Penney’s and Macy’s Battle Over Martha Stewart Products

Two of the biggest names in retail are fighting over Martha Stewart.

In one corner is Ron Johnson, the chief executive of the embattled J. C. Penney. In the other is Terry Lundgren, the chief of Macy’s. Both want the home diva’s housewares, and this week some of their maneuvers were laid bare in a courtroom in Lower Manhattan.

Only days after J. C. Penney stunned Wall Street with news of a big loss, Mr. Johnson described how the hobbled chain was trying to win over Ms. Stewart. He was willing to offer lucrative inducements, worth a potential $500 million in all, to persuade her to sell her branded and designed products in Penney stores.

E-mails in court documents suggest Mr. Johnson was keenly anticipating the reaction of Mr. Lundgren, whose chain has an exclusive contract with Ms. Stewart’s company,Martha Stewart Living Omnimedia, to sell certain housewares.

“Terry might have a headache tonight,” Mr. Johnson wrote to top lieutenants on Dec. 7, 2011, the day the deal between Penney and Ms. Stewart was announced.

“We put Terry in a corner,” he wrote to the Penney investor William Ackman the same day. To Penney’s president, he wrote, “He now has to work again,” of Mr. Lundgren.

Beyond the drama, which is expected to continue with Ms. Stewart’s testimony next week, the trial underscores how competitive the middle-market home goods category is and how much one brand like Martha Stewart can matter.

Home is not the sexiest of categories. It is things like sheets, towels, pots and toasters that are broadly available, low-margin and slow selling. Both Mr. Johnson and Mr. Lundgren said home goods rang up remarkably few sales per square foot. Mr. Johnson said that the category made $185 per square foot in 2007, but now made less than $80. And Mr. Lundgren said that at Macy’s, home was “generally the least profitable part of the store.”

Macy’s, which has been selling Ms. Stewart’s housewares for six years, filed suits last year against both Martha Stewart Living Omnimedia and Penney’s to stop the deal to bring her housewares into that retailer.

The fight over the dud home category might seem counterintuitive. But analysts say it is crucial to a department store’s offerings, and is particularly important now.

“The housing market is rebounding,” said Michael Brown, a partner in the consumer and retail practice at A. T. Kearney, “therefore the home products category is going to be in demand over the next 18- to 24-month period.”

Home departments bring in traffic, particularly from consumers who don’t want to make a separate trip to big-box competitors that are dedicated to home products only, Debra Mednick, home industry analyst for the NPD Group, said in an e-mail. Plus, she said, it brings in a wide range of demographics and ages. Most people need a pan at some point in their lives. Because high-end stores like Saks and Neiman Marcus sell few housewares, it is also a chance for the midrange stores to snag wealthier shoppers, Mr. Lundgren testified Monday.

Home-goods sales have been struggling as they tend to rise or fall in concert with the housing market, and new competition has been introduced from online-only vendors like One Kings Lane.

Exclusive products, like the Martha Stewart lines that Macy’s and Penney’s are fighting over, are particularly important in the home category. “The competitive advantage really lies with private label brands,” Mr. Brown said. “What drives consumers to a physical store is, is there something different?”

Ms. Stewart is the biggest vendor to Macy’s home department, and Mr. Lundgren said that Macy’s had nothing lined up to replace her line.

In a deposition, Mr. Johnson said that there was no other supplier to Penney’s that he expected to have the sales that Ms. Stewart would.

Sales are desperately needed at J. C. Penney, which has been in business for 111 years. Penney’s this week announced a $552 million loss and steep sales declines in the fourth quarter, as well for the year.

And Mr. Johnson, the former retail chief at Apple who took over the chain in 2011, is under increasing pressure to turn the retailer around. Ms. Stewart’s brand is a centerpiece of that strategy.

Penney is renovating an average of 19,000 square feet in each store to feature its new store-within-a-store home emporiums. It has signed up housewares designers like Michael Graves and Jonathan Adler. And Mr. Johnson told investors that when the home departments are unveiled in May, the company should see improved customer traffic.

On the stand on Friday, he said that Ms. Stewart was popular with middle-class shoppers, which fit Penney’s demographic, and that the Martha Stewart stores-within-a-store would serve as a showpiece for other vendors. “What a perfect example to show other vendors what these shops could be,” he said.

Before Mr. Johnson can pursue his full Martha strategy, though, Judge Jeffrey K. Oing will rule on the two lawsuits, which he consolidated into a single bench trial in New York State Supreme Court.

Macy’s has sold Martha Stewart-branded products like bedding, bath and cookware since 2007, and has been the only retailer to sell such branded products since the end of 2009, when Ms. Stewart’s deal with Kmart expired. Macy’s contends that Ms. Stewart’s products in these categories cannot be sold by competitors under the contract.

The legal case against Martha Stewart Living Omnimedia centers on a few questions. One has to do with the stores-within-a-store, where the Penney stores are divided into small boutiques. Fixtures and signs are designed by the brands, like Levi’s, though Penney employees staff the stores, and Penney owns the merchandise and gets credit for the sales.

There is an exclusion in the Martha-Macy’s contract for Martha Stewart’s own stores, letting her make products even in Macy’s exclusive categories for, as Macy’s saw it, a stand-alone store in Times Square or something similar. Martha Stewart argues that the Penney stores-within-a-store count as a distinct Martha store.

Therefore, Martha Stewart argues, the company is allowed to make products for Penney’s with her brand on them even in the Macy’s exclusive categories if they are sold in these stores-within-stores.

Aside from that dispute, Macy’s argues that Martha Stewart cannot, under its contract, design any products for Penney — even products that do not carry Ms. Stewart’s name — in the categories that Macy’s has exclusive agreements in. (Those are, broadly, kitchen, bedding and bath — things like candles and décor, cookware, towels and sheets and kitchen linens.)

Macy’s also contends that Martha breached the confidentiality clause in the contract by sharing elements of the contract with Penney’s and that Penney engaged in unfair competition by violating the contract.

As much as he was eager to have Ms. Stewart’s products, Mr. Johnson testified, it was Martha Stewart’s company and not Penney’s that came up with the idea that the store-within-a-store setup would let Penney’s carry products in the categories exclusive to Macy’s.

“A big breakthrough,” he e-mailed Penney’s executives in September 2011. “Martha’s lawyers have determined that they can do Martha Stewart Stores which include ‘Stores within a Store.’ ”

“We have a path should Terry not be amenable” to letting Martha produce for Penney’s, he wrote.

NewYorkTimes