focus on a few brands nationwide. The strategy hasn't been without pain. When Lundgren said he was replacing the Marshall Field's nameplate in Chicago with Macy's, movie critic Roger Ebert and the Chicago Tribune recoiled in horror.

Lundgren explained to FORTUNE's Julia Boorstin and Eugenia Levenson why he's not worried about getting a thumbs-down in Chicagoland.

What's one of the biggest benefits of a national platform?

We have never been able to advertise on our Macy's Thanksgiving Day Parade because it's a national program, and we didn't have national coverage. This year we've gone to 425 stores, which is enough coverage to get us onto national TV.

Any second thoughts about replacing the Marshall Field's name?

I am not surprised that there was a very strong emotional reaction. Marshall Field's captured the hearts of Chicagoans, but over the past few years has been unable to catch their pocketbooks. The reality is that the division's sales declined in four out of the past five years.

Two-thirds of the customers we surveyed said that if you have the same merchandise, the same service or better, the same store environment or a better one, and your pricing is the same or better, and if my salesperson behind the Frango Mint counter is the same person -- if all that is the same and you're going to change the name -- the answer is, 'Yes, I would still shop with you.'

But why risk offending that third of customers who remain loyal to regional brands?

I couldn't expand Marshall Field's. When we tested the name, it did not register on the East or West Coast. This is not unique to Marshall Field's. The regional department store sector has been under attack for a long time. People remember how great things were 20 years ago, but 20 years ago the retail landscape was substantially different.

Thousands of new stores have opened from the lower end and even at the higher end, and so customers have many more choices. The idea behind Macy's is that it can market on a national basis but can respond regionally to consumer fashion, choices, and taste. That's a new model for growth.

The market seems to be splitting to discount stores and specialty retailers. What's your niche?

We're not like a strip mall self-service operation, and we're not like a specialty boutique that is so high-end that it turns off the large majority of customers. A large segment of the population can afford to shop at Macy's. We're able to offer a much broader assortment of different products at different price ranges, focused on the four lifestyles of our core customers.

Four lifestyles?

We call them Katherine, Julie, Erin and Alex. There's a male version too. Katherine is traditional, a classic dresser, doesn't take a lot of risks, likes quality. Julie is neotraditional, slightly more edgy but still classic. Erin is the contemporary customer who loves newness and shops by brand. Then there's Alex, the fashion customer, and she wants only the latest and greatest. She worries about what everybody was wearing at the event she went to last night.

Erin and Alex sound pretty hip. Haven't they deserted the department store?

People have been saying that for decades. My friends in college asked, Why did I want to get into the department store business? Isn't it a dinosaur business? Shortly after that people said, Aren't you worried that the catalog business is going to make stores obsolescent? And then it was QVC. Next was the [Internet].

Every time I became less and less of a believer in all those things. We did $15.6 billion in sales last year, May Department Stores did $14.4 billion last year, and so people are still shopping at department stores. My job is to grow the business.

A lot of brands sold at Macy's are also available elsewhere. What's the draw?

One of our absolute secret weapons, a clear sustainable competitive advantage, is our private-brand prowess. Macy's private brand, INC, is a several-hundredmillion-dollar brand today, the single fastest-growing brand in all our stores.

The largest brand we have in our entire company -- bigger than Estée Lauder and Ralph Lauren -- is Charter Club. May's private brand was the worst-performing part of their business. We're going to replace that with the best-performing private brand in the industry, the Macy's private brand.

What's your outlook for the holiday season?

Analysts are predicting a slower year. We have modest expectations for the fourth quarter, in the 1 percent to 2 percent comp-store-sales-growth range. This is a really critical period for us. Then in January we begin the full integration. We start remodeling the May stores, setting our inventory, training our service expectations.

I can't tell you that oil prices won't be high, and I can't tell you that the housing won't be slow in terms of starts, but I can tell you that we will begin to take market share.

Do you have any other acquisitions in mind?

Not today.

Read the complete interview.  Top of page

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