The Long Arm of Federated

Federated Department Stores stock soared Tuesday above $60 for the first time since the retailer emerged from bankruptcy in 1992, reflecting investor confidence in Federated CEO Terry Lundgren's affordable luxury strategy. The luxury chains were the only retailers to boast healthy sales increases this past holiday season.

Going forward, I think Lundgren is going to provide suppliers with three different distribution options: Macy's will target budget-conscious shoppers; Bloomingdale's, high-end shoppers, and Marshall Field's the luxury shopper. While all are already powerful national brands, the acquisition lets them enter 15 states for the first time

This is good news for some luxury brands and bad news for others. Lundgren is going to use everything he knows from his experiences at Neiman-Marcus to ensure that shoppers in 64 of the top 65 markets spend as much of their discretionary income as possible in his stores. While not as demanding as Wal-Mart, luxury brands will have greater challenges in proving their appeal to Federated's clientele.

In the medium term this is good news for mall REITs like Simon and General Growth. The loss of less-productive department stores means opportunities for more productive retailers at potentially higher rents. But long term, the travails of Winn-Dixie show the dangers of remaining a commodity transaction point. Mall REITs cannot rely on tenants like Federated to innovate the shopping experience, and need to take a bigger role in defining the overall shopping experience.  I think Westfield (who hired Disney exec Kenneth Wong and Coke marketing guru Todd Putman) is on the right track with their concierge program and that their experiments with emerging programs like GoConcierge will gain traction as they work on transforming the mall shopping experience.