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PrintLazarus, the store: the decline of a great institution
This story appeared in the May 1990 issue of Columbus Monthly.
For more than a century, the giant family-owned retailer stood for quality and customer service. Then came the headquarters move to Cincinnati, the takeover by Canadian Robert Campeau and the Federated bankruptcy. Today, management fights to keep Lazarus healthy.
Sometime during the evening of Saturday, Jan. 13, 1990, a customer made a purchase at a Lazarus store and gave the salesclerk the one-billionth dollar spent by shoppers in Lazarus stores during fiscal 1989, a bookkeeping year that was to end three weeks later. No fireworks went off, no music poured out of the sound system—the way the computer system works it was impossible to capture the exact purchase—but it was a milestone nonetheless. Lazarus, the 44-store division of Federal Department Stores, was a billion-dollar business for the first time in its history.
The achievement was bittersweet. Less than 48 hours later, Federated and its sister retailing unit, Allied Stores, were dragged into federal bankruptcy court in Cincinnati by their parent Campeau Corp., to begin the long, difficult process of restructuring under a Chapter 11 filing. The most famous fashion stores in the United States—stripped of I. Magnin, Bullock’s and Filene’s since 1988, but still including the sainted Bloomingdale’s—were in the poorhouse. With combined Allied-Federated assets of $11.4 billion, it represented the fourth largest bankruptcy filing in U.S. history.
It was a strange twist, because the stores were making money. The estimated 1989 profit of the 44-store Lazarus group alone was in the vicinity of $120 million, according to financial statements to the Securities and Exchange Commission. That put it about on par with Rich’s of Atlanta and a few million below Bloomie’s. Of course, the figures didn’t take into account the interest payments on debt, and taxes and so on. When that was done, the accountants put parentheses around the figures to signify negative numbers.
“The irony is that they weren’t done in by the market,” says Carl Steidtmann, vice president and chief economist of Management Horizons, the Columbus-based consulting and market research firm for retailers. “They were done in by their balance sheet. It was inevitable that they would be bought out. It was not inevitable that it [the purchase] would be so leveraged.”
So leveraged because of the prices paid. And because the buyouts were financed, as these corporate gangbangs routinely were financed during the ’80s, with borrowed money, including those infamous high-interest junk bonds. For Federated Department Stores, the wily Canadian developer Robert Campeau paid $6.6 billion in 1988, about $500 million too much, according to the Monday morning quarterbacks. He paid $3.7 billion for Allied two years before.
The Campeau Corp. was $7 billion in debt and the interest payments were horrific. At a press conference following the Limited annual meeting last May, chairman Les Wexner, one of the acknowledged visionaries of the retailing industry, characterized the debt as putting Federated “at the edge of what the world will tolerate financially.”
In the end, the acquisition didn’t work, and on its heels came a reassessment of the era of leveraged buyouts. Robert Morosky, the ex-Limited vice chairman who spent six months as head of Allied Stores and a few weeks running Federated before a dispute with Campeau ended the relationship, says Campeau “put the nail in the coffin of the ’80s decade of greed and avarice.”
Yet for all the discussion of who is to blame, and of whether the investment community failed its responsibility in negotiating the deal and financing it; for all the they-zigged-when-they-should-have-zagged analysis; for all the thumb-sucking columnists churning over capitalism run amuck, there is close to universal agreement that Federated was ripe for a takeover—if not by Campeau, by someone else.
That’s because, as Lazarus chairman Mark Cohen acknowledges, there was a “gap” between the value of the corporation’s assets and its stock price. The public markets were punishing Federated and other retailing corporations, he says, because their earnings were stagnant. Says a former Lazarus executive, “It [Federated] went from being number one to being average, and it was underpriced in the market.” That lured takeover action and, in the end, “Someone came in and paid too much money for it.”
“If you truly analyze Federated,” explains Morosky, “every year they had a profit. But if you take a base year of 1970 and measure inflation, you see that profits were eroding. They were not keeping up.”
Federated was vulnerable. But what made it so? How did a business considered one of the best-managed corporations in the United States at the start of the 1970s disintegrate over 18 years? There was a time when every other department store chain was trying to keep up with Federated. A retired May Company executive remembers the competitive challenge presented by each new report of Federated margins. What happened?
There are those at a distance who offer a macro explanation: Department stores—with notable exceptions—were organisms done in by success; they didn’t adapt, they didn’t change with the times. There are those who see a singular failure at the top of the pyramid, in Cincinnati, at the corporate headquarters of Federated where chairman Howard Goldfeder and a group of very smart people with calculators tried to usurp the autonomy of the individual divisions, shifting the power to run the business from the selling floors to the corporate offices.
Both explanations are probably correct to a large extent. And no place did it all play out more clearly than at the Lazarus division in Columbus.
The story of the founding of Lazarus and the creation of Federated, as a network of strong, family-owned department stores, at the instigation of Fred Lazarus Jr. in 1929 is part of the saga of American retailing. (See “Lazarus, the family: The end of a dynasty.”) The department stores of the nation were local, parochial, and passed down from father to son. The heads of the families were community power brokers.
Department stores, says Cohen, were “businesses built on the backs of visionary merchants.” To this day, the merchant, the expert in buying and selling—rather than the back-of-the-house expert in personnel, real estate, finance—is the industry’s revered figure.
People who take the long view suggest that the seeds of trouble for the department stores were planted in the post-World War II era when house-hungry veterans moved to the suburbs and the government started building highways to reach them.
Says Morosky, “The real estate developers got involved and they changed the face of retailing.” In other words, the people who ran the department stores were sitting downtown contemplating business as usual while their futures were being charted by real estate developers who began building shopping centers that were, in effect, horizontal department stores—individual, side-by-side retailing units instead of the various departments within a multistory department store. Lazarus, in particular, was slow to move.
Nothing happened overnight, of course. The great generalists of merchandising still controlled their downtown stores and their towns. One former Lazarus executive estimated that through the 1950s, Lazarus “owned one-third of the retail business of this city.”
Then, in the mid to late ’60s and early ’70s, as the move of customers to the suburbs intensified, the department stores started following them out. Lazarus opened Westland in 1962, then Northland in 1964, Eastland in 1967, went into the Mansfield area in 1969, Kingsdale in 1970, Lima in ’71. Opening new stores made it easy to get more business. “Those markets were new and those customers were gold waiting to be mined,” says Cohen. When that was over, in the case of Lazarus as well as some of the others, there were stores to be built or bought in Indiana and West Virginia.
“A new store is like a drug,” Cohen continues. “Take the drug, feel the effect. The predisposition was to spend money on new stores. There was immediate gratification for it.” But because business was growing in all these new areas, it was easy to ignore the old stores. So while the people who ran the business were building up new markets, they fooled themselves that the old ones didn’t need work, he says.
Meanwhile, something else was going on in the ’70s. There was a demographic shift, a lifestyle change that would have far-reaching effects on department stores. Says Steidtmann of Management Horizons, “The Lazaruses of the world got caught in the middle market.”
He describes it as an economic entity that started to decline in 1973 both in size and purchasing power, and proceeded into a steep decline in the 1980s. “They didn’t anticipate it and they didn’t change.” Instead of going strongly upscale, the stores stayed with the tried and true, the same market they had always served. “There’s nothing like success to breed failure,” Steidtmann adds.
And in serving that market, says one former Lazarus buyer, “We became a routine, big-volume, polyester emporium.” The sense of adventure, the glitz was lost, she says.
Federated, says Morosky, “never recognized the changes in society brought by the baby boom. And never made the strategic commitment to change.” The strength of the department store was customer service and presentation, but, “Their merchandise wasn’t any different than anyone else’s.” And when the presentation and service went downhill, so did the business.
There were specialty stores with a focus on constantly changing fashion, with an understanding of the spending habits of the baby boomers; there were a reinvigorated stand-alone furniture industry, stores that specialize in appliances and electronics, sporting goods stores, football-field-size home centers and discounters. There were banks with credit cards that allowed customers to charge purchases wherever they shopped.
Keeping abreast of the competition was particularly difficult in Columbus, where it was so insidious. Executives felt they were fighting the Viet Cong, says one former store chief. Managers who came to Lazarus from other Federated divisions were used to an identifiable competitor, another department store or two. Then, they could walk across the street and see what the competition was doing. Here, says an executive of the period, “Lazarus had 15 percent of the market and was competing with everyone.” That’s what Federated didn’t understand, insists anther former executive. There was no willingness to reinvest in the business because, “We had no competition.”
But throughout the country, pieces of the business were being nibbled away. Critics contend that Lazarus, among others, was too slow getting out of businesses that were no longer profitable—hardgoods, staples—and using the selling space for high-profit fashion merchandise.
A former Lazarus executive, who says reports of the pending demise of department stores have been around for a hundred years, grants that they may have been a little slow in getting out of some businesses and getting into others, but that’s not what made Federated vulnerable, he says.
The 1980s was the critical period after, almost simultaneously, the batons of both the Lazarus stores and Federated were passed to non-family members. In 1981, Charles Lazarus retired as chairman of Lazarus; the following year in Cincinnati, Ralph Lazarus retired as chairman of Federated and was succeeded by Goldfeder, a retailing veteran who had been Federated’s president.
It was around this time that Federated embarked on a strategy that got it “caught in an identity crisis,” says Cohen, who started his retailing career at Federated in 1971, but left five years later. His return to Federated, at Goldsmith’s in Memphis, came a year before Campeau entered the picture and picked him to run Lazarus.
He explains that Federated “had almost always been a department store retailer,” and it decided to go into the discount store business. It opened Main Street, Children’s Place and an accessories chain, in addition to Gold Circle, which Lazarus had started initially.
While there were parallels between department store and discount store retailing, he explains, “They weren’t so natural as to make them mindlessly successful right off the bat.”
But what Cohen finds outrageous is that Federated poured money and energy into these fledgling discount operations at the expense of the core business. “There is no way that I can justify in my mind the singular neglect that took place with respect to large, productive long-standing facilities throughout the Federated group,” he says.
The Sunbelt stores fared better, he acknowledges, but for divisions like Lazarus, Shillito’s in Cincinnati, Rike’s in Dayton, there were all the manifestations of the lack of corporate support. Approval was hard to get for remodeling and refurbishing of the stores, for internal systems and operational facilities. The message was, “Shabby is OK,” says Cohen. Mediocrity became the norm.
“Eastland was like a slum, and nobody stepped in,” he argues. “You can only clean the carpet until it disintegrates; there is only so much duct tape you can use.” And he asks, “What does that tell the customer?”
“A department store does most of its business in products that are not requirements of life,” Cohen says. “None of us needs another dress, or a shirt or tie or we die. . . . The success of a department store is in providing an exciting array of products on a regular basis. It’s a whole host of things that make it successful. When a store is good-looking and restored and renewed and provides an array of fashion, it provides an arena in which to interest people in shopping.”
But in the mid ’80s, the Federated motto was, “Expense the way to profit.” It meant that instead of investing in ways to improve the merchandising of products, the stores could cut costs.
That did mean curtailment of refurbishing funds, but the largest of the costs was salaries of sales employees. When that was cut, service, the foundation of department-store selling, suffered.
It appeared to the leaders of Federated divisions that Goldfeder and other key executives were unduly influenced by a cadre of corporate financial experts, people who were, indeed, bright, and had answers. To remodel, to make a capital improvement, the division had to prove to corporate that it would make a difference in the bottom line. There were hours-long meetings focused on the raising of earnings per share a few cents. “We weren’t even getting back the depreciation,” says a former executive, explaining how difficult it was to pry improvement funds from corporate.
As Lazarus sought to meet corporate expectations, in Cohen’s view, it showed profits by cutting back and cutting back until it started to destroy itself. “First the gunnels fueled the boilers, then some of the hulk,” he says. “The enterprise was still afloat, but we were getting close to the water line.”
The Federated group in Cincinnati was smart, and they sterling educational credentials, says Morosky, a numbers man himself as a former chief financial officer. “They were intelligent, but they didn’t have merchandising product experience.” Morosky insists Goldfeder came under the spell of a society of bureaucrats who “spent their time on the telephone talking to each other, gossiping and binding together their point of view.” It led to a political war between corporate and the stores. Around Lazarus, says another man, they started referring to the Federated executives as the “seagulls” because they “flew in, ate your food, crapped all over you and flew away.”
What appeared to be going on was a half-hearted strategy to micromanage the various divisions of Federated, to bring them into a uniform, tight, centralized operation, run out of Cincinnati, the way iron-fisted David Farrell runs the May Department Stores, where every store operates just like every other store. The May Company is successful at it.
But the federated culture was different. The divisions had always been autonomous, run according to the needs of the local community, so long as the program worked and there were results. In one city, the Federated store could be the upscale fashion leader, with high margins and high expenses producing high profits. In another city, the store might adopt the “we-will-not-be-undersold” strategy: low margins, low prices, but also leading to high profits. To change that required a fully thought-out plan that would be implemented over time. “Department stores move like elephants,” says Bob Morosky. “They have to be slowly moved along. You can’t whip them and make them run like racehorses.”
Yet it wasn’t just that a bunch of fresh-faced number-crunchers took control, it was that no one came up with a complete strategy. There was no plan.
Of course, an enterprise as large as Federated needs financial and operational experts, says Cohen. “However,” he adds, “it’s still a retail business, and to a customer, if the merchant focus isn’t strong enough, the enterprise has no strength. We lose sight of the fact that we’re only as good as every one of those transactions between us and a customer, all added together.”
Cohen puts as much blame for the power shift to corporate on “the lack of will on the part of some of the divisions.” He contends that “Strong-willed leadership with convictions and the ability to produce results have received support.”
Perhaps the most glaring example of expense-driven management was the decision, in 1986, to merge Lazarus with the already-combined Shillito-Rike’s division, call all the stores Lazarus and move the operations to Cincinnati. As far as anyone can see now, it was done without any sense of what the outcome would be and more to show Wall Street that Federated was “doing something” than for any clear business reason. The stories about Federated as a takeover candidate had started the year before in the business press. Al Taubman and Leslie Wexner were among names bandied as potential buyers.
The merger and the move was a wrenching experience for Lazarus Columbus, and, in the end, it had only short-term benefits. Says Cohen, “I think it worked on paper in a very short-term setting. . . . The expense structure was reduced, but so was the operating performance of the divisions. The savings was illusory.”
According to Cohen, Lazarus’s market share declined in all three cities after the mergers. The stores’ conditions deteriorated, the inventory was skimpy and the morale of Lazarus associates plummeted. He’s been told, he says, that it was not unusual in Columbus for customers and sales people to commiserate with each other over the chain of events.
The way the announcement was handled, with a failure of communication internally as well as with the shopping public, was dispiriting. Says one former Lazarus buyer, “Nobody, not even anyone with the last name of Lazarus, stood up and said, ‘This is terrible.’ ”
The move will not be undone. The merger is accomplished, the headquarters of Lazarus will remain in Cincinnati, says Cohen. There will be a lot of driving up and down I-71, he says.
So what happens now? Although the Federated division heads say they were relieved when the bankruptcy petition was filed on Jan. 15—the other shoe had finally dropped—it is not as uncomplicated as they tried to make it appear by calling it a tactic to enable “a corporate problem to stay at the corporate level.” The corporation’s troubles are the stores’ troubles.
“The specter of bankruptcy created tremendous distractions, for everyone, including customers,” says the chairman of Lazarus. For one thing, big ticket sales slowed during the early period of speculation and confusion. People who were thinking of buying $2,000 couches worried about a company that was being reported as going out of business. Would they lose their deposit? Would they get their couch? If they bought a television set, would they get service?
“Credit customers assumed that if something happened to us they would immediately have to pay back their outstanding balances, and they were fearful,” says Cohen. And, following Christmas, the garmentos, the Seventh Avenue manufacturers, stopped shipping. “Fortunately we were in very good shape going into that period,” he asserts, “and were able to jump-start the market immediately following the filing. There were things missing, but the lapse was minimal.”
Now, business is coming back. “Our expensive custom furniture business has never been better,” says Cohen, a sign of confidence that Lazarus will be around. “But the outcome of reorganization is not known,” he continues. “The fact is there is several billion dollars of debt that has to be reconciled and that day of reckoning is going to come.”
In what form? The corporate point of view is that the corporation will remain intact, Cohen says, and, “Divisions will not be sold.” Selling divisions is less attractive these days—including Bloomingdale’s, although it’s on the block—because of tax complications that diminish how much Federated would get out of a sale. Plan A, he says, is to convert the debt into some other form of financial participation whose cash requirements are manageable.
Meanwhile, Cohen says he spends a lot of time cheerleading, keeping people apprised of what’s going on, keeping their morale up. “Many bankrupt companies become dispirited and lose their economic vitality. It’s important not to let that happen here,” he says.
There are people in the industry, interestingly, who believe that the era of the department store is coming back in the 1990s. Bob Morosky, for one, notes that while the ’70s and ’80s was focused on baby boomers, as young singles or as DINKS, the ’90s are a return to the family. Designed to cater to families, he says, “department stores have great opportunities.”
But that doesn’t mean there’s no need for department stores to change, to differentiate with products, with presentation, with service, he adds. “They’re not dinosaurs, but they are an endangered species.”
Adrienne Bosworth is managing editor of Columbus Monthly.
