• by Joe Mandese  @mp_joemandese, March 1, 2005

For the past decade Madison Avenue has been consumed by a wave of mergers among both agencies and major media outlets that has consolidated the media marketplace to a handful of key players. Now it's the marketers' turn. In the span of only a few months, an unprecedented spate of merger deals among leading national advertisers threatens to consolidate, and possibly contract, ad budgets for many big media and ad agencies. This was underscored Monday by the largest department store operator, Federated Department Stores, $11 billion acquisition of the No. 2 department store marketer, May Department Stores.

The deal, which comes on the heels of another big retailer consolidation, Kmart's acquisition of Sears Roebuck & Co., as well as the consolidation of marketers in other categories, has both media outlets and media agencies buzzing over the potential fallout. Other recent mergers announced by top marketers include Procter & Gamble's, the world's largest advertiser, acquisition of Gillette; as well as a consolidation within the high growth telecommunications category, including SBC's acquisition of AT&T, and Verizon's merger with MCI.

The most recent deal already is sending alarm signals across the media, particularly newspaper publishers, which are especially dependent on retail advertisers like Federated, May, Sears and Kmart.

Based on 2004 spending figures, the combined Federated/May advertising budget tallied more than $1.1 billion, 67 percent of which was spent on newspapers, according to estimates compiled by Nielsen Monitor-Plus. The top brands operated by the two companies were Federated's Macy's chain, which spent $319 million in 2004 and May's Foley's chain, which spent $103 million in 2004.

Meanwhile, other major retailer, Winn Dixie, has filed for bankruptcy protection, adding further uncertainty to the retail advertising outlook.

In a research note headlined, "Federated, May, Sears, Kmart, Winn-Dixie, Oh My...," Merrill Lynch advertising analyst Lauren Rich Fine issued a dire warning for the media industry, especially newspaper publishers.

"This merger, news of Winn Dixie's bankruptcy filing, the pending merger of Kmart/Sears and the imminent telecom mergers are all likely to put a damper on the newspaper industry outlook," she wrote, noting that Merrill Lynch's retail analysts have already predicted that Federated would convert 10 of May's 12 regional department store divisions into the Macy's brand, though they are expected to maintain the Lord & Taylor and Marshall Field's nameplates. Those moves could result in a net reduction of 74 stores. More importantly, the consolidation of retail brand names is likely to lead to a consolidation of brand-related ad spending.

"For newspaper companies, the merger of these two large department store holding companies is not good news given the $450MM of cost savings targeted," said Fine. "The merger likely represents at a minimum the elimination of name plates in certain markets, and even store closures in some markets, in both cases leading to less advertising."