Threshold Resistance Read online

  A few weeks later, Ron Baron called to invite me into his deal. I told him I wasn’t interested. Around March 30, I got a call from Ed Hoffman asking if I would be interested in buying the company. The Woodies board was convinced they needed a white knight. The next day, a Saturday, Ed and his vice-chairman, Robert Mulligan, flew to Detroit to meet with me at my home in Bloomfield Hills. I made it clear that I would consider making an offer for the company only if Ed and his management team stayed on to run the business. If Ed was committed to Woodies, I was interested.

  After about a month of due diligence, I made an offer through my investment bankers at Oppenheimer. Woodies was represented by Goldman Sachs. We arrived at a price of $59 per share, totaling $220 million, and negotiated an option—really an incentive to stay—for Ed, Bob Mulligan, and the company’s talented president, David Mullen, to buy 20 percent of the company. The Woodward & Lothrop board of directors accepted the offer at their April 30 meeting.

  The last step was for the shareholders to approve the deal. That didn’t happen until late September. In the intervening months, Ron Baron and his investors sold their shares, but another interested buyer entered the picture. Monroe Milstein, owner of the Burlington Coat Factory Warehouse, made several attempts to raise the funds for a counteroffer. Given Milstein’s reputation as a cost-cutting discounter, the merchants at Woodies were not thrilled with the prospect of his leadership. Burl Albright, a board member and former company executive, referred to the new suitor in the press as “an old cloakie,” retailer shorthand for a coat buyer. Seeking the support of Woodward and Lothrop family members, Milstein kept just enough pressure on the board to delay the vote. Anxious to end the impasse, I upped my offer to $60.50 a share. That did it, and I became the proud new owner of Woodward & Lothrop, the largest retailer in the Washington market and the largest advertiser in the Washington Post. I flew home to Detroit, confident that I had a terrific management team in place to grow market share and protect the future value of the Taubman Company’s Washington-area centers.

  My confidence was misplaced.

  One of the first signs of the trouble ahead came as Ed Hoffman and I were touring Nordstrom’s flagship store in Seattle. I respected the chain’s legendary reputation for customer service, and wanted Ed to see firsthand the level of competition we were facing with Nordstrom establishing a foothold in the Washington market. Halfway through our walk through the store, I realized that I had to make a phone call. Since we were in the dark, quiet days before cell phones, I asked a salesperson to direct me to the nearest pay phone. Instantly, she invited me behind the counter to use her department’s phone. “You don’t need to use a pay phone, sir. Just dial 9 and your number, and talk as long as you like.”

  We were witnessing the kind of inspired customer service Nordstrom was about to import to our backyard, the kind of service we weren’t providing customers. Ed and I looked at each other and without words expressed the same thought: “We’re screwed.” As it turned out, we were indeed screwed. Our historic franchise was heading into a perfect storm. The stores, which had been neglected for many years, were in need of major, expensive renovation. The most urgent candidate for attention was the once-grand flagship store at the corner of 11th and G streets in downtown Washington, D.C. We spent the millions of dollars required to restore its luster, along with the funds needed to spruce up our suburban locations to compete with our competitors’ newer stores. Nordstrom, Neiman Marcus, and Bloomingdale’s were hurting us at the high end, and discounters entering the market were nipping at us at the other end.

  Seeking to enhance our buying power, we formed national alliances and acquired the Philadelphia-based John Wanamaker chain in 1986. It, too, had an historic downtown flagship store in need of loving attention, which we provided, right down to the restoration of the nation’s largest concert pipe organ.

  We certainly kept our focus on improving the customer experience and enhancing our merchandise selection. Unfortunately, Ed Hoffman became less and less involved. Since I had purchased the company, Ed’s golf handicap had improved by at least six strokes, and our best executive and merchant, David Mullen, had left for a job with the May Company. Running Woodies became an increasingly personal commitment on my part; a commitment for which I had little time or enthusiasm.

  To be fair to Ed, the retailing industry was going through some dramatic change as we were struggling with Woodies’ future. The Ed Hoffmans of the world had reached the top of their profession through taste and merchandising instinct—what we called “nose” in the industry. Increasingly, however, the department store game was one of numbers, computers, and sophisticated financing. I saw much the same disconnect from my vantage point as a board member and major investor at Macy’s, where Ed Finkelstein—a great guy—had justly earned a reputation as a retailing genius. But as his attention turned from the latest fashions to leveraged buyouts and acquisitions, he proved to be a fish out of water. With debt tying the company’s hands, several seasons of overbuying, and customers losing their enthusiasm for the stores, Macy’s was ultimately acquired by Federated Stores in 1994—a company Macy’s had often dreamed of owning. Ed played no role in the new conglomerate.

  One holiday season, just a few days before Christmas, I received an impassioned phone call in my Detroit office from a customer in Washington. She had been shopping in Woodies’ downtown flagship location and had been informed that the store had run out of Kringle Bears, a promotional item we were giving away with purchases over $100. An unthinking sales associate had commented to her that all the stuffed bears had been shipped to our suburban locations.

  The customer was irate, and rightly so. “How dare you short-change us here in the city,” she protested. “I’m going to call the Washington Post.” I hadn’t heard such anger in a customer’s voice since I made the decision to close all of the ice skating rinks we had in our malls (maintaining the ice was prohibitively expensive, and the attraction drew few new customers). Mothers called for weeks to let me know that I had single-handedly destroyed their daughters’ chances of making the Olympic team!

  It wasn’t the threat to besmirch our character in the Washington Post that motivated me (the great Katharine Graham was a good friend, and we were, after all, the publication’s largest advertiser). But I wanted to right this wrong. I took her number and quickly got to the bottom of the problem. Response to the promotion was so overwhelming, we were running out of Kringle Bears in every store. Nevertheless, I secured one of the few remaining bears and called the disappointed woman back. “This is Alfred Taubman, and I’m pleased to tell you that we have a Kringle Bear waiting for you at the downtown store. Or if you like, we will deliver it to your home.”

  There was silence for several seconds, and then she spoke in a slow, deep voice: “Sir, do you know what the weather is like here in Washington right now?”

  “No, I’m in Detroit today.”

  “Well, it’s around twenty degrees and snowing.”

  “Then please, let us deliver the bear to you.”

  Again there was silence. And then she let me have it. “Now I am calling the Post. What kind of man would take a young bear out in such weather? The poor thing will surely catch a cold. Now, listen here: you hold that bear for me at the store until it warms up enough to safely transport him home. And for God’s sake, keep him warm until I come or I will call the Post!”

  I didn’t feel much like a white knight anymore. And the feeling just got worse as it became clear that even with new management—in 1989 Ed Hoffman retired and was replaced by former Saks executive Arnold Aronson—there was no future for this venerable department store chain. We had become a dinosaur. We had lost our relevance to the customer and lacked the agility to change course. Despite being encouraged by my bankers and financial advisers to place Woodies into bankruptcy, I delayed that decision for a year to see if we could turn things around. I owed that to our 12,000 employees and their families. In the end, we couldn’t make it work. B
ut we did succeed—at significant personal cost to me—in transferring ownership of every store location to other retail chains in the market. Not a single store-level job was lost.

  Did the Woodies experience kill my enthusiasm for the department store? No. As with everything, there are good department stores and department stores that don’t deserve to survive. Well-run, properly financed companies will continue to thrive. And while extraordinary consolidation continues to take place in the industry, the organizations still standing are well positioned for growth and profitability. The customers in Taubman centers respond very positively to the merchandise and service provided by such powerful brands as Saks Fifth Avenue, Nordstrom, Neiman Marcus, Bloomingdale’s, Macy’s, Dillard’s, and JCPenney. These retailers stand for something special, they stand out with promotional punch, and they consistently nurture customer confidence.

  The most successful malls will continue to be anchored by these powerful people pumps. And creative developers will continue to combine a host of different major offerings to deliver traffic to their specialty store tenants. In several Taubman malls, for instance, the total sales of the center’s restaurants equal the revenue of a traditional anchor. Large home furnishings and design centers are certainly good candidates for anchor locations in certain markets. Remember, in the days of the urban arcade, train stations and cathedrals functioned as very effective anchors for major retail destinations.

  But the Woodies experience teaches a critical lesson for any entrepreneur considering an acquisition of any size: People run businesses. Great people run great businesses. Stanley Marcus ran a magnificent store. My good friend Marvin Traub made Bloomingdale’s “like no other store in the world.” But Ed Hoffman lost his passion for Woodies, and Arnold Aronson never moved from New York to Washington to really get his nose into the business.

  So if you are not absolutely sure that a great management team is in place or can be recruited quickly, don’t buy the business unless you intend to run it yourself. And if you see yourself in that role, be sure you have the time to devote as much attention as you focused on your original business when it was first getting off the ground.

  It’s all about minding the store.

  NINE

  Fashion Statement

  In the current retail climate, it’s difficult for department stores and other large retailers to compete if they stake out the middle ground. One of the defining features of our economy in the past few decades has been the growth and expansion of luxury retailers. And for almost as long as we’ve been in business, we’ve focused on appealing to the luxury retailing customer. Again, this involved overcoming threshold resistance. Because while comparatively few people can afford to do all their shopping at high-end stores like Tiffany’s or Neiman Marcus, a lot of people can afford to do some of their shopping at such stores. That’s why the world of fashion has expanded so rapidly.

  In the shopping center business, we classify certain anchor tenants as “fashion” department stores. For example, Neiman Marcus and Saks Fifth Avenue are fashion department stores. Sears and JCPenney, better known for housewares and hard goods, are not. Nor are Marshall Field’s or Macy’s, which are classified as “full-line” department stores. They sell all categories of department store-type merchandise, shorthanded in the retailing business as DSTM. Yes, they carry some moderate-to-medium fashion apparel, but a true fashion department store’s merchandise mix focuses on medium-to-better goods and essentially no hard lines.

  Mass merchandisers Wal-Mart or Kmart are not even close to being fashion contenders. Target wants very badly to be perceived as a fashion merchant, and is having some success (thanks in large measure to terrific advertising). Of course, these stores sell apparel, but customers look only to certain retailers for true fashion.

  The term fashion is used loosely and is rarely well-defined. But the concept makes a big difference to the consumer and the merchant. The popularity, pricing, and promotion of fashion items can be very different from merchandise lacking this imprimatur. In essence, the fundamental quality that elevates anything into the fashion category is design. Not just any design: good design that appeals to your taste. Fashion is added-value through design. And we’re not just talking about apparel.

  For most of world history, fashion was the exclusive domain of the very rich. Style was driven by the royal families of Europe, and only the highest levels of landed gentry could hope to mimic their taste. This began to change in the late nineteenth and early twentieth centuries along with mass merchandising and the growth of the middle class in the United States and Europe. The shopping mall (Taubman properties included) helped strengthen this revolution in commerce. Marvin Traub in his terrific autobiography, Like No Other Store…: The Bloomingdale’s Legend and the Revolution in American Marketing, focuses on this historic transition:

  In the 1930s and 1940s, as I was growing up, shopping was, for most people, a basic function…before the Second World War, most department stores offered goods the way Henry Ford sold the Model T—you could have any color as long as it was black. Lipstick came in very few shades, and appliances and garden supplies were sold alongside cameras, radios, and religious items.

  My parents were friends with some of the most glamorous retailers and celebrities of their time; through them, I saw a cachet and style that was available only to a small circle of sophisticated shoppers, people who shopped at Bonwit Teller, Bergdorf Goodman, Saks Fifth Avenue, and Neiman Marcus. A generation later, Bloomingdale’s brought that cachet and sense of fashion authority to a larger audience, a new kind of shopper created by the growing wealth of post–World War II America. To the basic concepts of good taste and good value, Bloomingdale’s added entertainment and style.

  In recent decades, the fashion and design revolution has expanded into realms far beyond apparel. As consumer choice expanded, and as retailers and manufacturers aimed to build and serve new tastes and markets, design became an important consideration, not just for the growing of mass luxury products, but for all products.

  Consider a wastebasket, an everyday item you can purchase in any number of retail venues. You’re looking for a certain size or shape, or perhaps you want it to be waterproof, and you might want it to have a lid. For a few bucks, you can buy a terrific plastic wastebasket (in an array of colors) at Wal-Mart to satisfy all these functional criteria. For a few extra dollars, it can even be a brand-name wastebasket, like Rubbermaid, sure to last for years without any trouble.

  But for most consumers, utility is not the only consideration—even when buying a wastebasket. In a den, library, or bedroom, plastic will not do. The choices now extend to wicker, brass, leather, wood. Given the decor in the room, maybe a hand-painted wastebasket purchased during a vacation at the seashore would be perfect. Such a wastebasket will command a higher price than the Rubbermaid alternative. You have a story to tell your friends about the purchase, and you expect something so different, perhaps even unique, to cost more. The wonderful world beyond utility is the world of fashion. Here, design makes the difference, and the customer will pay for this added value. In fact, the closer an item comes to actually being unique, the more a merchant can justify a higher price tag (again, if the design is good).

  When Karl Lagerfeld designs a one-of-a-kind evening gown for an individual customer, that’s fashion at the highest level. The Lagerfeld couture dress wears and presses better than a more utilitarian garment. It is made to fit a particular person’s proportions perfectly, and flatters her hair color as well as her station in life. That’s the promise of couture. In a world of standardization and mass production, it makes what you might call a very personal fashion statement.

  But one of the defining characteristics of our retailing age has been the democratization of fashion, the offering and creation of luxury products for a broad audience. After all, retailers at all price points are always striving for ways to differentiate themselves and offer customers something special. When Karl Lagerfeld designs for a
popular merchant like H&M (a Swedish retailer known for very inexpensive but fashionable young people’s apparel), a significant amount of fashion magic still comes through to the consumer. The H&M shopper feels great about herself, even if the blouse may fall apart after just a few washings.

  Fashion can even be found in the kitchen or bathrooms of American homes. Chances are, you and your spouse have puzzled over just the right choice of faucets, dishware, towels, and pots and pans. Stores like Williams-Sonoma, Crate and Barrel, Pottery Barn, and Pier 1 Imports have created excitement around everyday utensils and products you may not have equated with fashion. Architect Michael Graves’s iconic teakettle, designed exclusively for Target customers, is a perfect example of successful fashion merchandising at a moderate price point (more expensive than a standard-issue teakettle, but inexpensive nonetheless). Martha Stewart’s sheets, towels, and pots and pans at Kmart are also examples of added-value through design. Customers feel confident in Martha’s taste (as well as her commitment to quality) and will pay a bit more to bring her products into their homes. They feel better about the purchase. And it is no coincidence that as a general rule, Martha’s merchandise is by far the most successful of any offered by Kmart.