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The Darwinian world of retailing
Merger frenzy gains steam as retailers battle Wal-Mart, other discounters, but is that good for you?
March 21, 2005: 3:55 PM EST
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - In case you've had your head in a cave all winter, the retail industry is spitting billion-dollar mergers, and more may be coming.

The question, though, is all this consolidation a good thing for consumers -- like you.

The eruption of Darwinian activity started back in November when clothing marketer Jones Apparel Group Inc. (Research) acquired the specialty chain Barneys New York Inc. for $294 million in cash.

Later that month, two of the nation's oldest retailers, Kmart (Research) and Sears (Research), set an $11 billion merger. Sears' shareholders will vote on the plan for Kmart to acquire the company on Thursday.

Then Federated, owner of Macy's and Bloomingdale's, inked an $11 billion deal last month to buy rival May Department Stores. And just last week a group of investors agreed to buy Toys "R" Us for about $6.6 billion.

What's fueling the merger mania?

Industry watchers said the rush of consolidation comes as retail executives seek size to better compete against the giant discounters Wal-Mart (Research) and Target (Research).

"Five years ago, Wal-Mart had $160 billion in sales. Now it has over $288 billion in revenue. That alone is enough to force retailers to come up with a different competitive technique," said Gilbert Harrison, chairman and CEO of New York-based Financo, Inc., a mergers and acquisitions firm specializing in retailing.

"A couple of years ago, retailers with $10 billion in sales were considered impressive," he said. "In today's terms, that's less than 5 percent of Wal-Mart's annual sales volume."

Indeed, big retailers are flush with cash and in general have little debt on their balance sheets. At the same time, many are struggling to boost sales and win customers from competitors in a mature industry burdened by too many stores and lackluster consumer spending.

"No doubt there is a lot of overcapacity in the industry," Harrison said. "Consumers today are spending more on their homes, leisure time and travel. Spending on soft goods like clothes and shoes has decreased."

Wall Street, however, is focused on growth, not excuses.

Since many retailers have hit the skids in terms of organic growth, an obvious way of adding bulk quickly is by feeding on the smaller players.

Harrison, whose firm advised one of the bidders on Toys "R" Us and is currently advising a buyer interested in snapping up luxury goods chain Neiman Marcus (Research), expects the merger mania to spread into the clothing sector next.

Candace Corlett, at the retail consulting firm WSL Strategic Retail, sees it a little differently. She's betting on impending marriages within the supermarket industry.

"This sector is having a very, very hard time competing with Wal-Mart. If grocery chains keep focusing on price, they will certainly lose the battle, just like Winn-Dixie," Corlett said.

She's referring to the Jacksonville, Fla.-based regional operator of grocery and drug stores that filed for bankruptcy protection last month after failing to fend off the expanding footprint of Wal-Mart into its turf.

"What consumers are telling us is that they're either going to a big-box store like Wal-Mart, Target or Home Depot to satisfy most of their needs or they're opting for a specialty store like Gap for a more edited merchandise mix," she said.

If that's the prevailing trend on how consumer are shopping today, it means that stores in the middle, especially department store chains, are getting squeezed.

According to her own firm's nationwide survey research on how America shopped over a three-month period, department stores' share of the market dropped in a key area: 66 percent of women consumers said they shopped mostly at department stores in 2004 for their clothes and accessories, down from 72 percent in 2000.

"We've actually tracked a percentage decline in that category going back to 1996," Corlett said.

While consolidations may appease Wall Street, both Harrison and Corlett are somewhat ambivalent about the benefit to consumers.

"Consumers may see better prices but less product variety," said Financo's Harrison.

Corlett agreed. She says the retail merger trend is really a real estate story that's about trying to boost stock prices for shareholders, and not on building value for consumers.

"By putting its Macy's brand on all its own and acquired stores, Federated becomes a nationwide brand," she said.

"But if consumer already weren't shopping at Macy's why would they go there after its merger with May? What consumers ultimately want is for retailers to improve their merchandise and the shopping experience."

Click here for more on the Toys "R" Us deal.

Click here for more on the $11 billion Federated-May deal.

Click here for more on the $11 billion Kmart-Sears deal.  Top of page


Mergers - Acquisitions - Takeovers
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