Federated Department Stores is deep-sixing its Macy's stores in the Deep South, in the face of Macy's losing battle for brand loyalty against regional sister chain Rich's. The Cincinnati-based conglomerate is closing its eight Macy's stores in Atlanta and converting its portfolio of 28 Rich's stores in Alabama, Georgia and South Carolina to Rich's-Macy's.

By tacking on the Macy's name, Federated is testing southeastern consumers' loyalty for their beloved Rich's, which has always been a stronger brand thanks to local roots dating to 1867, when Morris Rich opened his first store in downtown Atlanta. Federated acquired Rich's through a stock swap in 1976, but Macy's didn't enter the market until the early 1980s, when it acquired Davidson's and converted those stores to Macy's and built several other Macy's from the ground up. After 20 years, the company is conceding that Rich's is the stronger brand. But will the shared label with Macy's affect consumer perceptions?

The risk is worth it. Federated stands to save a lot of money by combining the similar chains, rather than having them compete head-to-head as co-anchors. “Atlanta is the only market where Macy's and Rich's competed directly,” says Federated CFO Karen Houget. “We've decided to focus our capital and our human investments on building one headquarters brand name in that market. The consolidation will increase our return on investments.”

In Alabama and South Carolina, where there are no Macy's, the existing Rich's will become Rich's-Macy's. Federated closed its Birmingham, Ala., Macy's store more than a year ago.

The experiment will play out largely in Atlanta, where Federated will monitor consumer response. “Rich's-Macy's may be temporary, or it may be permanent, depending primarily on consumer reaction,” Houget says.

The consolidated stores will operate under the current Rich's/Lazarus/Goldsmith's division management in Atlanta. Two of the closed Atlanta Macy's stores — at Simon Property Group's Lenox Square and The Rouse Co.'s Perimeter Mall — will reopen in April as Bloomingdale's, that Federated division's first Atlanta stores. Houget says the Macy's store closings will reduce Federated's net sales by $100 million.

Goldman Sachs analyst George Strachan thinks the changes make sense. Not only will the confusion between Rich's and Macy's end, but Federated can more clearly differentiate Bloomingdale's, its upscale chain that has no other outlets in the region.

“Fashion-conscious consumers will, for the first time, enjoy the high-end Bloomingdale's option,” says Strachan. “And moderate shoppers should benefit from combined merchandising best practices in the Rich's-Macy's chain.”

Federated is incorporating aspects of both brands into the new Rich's-Macy's stores. “This is not simply Rich's with a Macy's name on it,” Houget says. “We are trying to do the best of both companies, so some merchandising ideas and departments that Macy's is known for, for example The Cellar, women's shoes or cosmetics, will supplement what we're doing at Rich's.” Rich's is known for superior furniture and menswear departments.

The Rich's-Macy's stores will also include merchandising and layout tricks that Federated is adopting to compete with discounters. The Atlanta Rich's-Macy's locations will use the “reinvent” prototype, first deployed at the Lazarus Easton Town Center store in Columbus, Ohio, in 2001. Reinvent includes automated price-checking devices, shopping carts, enhanced fitting rooms, improved signage and plasma screens.

Federated's investment in Atlanta renovations and redesigns in the next 12 months will total more than $75 million, out of its overall $650 million capital budget for 2003.