PRINT THIS STORY:

CHANGE TEXT SIZE:

THE CONSOLIDATORS

’04 wasn’t a big year for deals, but it was a year for big deals

BY MICHAEL BAKER

The spotlight is back on tenant consolidation, thanks in large part to the Sears-Kmart merger that grabbed headlines last year. To track the trend, SCT introduces the Retailer M&A Scorecard, which focuses solely on retailer-to-retailer merger and acquisition activity since 1999.

The data in the table on page 59 come from a study of 130 public retailers conducted for SCT in December. They indicate that despite some recent high-profile transactions involving a substantial number of stores, retailers are not growing primarily through merger/acquisition. Rather, they largely remain focused on the three “internal” paths of growth: same-store sales, maximizing the penetration of each existing store name and extending the brand into new concepts.

Bebe Stores, for example, which posted phenomenal sales gains for its second quarter ended Jan. 1, 2005, is sitting on enough cash to buy another retailer. But CFO Walter Park says the Brisbane, Calif.-based women’s apparel chain will use those funds to finance in-store improvements. “We’re going to focus on organic growth for a while,” he said.

Also, retailers say that improving customer service and heightening the shopper experience are their major objectives in 2005, according to a recent survey of 700 retail executives conducted jointly by the National Retail Federation and consulting firm BearingPoint.

In addition, the Scorecard data indicate that despite the pickup in the economy, retailer-to-retailer M&A activity was roughly the same in 2004 as in 2001-2003 in terms of the number of deals, with eight major transactions among the retailers studied, compared with 10 in 2003, six in 2002, nine in 2001, 14 in 2000 and 13 in 1999, for a total of 60 transactions over the six years.

What is eye-popping about the 2004 transactions, of course, is the number of stores involved — 900 in Circuit City’s acquisition of InterTAN (a Canadian consumer electronics retailer that, interestingly, operates largely under the franchised RadioShack moniker in its home country); 2,800 Eckerd drugstores falling to CVS Corp. and Jean Coutu Group; and 2,300 Sears stores coming under the merger with Kmart.

In fact, with the exception of Limited Brands’ merger with Intimate Brands in 2002 (the acquiring company already owned 84 percent of the target’s shares before the acquisition) and Zale Corp.’s takeover of Piercing Pagoda’s kiosks in 2000, one has to go way back to 1999 for acquisitions on the scale of 2004’s, in terms of the number of stores involved. 1999 was a year of massive consolidation in the grocery sector, as Albertsons merged with American Stores (1,550 units), Kroger acquired Fred Meyer (800 stores), and Safeway acquired Carrs and Randall’s (64 stores).

Another significant factor in last year’s acquisitions is the iconic status of some of the retailers that were acquired. Such names as Sears and Marshall Field’s are familiar to consumers nationwide.

M&A activity continues to occur primarily in those retail segments where it has long been prevalent: grocery, department stores, apparel and accessories, and home entertainment.

Two recent major transactions also involve sporting goods companies: Dick’s Sporting Goods acquisition of Galyan’s Trading Company, and The Sports Authority’s merger with Gart Sports.

In each of these segments, with the exception of apparel, M&A is clearly having an impact on industry structure, even if the benefits of the individual transactions to the participating companies are much less certain. In the grocery segment, the traditionally strong middle-market retailers continue to pick off regional and local players. Albertsons’ acquisition of the Shaw’s/Star Market company highlights this trend.

But so far this seems to have accomplished little in the way of strengthening them against competition from low-priced grocers such as Wal-Mart on the one hand, and highly differentiated niche operators such as Whole Foods and Wegmans on the other.

Middle-market department store companies also continue to make strategic acquisitions, either to increase their competitiveness as retailers or to position themselves to exploit untapped real estate value.

When bigger ain’t better
Major acquisitions are altering the face of the home entertainment segment too, and here the positive impact of the transactions is possibly the least evident of all. Best Buy acquired Musicland’s 1,321 record stores for $425 million in 2001, for example, only to jettison them to a private investor less than two years later in a tacit admission that even Best Buy’s mighty retail know-how wasn’t enough to save an overstored and competitively overwhelmed business.

The busiest companies on the acquisitions front during the period of study were Trans World Entertainment, with five transactions (including 1999), Best Buy (four), May Department Stores (four) and Safeway (three, including 1999).

By and large, the majority of the companies studied were uninvolved in any acquisition activity. They were generally specialty stores whose primary focus was building core brands to maturity and then extending them into new concepts. The retailers most adept at doing this have also tended to be the most successful and enduring, such as Gap Inc. and Abercrombie & Fitch.

Retailer-to-retailer deals are only part of the M&A story, because many high-profile transactions in recent years have involved private equity investors, such as Best Buy’s sale of the Musicland unit to Sun Capital, and Target Corp.’s sale of the Mervyn’s chain to a consortium that included Sun Capital and Cerberus Capital. In many of these instances, the acquired chains are underperforming assets that undergo a significant operational and real estate overhaul, including being stripped down to their best-performing stores. As 2005 progresses, several struggling retail operations, including Gadzooks and Toys ‘R’ Us, are reportedly being eyed by private funds for possible acquisition.

In another acquisitions twist, mid-price apparel vendor Jones Apparel Group, which owns the Anne Klein and Nine West brands, bought luxury department store chain Barney’s for $400 million in cash in mid-December.

Keeping up with who owns what
ICSC has long compiled a Retail Ownership Scorecard that tracks the store holdings of major retail chains. This data has appeared from time to time in SCT itself (most recently in the September issue) and is also available on ICSC’s Web site at www.icsc.org/cgi/rsdispsearch.

The total store count for each chain shown in the Retail Ownership Scorecard is the net result of stores added by merger, acquisition and internal store growth, minus dispositions and store closings. ICSC will continue to monitor M&A trends for the industry and produce the M&A Scorecard yearly.

Michael Baker is principal of Syracuse, N.Y.-based Independent Retail Research.