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Macy's Gets Cosi

By Alyce Lomax
March 30, 2004
Sandwiches and new sandals? Cocktails and new cocktail dresses? S'mores and new suits? Forget the food courts, Federated Department Stores (NYSE: FD) is trying to get back into the one-stop shop method of customer loyalty by offering Cosi (Nasdaq: COSI) cafes in Macy's, according to USA Today. Is it a messy mistake or a miracle in the making?

This move may seem alien, but the article pointed out that many people probably remember when the department store experience included dining. Also, the article highlighted other recent precedents: Target (NYSE: TGT) offers Starbucks (Nasdaq: SBUX) cafes in some of its stores, while Wal-Mart (NYSE: WMT) sometimes has McDonald's (NYSE: MCD) for its shoppers on the go and has opened a gourmet coffee shop in one location in Texas.

Certainly, the move may help Federated keep its customers from wandering out into the mall in search of sustenance -- and, in fact, it's likely that Cosi vittles are of much better quality than most food-court fare. However, if there's a company that has the most to gain or lose, it's Cosi.

The chain (which offers everything from lattes and pastries to adult beverages and full meals) is not yet profitable. Meanwhile, the press release describing the deal said Cosi plans to construct the cafes in Macy's by racking up some debt.

Because of its wide variety of food choices, as well as cushy, overstuffed chairs and couches, one might argue that Cosi may look like an innovative niche player, but it competes with all types of restaurants and watering holes, including coffee and hangout powerhouse Starbucks. Cosi, which has only been public for two years, was recently forced to close some underperforming stores to increase profitability.

Aside from its continued losses through the shaky last year, Cosi will put cafes in 10 Macy's stores with this pilot program, all of which are in new markets for Cosi -- Seattle, Atlanta, Miami, and Memphis. According to USA Today, if the test is a success, it could open the door for more Cosis in more Macy's. One of the company's recent initiatives to bolster profitability was to only open new stores in existing markets.

Although the idea of a diner with greasy hands (not to mention sticky fingers from eating Cosi's S'mores) handling new clothes is a bit unpleasant, both companies have reason to see this innovation as a possible boon. Cushy chairs notwithstanding, however, Cosi's path to profitability is still paved with discomfort.

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Alyce Lomax does not own shares of any companies mentioned. She's made S'mores at Cosi before -- she made a big mess.

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