R.H. Macy & Co., Inc.

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R.H. Macy & Co., Inc.

151 West 34th Street
New York, New York 10001
U.S.A.
(212)695-4400
Fax: (212) 629-6814
Web site: http://www.macys.com

Wholly Owned Subsidiary of Federated Department Stores, Inc.
Incorporated: 1919
Employees: 56,300
Sales: $8.5 billion (1998)
NAIC: 45211 Department Stores; 44815 Clothing Accessories Stores

R.H. Macy & Co., Inc.—better known as Macy’s—is a subsidiary of Federated Department Stores, Inc. and operates through two department store groups: Macy’s East and Macy’s West. The groups, in turn, operate approximately 187 stores located in 21 states. Macy’s stores target the middle-to-higher-priced market, offering women’s, men’s, and children’s clothing and accessories; housewares; home furnishings; and furniture. The company also maintains two direct-to-customer retail operations: a mail-order catalog business called Macy’s By Mail, and an e-commerce web site, macys.com.

The Macy Family: 1858–96

Rowland H. Macy made his fifth attempt at opening a retail store in Manhattan in 1858. His previous four attempts with similar stores had failed resoundingly, culminating, with the demise of his shop of Haverhill, Massachusetts, in his bankruptcy. Although Macy’s store was situated far north of the traditional retail market, the store on Sixth Avenue near Fourteenth Street sold a healthy $85,000 worth of merchandise within one year.

Macy instituted a cash-only policy not only for customers but for himself as well. No Macy’s inventory was purchased on credit, and no Macy’s credit account was issued until well into the 1950s. This was unusual in a day when most stores routinely sold on credit. The new store benefited from the founder’s advertising and promotion skills as well as his product line instincts. By 1870, when sales broke $1 million, a stable clientele could purchase not only dry goods, but items like men’s hosiery and ties, linens and towels, fancy imported goods, costume jewelry, silver, and clocks.

Macy’s son was not interested in the retail business, so Macy passed ownership into other hands. In 1860 he hired his cousin Margaret Getchell to do bookkeeping at the store, and she subsequently married a young Macy’s salesman, Abiel T. LaForge. Macy increased LaForge’s responsibilities, and eventually chose him as heir to half his store. The other half went to Macy’s nephew, Robert M. Valentine.

Valentine and LaForge became the proprietors when the founder died unexpectedly in 1877 on a buying trip in France. LaForge died soon after. Valentine bought LaForge’s share, and attempted to continue the family succession by bringing in LaForge’s relative, Charles Webster. When Valentine died, Webster married his widow, and brought in his brother-in-law, Jerome B. Wheeler. In 1887, however, Webster bought Wheeler out, becoming the sole proprietor of a thriving business, which he felt he could not perpetuate singlehandedly.

Searching for a partner, Webster approached the Straus family, who for 13 years had leased space in Macy’s to operate a chinaware department, the store’s most profitable section. In 1887 it generated almost 20 percent of the store’s sales. The Strauses eagerly accepted Webster’s offer, the partnership culminating many years’ work and launching the family into a social role comparable to that of the Rothschilds in Europe. Lazarus Straus, the family’s patriarch, emigrated in 1852 from Germany to the United States, dissatisfied with Germany’s collapsed 1848 revolution. After several years as a peddler, he was able to send for his wife and four children. The family developed a successful general store in Talbotton, Georgia, then moved to New York City in 1867 after the end of the Civil War. Lazarus Straus bought a wholesale chinaware-importing firm and brought his sons Isidor, Nathan, and Oscar into the business, renaming the company L. Straus and Sons.

Lazarus Straus died only a year after buying into Macy’s but his sons carried on the business. Under the new partnership, Macy’s matched and outpriced its rivals, including A.T. Stewarts, Ream’s, and Siegel & Cooper. Macy’s sales rose to $5 million within a year, and subsequently continued to grow by ten percent annually. The Straus brothers introduced their odd-price policy, now used virtually everywhere in U.S. retailing. Charging $4.98 instead of $5.00, the store motivated consumers to buy in quantity in order to accumulate substantial savings. Following in Macy’s footsteps, the Strauses brought in line after line of new merchandise—Oriental rugs, ornate furniture, lavish stationery, bicycles, even pianos. They also instituted the store’s depositor’s accounts, in which shoppers could make deposits with the store and then charge purchases against them. This, in effect, provided Macy’s with interest free loans, and was a forerunner of installment buying and lay away plans.

The Straus Family: 1896–1918

In 1896 Charles Webster sold his half interest in Macy’s to the Strauses, ending the founding family’s line of ownership. Jesse, Percy, and Herbert Straus, Isidor’s sons, urged their father to relocate the store to its Herald square location at 34th Street and Broadway in 1902. The giant new store cost $4.5 million, but funds were easily raised on the Straus family’s good name, built upon the success of Macy’s and the independently operated Abraham & Straus, acquired in Brooklyn in 1893.

No modern convenience was lacking in the Herald Square store. It was equipped with newly designed escalators, pneumatic tubes to move cash or messages, and an air exhaust system that provided the store with a constant supply of fresh air. Macy’s spacious building had ample fitting rooms, accommodation desks, an information counter, and comfortable rest-rooms. Macy’s had a fleet of comparison shoppers who checked out other stores’ prices to be sure Macy’s merchandise was competitively priced. Sales pushed to $11 million within a year of the move. Called the world’s largest store, Macy’s Herald Square thrilled tourists and locals alike.

After his father’s death, Isidor Straus had emerged as the family patriarch, and remained, among the sons, the most interested in the store. Nathan gradually developed more as a philanthropist than a businessman, and Oscar, after taking a law degree, disregarded the business in favor of politics. Isidor and his wife, Ida, were among the passengers on the ill-fated voyage of the Titanic. After their deaths in 1912, Isidor’s sons Jesse, Percy, and Herbert bought out Nathan’s interest in Macy’s and ceded their interests in Abraham & Straus to Nathan. Nathan, thus, became the sole owner of Abraham & Straus.

As it did most of its products, Macy’s sold books at substantially below their wholesale price—25 percent below. In 1909 a book publishers’ association sued Macy, charging that the price-cutting hurt their copyright value. The Strauses countersued, claiming that the group constituted an illegal trust under the Sherman Antitrust Act. The publishers responded by cutting Macy off completely. The Strauses, however, obtained stock through other channels—wholesalers, trans shippers, or other retailers who had overstocked; they even cut deals directly with authors. The U.S. Supreme Court decided in Macy’s favor in 1913, but the controversy made it even tougher for the store to acquire well-known brands in any product line, prompting Macy’s to develop its own private labels.

Postwar Expansion

When World War I ended in 1918, sales were up to $36 million, twice that of 1914. Macy’s began its expansion into other cities, acquiring substantial interests in LaSalles & Koch Co. in Toledo, Ohio, in 1923, and Davison-Paxon-Stokes Co. in Atlanta, Georgia, in 1925. In subsequent years the balance of stock in both companies was acquired. In the 1920s Macy’s began the tradition of sponsoring New York City’s Thanksgiving Day parade. The public relations impact of the event went national when two major television networks began to cover the parade in 1952. Just before the Great Depression, Macy’s bought L. Bamberger & Co. of Newark, New Jersey, a division that would later lead a renaissance for Macy’s. In the 1940s, it added stores in San Francisco, California, and Kansas City, Missouri. By the late 1940s, Macy’s was not only the world’s largest store but the United States’ largest department store chain.

Jack I. Straus, Jesse’s son, became chairman of Macy’s in 1940. He had grown up with the store, having been present at age two at the Herald Square opening. He realized that the family line was thinning, and began training and promoting outsiders into the top executive positions in the firm. Over the years the Strauses would gradually lessen their holding in the company, but the family remained at the helm of Macy’s until the 1980s, when Edward S. Finkelstein, a manager hired by Macy’s in 1948, led the company into an entirely new phase.

Straus passed the chairmanship of Macy’s on to Robert (Bobby) Weil, his sister’s son, as the 1940s ended. Weil beefed up Macy’s advertising campaign, billing the store as the “community” store. Nevertheless, as the postwar economy picked up, New Yorkers no longer craved the bargains that were Macy’s stock in trade, and did more shopping at other stores. Macy’s stock fell from $3.35 per common share in fiscal 1950 to $2.51 in fiscal 1951. Further problems lay ahead.

In 1931 the Federal Fair Trade Law had allowed suppliers of certain products to specify a minimum retail price in order to stabilize the depression-era economy. With the exception of Korvettes, Macy’s competitors—Abraham & Straus, Gimbel Brothers, Bloomingdale’s, and B. Altman—abided by these minimums. In 1952, however, Schwegmann Brothers, a New Orleans, Louisiana, drugstore chain, contested the law and won its case. The reversal of the 20-year-old practice of price fixing undercut Macy’s strategy. Macy’s had undersold its competitors with its six percent-less-for-cash policy, but now that fixed minimum prices were not protected by law, all retailers could lower their prices without fear of being sued by suppliers.

Weil decided to combat this by cutting Macy’s prices even further. The huge Herald Square store proved to have several weaknesses—while no one could match the giant’s prices across the board, Gimbel could undersell Macy’s in pharmaceuticals; Gertz of Long Island, New York, in books; and Bloomingdale’s, in stationery and menswear. In 1952 Macy’s posted the first year of loss in its history. Its battle plan was outmoded; Macy’s fumbled in directions it had previously ignored, instituting charge accounts and catering more to its suppliers.

The Finkelstein Years: 1960s–85

While the flagship store struggled with image problems, a renaissance began in another division: Bamberger’s of New Jersey. David L. Yunich took the helm of the decaying urban store in Newark in 1955. During his eight years of guidance, Bamberger’s mushroomed, opening in suburbs all over New Jersey. The chain’s annual sales rose from $82 million to $500 million, its profits being among the highest in the nation and topping even those of the mammoth New York division. Herbert L. Seegal and his protege Finkelstein came to Bamberger’s in 1962 to step up its growth, using new customer-oriented merchandising. Instead of buying whatever suppliers offered, Bamberger’s bought the top of the line in any new group of goods, and featured that in the most glamorous displays Bamberger’s customers had ever seen. The technique garnered notice not only within Macy’s but from top executives of other chains as well. The store began its push out of New Jersey to the south and west in 1968, and by the 1980s had three times as many stores as in the late 1960s. Bamberger’s of New Jersey’s sales for the fiscal year ending July 31, 1981, were $799 million; with Macy’s California and New York divisions, it formed a powerful triad generating 86 percent of Macy’s sales.

Macy’s had acquired the old O’Connor, Moffat Co. store as its first California outpost in 1945. It was renamed and made Macy’s flagship in San Francisco’s then posh Union Square. Like other urban retail centers, however, Union Square and its surrounding complement of chic shops, including I. Magnin, Liberty House, the Emporium, Bonwit Teller, Gumps, and a host of others, fell victim to urban decay in the 1960s. Finkelstein was sent to bail out Macy’s California in 1969. Macy’s upgraded its image, aiming its product lines at a more well-heeled buyer. The transformation of California’s 12 stores helped Macy’s surpass most of its competitors, leaving it as one of the top three retailers, along with the Emporium and I. Magnin.

Finkelstein was brought back to the East in 1974 to work on the Herald Square store. He trimmed off such departments as Pharmaceuticals, major appliances, sporting goods, and toys in which the store could not compete. Macy’s put an end to its concentration on household durable goods, departments that got heavy competition from Korvettes and Sears as well as local department stores. In place of the discontinued departments, inventories were increased and presentations were refined in certain departments, including linens and domestics, furniture, menswear, and jewelry.

Finkelstein remodeled about 35 percent of the space in New York’s 16 stores, including the Herald Square store, which benefited from the installation of the Cellar in 1976. Macy’s basement, which had been a no-frills depository for bargain merchandise, was transformed into a sparkling esplanade of airy specialty shops offering gourmet foods, yard goods, stationery, baskets, and contemporary housewares. Geared to a trend-conscious consumer, the cross between a European boulevard and a chic suburban mall also offered frequent cooking demonstrations, an old-fashioned apothecary, and a pottery shop complete with a working potter at the wheel. The Cellar caused such a stir that Bloomingdale’s hastily installed a similar group of boutiques, although Bloomingdale’s management claimed its conception predated the Cellar’s opening. The revitalized Macy’s had its biggest holiday season ever in 1976, and increased its annual earnings greatly from the previous year.

The chinks in Macy’s formidable front were minor; competitors claimed that Macy’s modern image was tarnished by its refusal to accept major credit cards. In addition, Macy’s as a corporation lacked diversity. It operated only department stores, while most other similarly sized operations had diversified into specialty stores. Macy’s eventually began development of such stores in the early 1980s.

In 1978 Finkelstein was promoted from president to chairman of Macy’s New York division. The Macy’s Miracle, as it was called, gained momentum as annual sales soared between the years 1979 and 1982. In 1982 corporate sales gains of 20.1 percent topped the industry, and Macy’s surpassed its major competitors in operating profit per square foot.

While other stores were consolidating departments under fewer buyers, Macy’s added more buyers, encouraging them to find unique products. Stores were overstocked by ten percent to 20 percent, so that unpredicted buying surges could be accommodated. It hired many executives for its training program, up to 300 per year in larger divisions. In 1984 Macy’s had its theretofore best year. Sales rose 17.2 percent to $4.07 billion from 1983’s $3.47 billion, which was up 16.4 percent from the previous year. At each of its 96 stores, Macy’s averaged after-tax profits of $2.31 million. During 1984 Macy’s common stock soared in value. The year 1985 was tough for most retailers, including Macy’s. For the year, sales were $4.37 billion, up 6.4 percent from the previous year, but net income dropped almost 15 percent from $221.8 million to $189.3 million. The increase in sales was small compared to steady gains of 12 percent to 17 percent in the previous four years. Sales costs had risen, due to an increased advertising push, and to new staff training programs.

By 1984 Macy’s bulky inventories had gotten out of hand. Inventories were 35 percent larger than in 1983. Prices were slashed, but the store could not seem to get rid of its excess. The store continued to build stock instead of eliminating it, miscalculating the buying force of the public; other stores were reducing their inventories. Finkelstein had attempted to expand his private-label lines; he kept the prices too high, however, to attract buyers. Finkelstein’s vigilant management had never slipped before; the uncharacteristic miscalculation worried analysts. Wall Street began to waver in its praise. Macy’s had the second best year in its history in 1985, but the radical drops were not taken kindly in an institution that had been on a steady rise for over a decade.

Mergers and acquisitions abounded in the retail industry in 1985. A company with a weak profit record was a likely target because that performance pushed its stock value down, and a change in management could improve it. Although Macy’s ten-year profit history was phenomenal, the recent questions from analysts were pushing Macy’s stock prices down, and Finkelstein worried about a hostile takeover. In addition, he felt that his best executives were being lured to other stores. Rapid growth and subsequent compensation had satisfied his players over the past ten years, but now the store approached a plateau. Finkelstein had to do something to restore the company’s vitality.

Finkelstein’s solution was to lead the top 350 executives in a leveraged buyout of Macy’s, at $70 per share, not much above a recent market high. He saw ownership and the subsequent share in profits as a way to motivate employees. Some shareholders objected, and one even filed suit, but the offer was sufficiently attractive that they eventually agreed. As for the Straus family, patriarch Jack was outraged, but in effect he had relinquished ownership long ago. In 1924 the Straus family had total ownership; by the 1960s, it was down to 20 percent; and by the 1980s, the family held only about a two percent interest in the chain. Its attachment to the store could not stop management from executing the biggest takeover of a retailer at that time and the first leveraged buyout of a major retail chain.

Losing Ground: 1986–90

The year after the buyout, Macy’s stores did so well that the chain could almost report a net profit, despite the debt service on the heavy borrowing needed to fund the buyout. In 1988 Macy’s added further to its debt, however, by purchasing Federated’s Bullocks and Bullocks-Wilshire and the I. Magnin chains. The $1 billion expenditure weighed heavily on company finances, but a confident Macy’s stocked stores with merchandise in anticipation of a strong holiday season in 1989. The economic recession of the late 1980s, however, had lowered consumer demand for the entire retailing industry, and sales during the holidays proved disappointing. Moreover, when a troubled major competitor, the Campeau retailing empire, ran huge sales to increase its cash flow, Macy’s had to follow suit. Burdened with an overstocked inventory that was selling too slowly, coupled with high spending on expensive promotions, Macy’s saw its earnings for the holiday season drop 50 percent.

Factoring companies that finance manufacturers’ shipments to retailers tightened credit for those who did business with Macy, but the company was able to show that it was managing its cash flow through financial maneuvering that allowed Macy’s to get additional monies from major stockholders. In addition, the company sold two subsidiaries, Macy Credit Corp. and Macy Receivables Funding Corp., to General Electric Capital Corp. for $100 million, relieving the company of $1.5 billion in debt. Several months later, Macy’s completed the sale of its equity interest in the Valley Fair Shopping Center in San Jose, California.

The company, however, still had $4 billion in long-term debt, and in early 1990 rumors of bankruptcy started to circulate. The rumors persisted throughout the year and on December 4, 1990, Finkelstein took out a full-page ad in the trade journal Women’s Wear Daily to quash them once and for all. Once again the store looked forward to holiday sales to boost cash flow, and once again there were heavy promotions and discounting to spur consumer demand. But the recession had persisted, consumer confidence was low, and sales were again below expectations. Sales throughout 1991 continued to be slow and Macy’s sustained further losses. Still another disappointing holiday season made it increasingly difficult for Macy’s to service its debt. To further cut its deficit, Macy’s bought back $300 million of its bonds for less than 50 percent of their face value.

Bankruptcy: 1992–94

Despite Macy’s efforts, the poor retail climate combined with ineffective merchandising, diminishing public image, and lack of management focus led to further revenue losses. In early 1992 the company announced an indefinite delay in paying its suppliers. A last minute effort by investor Laurence Tisch to buy $802 million of outstanding stock did not win creditor support. The final blow came on January 27th when Macy’s declared bankruptcy. By April, Finkelstein had been replaced by Myron E. Ullman III and Mark S. Handler.

The new co-executives devised a five-year business plan that included reducing the advertising budget from over four percent of sales to under three percent, fewer one-day sales, more focused promotions, fewer private-label items, improved customer service, and a new computerized inventory management system. Store expansion continued, however, and in August 1992, a new department store was opened in the Mall of America in Minneapolis, the company’s first in Minnesota. Later in the year a new Bullock’s department store was opened in Burbank, California, and new I. Magnin stores replaced existing department stores in Phoenix and San Diego.

By early 1993, the plan had begun to demonstrate its effectiveness as Macy’s showed its first profit—$147.7 million—since filing for bankruptcy. Moreover, sales during the 1992 holiday season were better than expected, reaching $1.2 billion, while revenue was 3.8 percent higher than the previous year. Even with these promising results, however, Macy’s continued to rid itself of unprofitable operations. In March 1993 the company announced that it would close 11 stores with low growth potential. The latest store closings included five department stores in Connecticut, New Jersey, and California, and six I. Magnin specialty stores in Seattle and cities in California.

Continuing its marketing strategy of reaching out to consumers in new ways, Macy’s announced in June 1993 that it was planning to start a 24-hour television home shopping channel. Orders and customer service would be provided by the Home Shopping Network Inc. That month brought more promising news—sales of $1.34 billion for the quarter were 5.8 percent higher than the same period the previous year. In addition, sales in stores open at least one year increased 3.1 percent. Macy’s cash flow was $28.5 million in the quarter, exceeding the requirements of its bank loans by about $6.5 million. Industry analysts reported that the strategy of increasing productivity and cutting costs, in spite of the continued poor economy on the coasts, was beginning to pay off for Macy’s.

Under Federated’s Ownership: 1994–99

In January 1994, Federated Department Stores made a move to acquire Macy’s when it bought almost $5 million of Macy’s debt from Prudential Insurance Company. Headquartered in Cincinnati, Federated owned several department store chains, including Abraham & Straus, Jordan Marsh, The Bon Marche, Rich’s/Goldsmith’s, Stern’s, Lazarus, and Macy’s major competitor, Bloomingdale’s. For seven months, Macy’s officials resisted Federated’s efforts to purchase it, hoping to instead turn the company around on their own. However, the company’s efforts to climb out of bankruptcy were proving inadequate; despite cost-cutting measures and new marketing initiatives, it was unable to return to profitability. In July 1994, the company yielded to Federated, agreeing to be acquired and filing a joint reorganization plan. After bankruptcy court approved the reorganization in December 1994, the companies completed the merger, bringing Macy’s out of its three-year bankruptcy.

The Macy’s-Federated merger created a true retail giant. The combined companies laid claim to more than $13 billion in revenue, 11 department store chains, and more than 300 stores in 26 states. It was not long after coming under Federated’s ownership that Macy’s felt the first tremors of change. Federated began rolling several of its smaller chains into the two large Macy’s East and Macy’s West divisions to streamline operations and avoid intercompany competition. As an initial move in this direction, Federated consolidated its Jordan Marsh chain into Macy’s East. The following year, the company phased out its 130-year-old Abraham & Straus chain in January, converting most stores to Macy’s, Bloomingdale’s, or Stern’s. Nine of the former A&S stores joined the Macy’s East division.

On the West Coast, as well, retail institutions were vanishing as a result of the Macy’s-Federated union. In 1994, Macy’s West discontinued its I. Magnin business, a chain of 12 stores that dated back to 1876. While rich in history, I. Magnin was not proving financially successful. The following year, another famous name disappeared from the retail scene, when the company converted all 21 Bullock’s locations to Macy’s. Federated also bulked up Macy’s presence on the West Coast with the 1995 acquisition of Broadway Stores, Inc., an 82-unit chain headquartered in Los Angeles. The majority of the newly acquired Broadway stores were converted into Macy’s.

In 1997 and 1998, Federated began major renovations on Macy’s East flagship store at Herald Square in Manhattan and Macy’s West flagship store at Union Square in San Francisco. The company also explored two new avenues of retailing: mail order and online sales. Macy’s East began the company’s first-ever mail order catalog, Macy’s By Mail, while the West division tackled cyberspace by launching macys.com.

By the middle of 1999, Macy’s East operated a total of 87 stores, occupying a total of 23.8 million square feet. Macy’s West consisted of 100 stores, totaling 20.1 million square feet. As a Federated subsidiary, Macy’s was part of a strong and growing organization, with a healthy bottom line. Building on Federated’s strength, Macy’s was likely to remain a cornerstone of department store retailing for years to come.