The 5 P's, How Federated used a total marketing strategy to climb to the top

September 24, 2006
St. Louis Post-Dispatch Business E5
"The 5 P's, How Federated used a total marketing strategy to climb to the top"


May Department Stores Co., the parent of Famous-Barr, was the most successful and best-managed department-store chain in America when Eugene S. Kahn became president and chief executive in 1998. Federated Department Stores Co., the parent of Bloomingdale's and Macy's, lagged far behind. May had a market value of $13.5 billion, compared to $4.0 billion for Federated.

 

Yet, Federated acquired May in August 2005. Two weeks ago, all Famous-Barr department stores became Macy's. How this happened is a classic study in the "do's and don'ts" of marketing.

The root cause of May's decline is simple: To use a phrase from legendary marketing guru Philip Kotler, May became a "One P marketer" by focusing excessively on price. Under Kahn, May became the leading proponent of a strategy called "high-low" pricing. It did attract bargain seekers. But the resulting low margins forced cost-cutting that hurt product quality, service and the shopping experience. More-profitable, fashion-focused shoppers deserted to specialty stores.

By focusing on price, May neglected the other three P's of the marketing mix: product, place (the store shopping experience) and promotion (advertising).

The major driver of Federated's ascent is Terry Lundgren, who became president and chief merchandising officer in 1997 and chief executive in 2003.

Martin Sneider, adjunct professor of retailing at Washington University, describes Lundgren as a visionary, charismatic, larger-than-life impresario. His strategy is to build strong store brands through great marketing, merchandising and in-store execution.

Lundgren's marketing strategy begins with segmentation. Kotler notes that shoppers can be divided into (1) bargain shoppers, (2) those "who will pay a little more for better quality and service," and (3) those who want "the very best quality and service."

While May focused excessively on the first segment, Lundgren appears willing to lose share in this segment to Wal-Mart Stores Inc., Target Corp. and Kohl's Corp. Instead, Macy's focuses on the second segment, while Bloomingdale's focuses on the third segment.

Federated uses all four P's of marketing to meet the needs of each customer niche within the target segment. It focuses on every detail of the merchandise, the shopping experience, marketing communications and (not least) an affordable price.

The strategy has worked, at least in the full-service department-store wars. With the acquisition of Macy's in 1994 and May Co. in 2005, Federated has won. Federated's market value is nearly nine times that of Dillard's Inc., its largest direct competitor.

However, Federated now faces a tougher challenge -- reversing the decades-old downward momentum of department stores. The department stores' share of women's casual apparel fell to 35 percent in 2004 from 75 percent in 1982, according to Service Industry Research Systems. Wal-Mart and other discounters took the bargain shoppers. Mall specialty stores took the fashion-oriented shoppers.

Federated's biggest challenge is driving all of the changes necessary to reclaim the two fashion-focused customer segments. The probable result is a marketing war with the specialty stores.

Does Federated have the strategy and resources to win this war? Let's look at each of the four P's.

Product

With $30 billion in annual sales and no direct competitor, Federated has greater influence with leading brands like Tommy Hilfiger and Liz Claiborne than does a fragmented group of specialty retailers. Federated will get the product it wants (and probably take some of its suppliers' profit margin).

Sneider says Federated has been especially successful with its private brands, which accounted for 18 percent of Federated sales before the merger, vs. 12 percent for May.

Eliminating the cost of intermediaries allows good quality, lower consumer prices and higher profit margins. Consumers benefit. Private brands today are affordable and precisely designed to meet the needs of lifestyle niches. Federated also benefits. Exclusive brands attract customers, and lower costs produce higher margins.

Promotion, advertising

The acquisitions of Macy's in 1994 and May in 2005 produced the first national high-end department-store chain. Federated is now in 64 of the largest 65 U.S. markets. Lundgren recently visited the holdout, Jacksonville, Fla.

National television advertising is a major opportunity for Macy's. The benefits are numerous. A single national brand will have dramatically lower production costs. National television spots have a lower cost per exposure and often get better program placement, which leads to greater effectiveness. A national brand travels with families as they move to new regions.

Finally, Federated and May had a combined marketing budget of $1.2 billion last year. No specialty store can compete.

Place (stores)

Lundgren is converting Famous-Barr in St. Louis, Marshall Field's in Chicago and Lazarus in Ohio to the Macy's name. Resistance is high. Chicagoans demonstrated and conducted a petition drive to save the Field's name. Sales declined in Ohio. Federated, however, is taking the short-term heat to achieve the long-term benefits of national branding.

Federated works to strike the right balance between "national branding and local implementation." Each store can modify its assortments, pricing, service and environment to reflect the lifestyles and needs of its customers.

Federated is committed to constantly improving its stores to make the shopping experience more convenient and enjoyable. Sneider says Federated is widening aisles and replacing fixtures teetering with merchandise with tasteful and accessible assortments.

Price

Federated also pays attention to price, but it recognizes that value is the best combination of product, shopping experience and price.

Federated's size leads to lower costs for products, marketing, administration and store operations. These lower costs allow Federated to optimize value for customers who value fashion, service and the shopping experience as well as price. Price-off sales and coupons won't be eliminated. They will just decrease, and Federated rewards its best customers (charge-card users) with most of the coupons.

Federated may have won the department-store wars, but victory in the coming brawl in the mall with specialty stores is not necessarily assured. Specialty retailers will work behind the scenes to prevent merchandise suppliers, advertising outlets and mall operators from giving Federated preferential treatment. You can also anticipate mergers among the specialty retailers so they will have greater influence with suppliers and better internal economics to compete with Federated.

The fifth P – people

In the end, people - a fifth P - may be the deciding factor in this marketing war. Federated's strength in people starts at the top.

A recent story in The Wall Street Journal describes Lundgren's "lifelong prodigious attention to detail, passion for fashion and belief in the power of store display on a vast scale." It also quotes him as saying, "This is a chance to get the market share back that we deserve."

The Federated people I have met are committed, well-trained marketing and sales professionals. A leader like Lundgren, Federated's immense resources and the exciting vision of reinventing the department stores will allow Federated to attract additional outstanding professionals.

Competition between Federated and the specialty stores should produce great value for people who love shopping. The Federated example also can produce great value for businesspeople who loathe shopping but love winning business wars.

How can you adapt Federated's "total marketing" strategy to produce incredible results at your company?




Bill Finnie, a business consultant and adjunct professor at Washington University, writes about the do's and don'ts for success.

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