Questions for Questrom

Master merchant Allen Questrom talks about the state of retail, the industry's consolidation, and a shift to more conservative fashion this year.

Everyone wants Allen Questrom's advice these days.

Leveraged-buyout veteran Thomas H. Lee recently lured him into the private equity fold as a senior adviser after Questrom retired as C.E.O. of J.C. Penney in 2004. Questrom's expertise immediately came to hand, as he helped Lee's new fund orchestrate a $395 million takeover of national retailer Deb Shops last summer.

As he was closing that deal, Wal-Mart named Questrom to its board after suffering big losses in its apparel division. Now, new rumors have him sitting atop a shortlist of candidates to take over the ailing Sears Holdings after hedge fund financier Eddie Lampert announced he would be relinquishing operational control.

Considering Questrom's 40-year career, the attention is understandable. The veteran C.E.O. has saved more companies than most executives have managed. As chief executive, he reversed the fortune of Neiman Marcus by revamping its customer service. He left Neiman in 1990 to head up Federated Department Stores, where he earned the moniker "turnaround artist" by taking the company out of chapter 11 bankruptcy proceedings. Questrom followed that up from 1999-2000 running Barneys New York, where he instituted an expansion into the contemporary category, a fashion area it now dominates (the retailer was bought by Dubai investment arm Istithmar for $942 million last August).

Questrom, 67, recently spoke to by phone from his Aspen home, where he reflected on needed changes in the retail landscape, the mass-class phenomenon, and New York Fashion Week. Given the recent economic outlook and the disquieting chatter about recession, what does that mean for the retail sector?

Questrom: The retail business has already slowed down, directly in relationship to the overall feeling of the economy. That's the obvious thing. Everyone's talking about the subprime, but the subprime is only a small part of the issue. The real issue is people seeing the value of their overall home market drop-precipitously. Five years before all this, the value of their homes was going in a positive direction, extremely positive, and they took out a lot of money in financing and put that money into the marketplace, whether that was in buying a new car or buying apparel or renovating their house. With that benefit the economy had with the inflation of homes, you now have a double reverse, because people are not only taking money out of the market, now their house is worth less, and that's a real psychological negative. Is the U.S. economy in a recession?

Questrom: I'm not an economist, so I don't want to say. But there's a general malaise in the marketplace, and that's going to play out over the next several quarters. How does that affect a retailer like Wal-Mart?

Questrom: Wal-Mart benefits dramatically in a couple ways. One, there is nobody who has lower cost-of-operation, so if, as a customer, I'm pressed in terms of my own spending ability, I'm going to Wal-Mart. In addition to that, Wal-Mart has a very big presence in the food industry, and that part of the economy has gone up. Food prices have gone up I would say probably in the range of 4 to 6 percent, and Wal-Mart is enjoying big increases. When you're looking at retailing and other retailers, most people think of Wal-Mart in terms of Target and Sears, but they usually don't put Wal-Mart in the supermarket category. Wal-Mart has the biggest piece of the supermarket business, and all supermarkets have done quite well and are still doing quite well. What about apparel?

Questrom: Wal-Mart has not done as well in apparel for other reasons, but I don't want to go into that because I don't want to speak on behalf of Wal-Mart. That said, moving forward, Wal-Mart will focus on more basics in apparel and they will continue to do that better and better. Historically, they've never been viewed as an apparel center, but because of their size they probably do the biggest apparel business in the country. What about the other end of the apparel spectrum, high fashion and luxury goods?

Questrom: The upscale customer is not going away, but the lower end of the upscale market is shifting down. She might buy at a lower price point now, or she may buy less. But for Neiman Marcus and Barneys, the person who is at the very top end of their customer base will not change their spending habits that much. Target pioneered the mass-class market when it signed Isaac Mizrahi to do a lower-priced fashion line, but he announced he's leaving to head up Liz Claiborne. Is the cheap-chic phenomenon on the wane?

Questrom: It's not on the wane but it may not be as valuable as it once was. People are willing to pay a little more money on fashion if their economy is good. If your economy is bad, you go back to fundamentals, what I call basics. You're less willing to buy the next fashion item. It's not going away, but it may not be the same level as it was a few years ago. Target did a very good job with Isaac Mizrahi and other designers but now you've got H&M doing the same thing, and Top Shop, so there's more competition. I don't think it's going to be as big to the overall business. What does that mean for fashion overall?

Questrom: The whole fashion market is moving more conservative. They're going back to the fifties-sixties era. Even politically, you're going back into the sixties with the recent endorsement by Senator Kennedy of Senator Obama. The apparel market is becoming more conservative. You mentioned the fifties and sixties-is fashion's conservative trend a function of nostalgia or politics?

Questrom: It's about the "Generation of Kennedy"-the kids today who are going to be voting, they're looking to that era as a nostalgic era. They weren't part of it but they have a vision of what it was, and they're not happy with what they're currently in. They want their life to be different. Because of this attitude, I think you're going see more conservative fashion. By conservative, you mean people are going to be more dressed up?

Questrom: We went through the dotcom period where everybody threw away men's clothing, and we adopted a casual Friday all week long. That is changing-very dramatically. Men's clothing has performed better recently than women's because men are going back to getting dressed up. That's now happening with women-they're going to go back to wearing skirts and suits. But we'll have to see what there is on the runway. Who are you looking forward to at Fashion Week? Do you have a favorite designer?

Questrom: I used to go to all the runway shows. I don't do that anymore. But Ralph Lauren has always been well positioned, and Chanel has been very consistent. Designs don't come from nowhere-it comes from the impulse of what's happening around you. I think American designers should be very well attuned to what's happening now, the economy and the move toward conservative looks. More and more private equity groups have been taking stakes in fashion and retail concerns. Is the industry consolidating?

Questrom: You will definitely continue to see more consolidation. Also, over the next year or two you will see a reduction and contraction in new-store development. You've just got more retail space out there than you need. Retail expansion has grown faster than population growth. What do you think about the recent move by private equity firm NRDC to buy Fortunoff?

Questrom: I don't know enough about the deal, but I think Fortunoff is a terrific company and I think Lord and Taylor [owned by NRDC] in their new contracted point of view is doing quite well. The only concern is that Fortunoff is heavily into the home business and the home business has been doing worse than the apparel business. But ultimately, I think it will probably be good for both parties. You used to run Barneys New York. What do you think about the Dubai deal?

Questrom: It's a good deal for Barneys-certainly was a good deal for the Jones company [the seller]. Barneys is a good brand, it's internationally known, and Barneys is probably one of the best at doing the contemporary category. And they've got a really good management team. Many of their senior merchants have been around a long time so they really understand the business. I don't know what Dubai is going to do with it, but they've got a really good brand in their hands. As an adviser in Lee Equity Partners, who would you say is a ripe target for acquisition?

Questrom: [Laughing] I wouldn't want to start going down that road. I'd be competing with myself. You're in high demand these days. Is anyone else courting you at the moment? Either to sit on a board, or-

Questrom: I don't want to sit on any more boards. I need time to go ski.

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