Threshold Resistance (7 page)

But from this experience I can attest that restaurateurs really do have to live over the store. With an increasing array of investment interests to watch over, I left it to others to get the garlic just right.

I
n the early 1980s, our two malls in the Washington, D.C., area—Lakeforest in Gaithersburg, Maryland, and Fair Oaks in Fairfax, Virginia—were anchored by Woodward & Lothrop department stores. Woodies, as it was affectionately called, was the strongest regional department store chain with the best locations in arguably the best retail market in the country. Since its founding, in 1873, by Samuel Walter Woodward and Alvin Mason Lothrop, Woodies had earned its reputation as the most trusted retailer in the nation's capital.

Now, for as long as I can remember, critics have described department stores like Woodies as dinosaurs. Going back to the 1950s, it has been hard to find a vocal champion of this much-maligned institution. The same cocktail party philosophers who express knee-jerk disdain for suburbs, malls, and developers, universally rail against department stores—usually while dressed from head to toe in evening apparel purchased at one of the emporiums they slander.

To be sure, many department store chains have deserved the fate of the dinosaurs. But it's too easy to dismiss the contributions and continuing relevance of what I believe was the most important retailing institution of the twentieth century. Every good retailer
understands that the customer, God love her, lacks confidence. (Again, please excuse the “her.” I am just reflecting the fact that the vast majority of mall and department store customers are women. And for the record, male customers lack confidence, too.) While this inherent insecurity contributes to threshold resistance, it also presents the good retailer with a golden opportunity. By earning the trust and confidence of your shoppers—through product knowledge, service, taste level, and consistency—you can win a customer's loyalty for life. Purchasing a dress or a pair of shoes is a far more enjoyable experience if you are guided and supported in your decisions by a professional, courteous salesperson who wants to help you look your best. And it's even better if the store in which you are buying the apparel stands for something important to you and meshes with your self-image.

In other words, a clearly defined brand bolsters a customer's confidence. So does a good salesperson. And no selling institution or product distribution system in history has combined the power of branding and salesmanship better than the department store. Pioneering American department store merchants like Marshall Field and John Wanamaker, as previously noted, used mass production and product standardization to offer customers unprecedented levels of selection and value. They also built sufficient critical mass into their organizations to create buying power (holding prices down) and promotional impact. Urban newspaper readers learned about sales at downtown department stores every day. Seasonal sales and special events drew people into town from far and wide. Artfully designed store windows featured the fashions of the day and set styles for everyone to follow. Colorful shopping bags adorned with department store logos were seen in the hands of beautiful people all over town.

I thought I knew something about department stores. I served on the board of Macy's from 1986 to 1995. I also helped create a national
platform—the regional mall—where department stores competed with agile specialty stores. And I believed Woodies had some competitive advantages in its excellent Washington home market.

After all, through the ups and downs of the economy, our federal government keeps cranking, supporting a well-paid, stable workforce in which women are well represented. Elections every two years create positive population turnover. The working women of Washington (coming to D.C. from cities all over America) were eager to fit in with the city's distinctive sartorial style. They trusted Woodward & Lothrop to outfit them with just the right professional, casual, and special occasion wardrobe.

The chairman of Woodies at the time was a highly respected merchant and businessman named Edwin Hoffman. Working through the Lakeforest and Fair Oaks deals, Ed and I had become good friends. We spent enough time on golf courses together (Ed belonged to several of the best country clubs on the East Coast) and at a few University of Michigan football games to really understand and trust each other. After decades of dedicated but sleepy management by members of the Woodward and Lothrop families, Ed had clearly kicked some new life into Woodies, then the nation's largest independent publicly traded department store chain. In 1983, sales in Woodies' seventeen Washington-area stores exceeded $400 million, and net earnings were $15 million, or $4.17 per share.

With all that success, it surprised me when Ed seemed so distracted at a New Year's Eve party at my home in Palm Beach in 1983. Toward the end of the evening, he mentioned that he had received a disturbing proposal from an aggressive and always ungracious New York investment advisor named Ronald S. Baron. Baron had called Hoffman to suggest a leveraged buyout of the company at a price 50 percent higher than the stock's current trading levels. Claiming to represent around 18 percent of the shareholders, Baron told Ed that he had already begun to line up bank support for a $300 million loan
to complete the deal. Concerned that Baron's unsolicited activity would put the company in play, Ed asked if I would be interested in lending a hand if things got difficult. I assured him that I would do anything I could to help. The strength of Woodward & Lothrop was critical to the success of our Washington-area properties, which were performing very well. The last thing Woodies needed was an unwelcome distraction. Since the midseventies, Bloomingdale's, I. Magnin, and Neiman Marcus had come to town with strong competition for the hearts and wallets of the sophisticated D.C. shopper. Ed Hoffman knew he had to mind the store.

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-cut
ting 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. But 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.