February 28, 2006, 12:00 AM

Reviving the Web Sites

Federated invests $130 million in a drive to create a $750 million-a-year web operation

It’s been a rocky existence for Federated Department Stores Inc.’s web strategy. Four years ago, Federated announced that Bloomingdales.com would become a brochureware site, pointing customers to Bloomingdale’s stores, and that Macys.com, an online pioneer, would scale back its assortment and focus on best sellers.

But two months ago, that strategy was ancient history. Terry J. Lundgren, Federated’s chairman, president and CEO, announced that Federated plans to invest $130 million in its direct-to-consumer businesses, including Macys.com and Bloomingdales.com.

“Online sales represent the fastest-growing part of our business and an outstanding opportunity for continued progress as we serve ­millions of new customers nationwide through our acquisition of May Co.,” Lundgren said. “Our ­customers have told us they ­appreciate the ­convenience of shopping online as well as in our stores. This cross-­channel integration is a vital component of our ability to maximize the potential of the nationwide Macy’s and Bloomingdale’s brands.”

Crucial timing

The timing of the investment is particularly crucial because Federated is moving to consolidate the stores and web sites of the recently acquired May Department Stores Co. under the Macy’s and Bloomingdale’s brands. It also comes at a time when department stores are losing ground to specialty stores, discount super stores, and online retailers.

Federated needs a strong web presence to remain a player in the retail world, says Robert Garf, analyst at AMR Research. “The reality is that approximately 50% of in-store purchases are influenced by research that is done online prior to entering the four walls of the store,” he says. “Brick-and-mortar retailers shouldn’t see the web channel as a nice-to-have. It’s really a ticket to entry. Those retailers that can create a ­transparent shopping experience among all ­channels will be the winners.”

Macy’s online businesses have posted consistent double-digit sales growth over the past few years and are more profitable every year, Lundgren said. Federated expects direct-to-consumer sales to grow to more than $750 million by 2008 from about $450 million last year.

Federated employs about 100 people in San Francisco and another 125 in New York City to support the web, Lundgren says.

Maintaining momentum

“To maintain the momentum, we recognize we need to invest to better serve additional ­customers who want to shop online for the type of fashion merchandise we sell, especially as Macy’s and Bloomingdale’s expand their store presence nationwide,” Lundgren said. “We are very ­serious about ­capitalizing on this opportunity.”

The funds for upgrading the online stores represent about 4.6% of the $2.8 billion Federated has budgeted for capital improvements through 2007.

As part of the plan, Federated will upgrade and enhance content and order-management software ­systems supporting Internet-based selling functions. The systems will help handle increased traffic and orders, improve service levels, enhance efficiency, and enable increased personalization of gift packages, Federated said. The upgrades also will give customers more details on order status and delivery schedules.

In addition, Federated plans to build a 595,000-square-foot distribution center to handle direct-to-consumer orders, which will be supported by a tailored warehouse-management system. The center, to be built in Portland, Tenn., is expected to be completed in spring 2007. Federated currently fulfills online orders from distribution centers that primarily supply its stores.

Driving multi-channel sales

Federated is more concerned with using the sites to drive multi-­channel sales rather than just ­boosting web sales, Lundgren said at the National Retail Federation’s convention in January. “Our two-channel ­customers spend about 29% more each time they make a purchase than if they just shopped in one of our stores or on the web,” he says.

Almost 59% of ­customers who shop at Macys.com, Bloomingdales.com and other Federated sites also shop at the company’s network of stores. On the web, about 40% of all customers use a Federated private-label card to make purchases. “Using the web we can reinforce the Macy’s brand across other channels,” Lundgren says.

As Federated re-names former May stores as Macy’s, Lundgren says the company is seeing a big surge in both online and offline sales. “When we converted stores in Florida, we saw a big spike in sales from that region on Macys.com and we are seeing the same trend in Atlanta,” he says. “The web has an impact on our stores and the stores help drive more online sales.”

Since briefly outlining plans for the web site at the NRF convention and at a press conference, Federated has refused to discuss in detail how it will upgrade the site.

A well-run, technologically sophisticated web site is a necessity for Federated and other retailers, says Paula Rosenblum, director of retail research at the Aberdeen Group. “They don’t have a choice anymore, particularly if they want to attract younger customers,” she says.

A major piece of Federated’s web strategy involves the consolidation of May Department Store’s nearly dozen sites under the Macy’s and Bloomingdale’s brands, its two strongest brands.

That consolidation limits Federated’s web strategy, Rosenblum says. “If you’re going to have one brand, you’re going to have to have one web site,” she says.

By September, Macys.com will be Federated’s flagship site. But the retail chain also will continue to operate Bloomingdales.com, MacysWeddingChannel.com and BloomingdalesWeddingChannel.com.

Federated began ­consolidating former May sites into Macys.com and Bloomingdales.com last fall. But until the conversion is ­complete, some May store sites continue to operate as regional brands. The regional brands also are listed on Federated’s home page with links to pages explaining they are part of Macy’s.

With a bigger web operation, Macys.com will have broader market share in regional markets and cities such as Chicago, Dallas, Houston, St. Louis, and Minnesota. The more than 300 May stores also will help Macys.com build a bigger multi-channel program, particularly for Macy’s policy of buy online and pick-up or return to store.

“We are creating a bigger national footprint and moving into regional markets where we will have more of an offline and online ­presence,” says Kent Anderson, Macys.com president.

But Rosenblum questions Federation’s overall branding strategy. “I’m not crazy about having one department store name for the mid-market all around the country,” she says.

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