Filene's Basement Ch. 11 abetted by market glut

Discount Store News, Sept 6, 1999 by Mike Duff

WELLESLEY, MASS. -- Filene's Basement may have been driven into Chapter 11 because of something consumers have in abundance: choice.

For the off-pricer, too many of its potential customers are faced with too many choices, all of which constitute alternatives to a trip to Filene's Basement, observers said. It's not that Filene's Basement didn't make mistakes on its road to Chapter 11. An unfortunate foray into the world of private label and a poorly executed expansion strategy were missteps that led to its stumble into bankruptcy. But these may have been symptoms rather than causes. As consumers were offered more choices, the environment changed, and Filene's Basement couldn't figure out how to effectively change with it.

Before Federated bought Filene's, Filene's Basement was Filene's basement, a ground-level space where the famous Boston department store got rid of past season's offerings at cut-rate prices. During that era in New York, Bloomingdale's also had a bargain basement, and shopping in light-deprived locales for great deals was a trendy thing to do whether in the Big Apple or Beantown. However, like Starsky & Hutch, the bargain basements slid into history. Federated spun off the Filene's Basement operation, and Bloomingdale's opened up a food court downstairs.

Filene's Basement, however, took its place as a regional off-pricer and did well enough until it tried to expand into new markets where the name Filene's had little or no cachet. The entry of Filene's Basement into New York was particularly mishandled, said Kurt Barnard, president of Barnard's Retail Trend Report.

"Filene's did a lot of things," Barnard said, "most of them wrong. Once upon a time, Filene's was emblematic of the adventure of shopping and bargain hunting."

While Filene's had expansion problems, TJX Cos., which combined two successful off-pricers, T.J. Maxx and Marshals, was able to deliver all the power of a two-stroke engine, helping the company expand rapidly beyond New England while leaving Filene's Basement less and less maneuvering room at home.

Other competitive factors squeezed Filene's Basement further. First was the abundance of off-pricers in the Northeast. Not only was TJX heavily represented in the Northeast, but so too were myriad other off-pricers from Daffy's to Fashion Bug. Then the department stores, where the labels that off-pricers depend upon go to get their premium cachet, became more price-aggressive themselves. They sped up the discount cycle to get inventories out faster at discount prices that rivaled what was available from the off-pricers. Not only that, but they opened their own outlet shops as outlet malls became increasingly popular.

Mass merchants played their part in putting pressure on Filene's Basement. With many mass merchants emphasizing proprietary "fashion-right" merchandise consumers had still another choice in the marketplace but one that is consistently in stock on core items, unlike the off-pricers, which may have a style or size today and be out tomorrow. To make matters even worse, traditional mass merchants recently have been supplemented by newer, related concepts that target the off-pricer customer even more directly. Kohl's, for example, enters markets aggressively looking for the brand-conscious customer, said Bob Obernesser, an analyst with McMillan/Doolitttle. Filene's Basement has never been as assertive in finding and linking good locations into thorough market coverage.

"Kohl's, with its high focus on soft lines, is a place where people who would have gone to Filene's Basement go today," Obernesser said. "Kohl's has name brands at good prices. As an off-pricer, unless you commit to a market with 15 or 20 stores, you won't have critical mass and you won't succeed."

In today's unforgiving retail environment, mistakes are punished quickly and hard. A second critical mistake made by Filene's Basement was to attempt a private label strategy several years ago. Private label often looks easy to retailers that have never attempted it. And Filene's Basement's customers were put off when they couldn't find bargain labels they were hunting for in the first place.

The immediate cause of the Filene's Basement bankruptcy filing was an unwillingness on the part of vendors to ship merchandise. But the company has been in rough financial straits for several years. In 1995, the company even contemplated a lawsuit against Forbes magazine, which had written that Filene's Basement was in serious financial trouble.

The company already has cut back headquarters staff by about 15% as part of an economizing drive.

The company has two important factors in its favor as it contemplates the immediate future. The first is a $135 million debtor in possession financing commitment from General Electric Capital Corp. and Paragon Capital LLC.

The second is Aisle 3. The concept--which also has financial backing from General Electric Capital and Paragon--is a weekend-only concept that has drawn praise from observers. Rich Tauberman, a spokesman for Filene's Basement, said that the planned opening of four Aisle 3 outlets in the Chicago area during this month and October will go ahead. Otherwise, he asserted, it is too early to tell just what direction Filene's Basement will take, although all components of the business are under review.