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Saturday, September 24, 2005

Federated, Filene's & Failures

In what is rapidly becoming an epidemic, Federated Department Stores announced that it's shutting down many of this country's most enduring brands. Entities such as Filene's and Marshall Fields will be going the way of Studebaker, Woolworth's and Oldsmobile, proving yet again that Caretaker Management Syndrome has now reached epidemic proportions.

The management at Federated is playing the old saw (that Wall Street falls for again and again), wherein "the economies of unifying the brand will increase overall profitability." While that may sound really good on the pages of the Business Section, the unfortunate truth is that it doesn't work that way in real life.

Truth be told, it's more a recipe for disaster.

Whenever a Caretaker Managers move into position, the first thing they promise is to do is "restore profitability" to the beleaguered operation. But they don't say they'll increase revenue. They don't say they'll increase profits. They don't say they'll nurture or even grow the brand, because they don't know how. If history is any indication, you can expect them to do just the opposite. They merge units together and cut out the departments they view as duplicated. Then then proudly thump their chests for having cut costs.

But that doesn't build a brand. It actually undermines it and dooms it to failure. Here's how:

First, Caretaker Managers do nothing to increase the brand's revenue. All they do is look for costs to cut. Which means even if revenues drop, the Caretaker CEO simply cuts costs even deeper, in hopes he'll manage to show some kind of profit. Pretty pathetic, if you ask me, yet this is exactly what's happening in corporate boardrooms across America. Increased profitability? Big deal. It doesn't take a genius to keep cutting pieces out of an organization in order to make total costs appear less than total revenues, even when total revenues keep dropping. What takes genius is to build revenue, something that most CEO's seem increasingly incapable of doing, which is why brands like Maytag are circling the drain as we speak.

Federated's think tank figures that by merging all of its sub-brands into one or two national brands, it will achieve economies of scale which will increase its overall profitability. But you heard it here first:

This sucker is going to backfire, big time.

What Federated doesn't realize is that these brands are mostly regional in nature. Brands like Marshall Fields are popular in the midwest, but unheard of in the west. Generations of families have grown up around Marshall Fields in cities like Chicago. Others, in Boston and New York, have known Filene's for years. These stores grew up around the neighborhoods they served. That, in essence, is how brands command their markets. They cultivate a loyalty that can't be measured on a spreadsheet.

What Federated should be doing is understanding how each local and regional brand really works. How they're so much more than a mere identity. But Caretakers don't get it. And they won't any time soon. Instead, they're going to merge everything into one national brand, which is almost like telling you that only hamburgers will be served for dinner in restaurants across America. Regardless of the Southerners' fondness for fried chicken or the Northeasterners' preference for seafood, it's more cost-effective to serve everyone the same dish, no matter where they live. They think local shoppers won't mind a local brand's culture homogenization into national nothingness.

Clearly, this is headed for disaster. In fact, Federated's own limp argument of "efficiency in advertising" isn't going to play, when they finally wake up and realize that what sells in Ohio doesn't make it in California; what flies off the shelves in Seattle sits like a lox in Kentucky. Which means different branches of the national brand will still have to advertise and merchandise independently.

Not exactly rocket science.

Just you watch. A quarter or two from now, the Caretaker Managers at Federated will crow about their "increased profitability." But a year from now - after they've all been fired and replaced with even less competent managers - you'll see Federated's total revenue down and their "increased profitability" all but evaporated. In the meantime, all of those well-loved, time-valued brands will have been allowed to rot on the vine. Hundreds of years' worth of goodwill and loyalty will have gone by the wayside, all because the Caretaker Managers chose to kill good brands instead of building them.

But it's not all bad news. It's actually really good news - if you happen to be one of Federated's competitors.

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