Feb. 8 (Bloomberg) -- When J.C. Penney Co. announced in December that it had cut a deal to carry Martha Stewart-branded home goods in its stores, it didn’t take Macy’s Inc. long to say: Wait a minute, Martha.
More than five years ago, Macy’s signed its own exclusive contract to sell bedding, towels, dinnerware, cookware and the like from Martha Stewart Living Omnimedia Inc. Under the terms, Martha Stewart Living isn’t allowed to sell such wares at a Macy’s competitor, including J.C. Penney, Macy’s says.
On Jan. 23, Macy’s, the second-largest U.S. department store chain, sued Martha Stewart Living in New York State Supreme Court, seeking to stop the deal and collect damages. Martha Stewart Living, which has until Feb. 13 to respond to the lawsuit, will argue that the deal doesn’t violate the contract because it will operate its own stores inside J.C. Penney, a person familiar with its strategy said.
Retailers increasingly will knock heads as they compete to lock up celebrity designers in a battle for market share, according to Craig Johnson, president of consulting firm Customer Growth Partners.
“The days of everyone offering the same-old, same-old thing are over and there is a limited number of exclusive vendors,” said Johnson, who is based in New Canaan, Connecticut. “Retailers are trying to ensure they have different merchandise than the anchor they’re competing with 50 yards down the mall or on Amazon.”
Darcie Brossart, a spokeswoman for J.C. Penney, said the company had no comment. Jim Sluzewski, a spokesman for Macy’s, said the company is not commenting beyond the lawsuit.
Martha Stewart, chief editorial, media and content officer of Martha Stewart Living, declined to comment on the suit.
“We love Macy’s,” Stewart, 70, said yesterday at a Staples Inc. store in New York, where she was unveiling a home organizing line of products. “They’ve been great partners.”
While department stores have been making incremental gains, their share of the U.S. retail market in 2011 was less than half the 7 percent they commanded 20 years ago, Johnson said.
Macy’s, which is based in Cincinnati, has outperformed J.C. Penney, with a 5.4 percent gain in sales at stores open at least a year in the 11 months ended Dec. 31 compared with J.C. Penney’s 0.7 percent increase. Last year Macy’s shares advanced 27 percent; J.C. Penney rose 8.8 percent. Martha Stewart Living fell less than 1 percent in 2011.
Martha Stewart Living approached Macy’s about a deal in 2005, not the other way around, according to the complaint. The previous year, Stewart was sentenced to five months in prison after being convicted of obstructing justice in an insider trading case. Tying up with a convicted felon was risky for Macy’s because Stewart’s brand was “under pressure by very public proceedings and their aftermath,” the complaint says.
Still, Martha Stewart merchandise was “lucrative” and generated “billions of dollars of sales,” according to the complaint. The Martha Stewart Collection is one of Macy’s biggest home goods brands. Household merchandise accounted for 15 percent of the chain’s 2010 sales of $25 billion.
“From Macy’s point of view, they obviously are upset,” Johnson said. “They threw Martha a nice little lifeline. Macy’s had invested a lot of money in it, promoting the brand.”
Macy’s had no idea Martha Stewart Living was talking to J.C. Penney and found out about the deal one day before it was announced on Dec. 7, according to the lawsuit.
Under the new partnership, J.C. Penney is buying a 17 percent stake in Martha Stewart Living for $38.5 million and opening home products mini-stores in hundreds of its locations starting next February. According to the companies, the partnership will generate more than $200 million in revenue over 10 years for Martha Stewart Living, which is trying to boost growth after three years of falling revenue.
“Martha Stewart needed the money,” said Margaret Gilliam, founder of an eponymous retail consulting firm in New York. “Penney offered to buy a chunk of stock, and infuse a bunch of money and gave a great opportunity to grow.”
For J.C. Penney Chief Executive Officer Ron Johnson, who previously ran Apple Inc.’s retail operations, the deal is part of a strategy to revive sales at the Plano, Texas-based department-store chain, which in November posted its first quarterly loss in two years.
Representatives from Macy’s and Martha Stewart Living met Dec. 15 to discuss the J.C. Penney deal, according to the complaint. Macy’s said the Martha Stewart Living executives didn’t address the most “critical question” Macy’s had posed: Why it believed it could enter a deal with J.C. Penney.
Macy’s was “cold-shouldered,” said Harley Lewin, an attorney who has defended such brands as Christian Louboutin and Alexander Wang in trademark and other cases. Lewin is not connected with the Macy’s-Martha Stewart Living case.
In a Feb. 2 statement, Martha Stewart Living said it was “confident” it hadn’t breached the terms of the agreement. “It’s good for our partners, our consumers and our brand to have a wide range of Martha Stewart products available in a variety of top retailers and we structure all our commercial agreements with this strategy in mind,” the company said.
Martha Stewart Living’s interpretation of the Macy’s contract is that it can sell goods through its own physical stores and its own websites, according to the person, who is familiar with internal deliberations. Under that theory, the stores inside J.C. Penney would be Martha Stewart Living’s, said the person, who declined to be identified because she wasn’t authorized to speak publicly on the matter.
“The judge will blow through the argument like a hot knife through butter,” said Lewin, a partner at McCarter & English in New York.
In the meeting between the two sides, Martha Stewart Living executives said the mini-stores would be operated by J.C. Penney, according to the Macy’s complaint.
It’s unclear whether Martha Stewart Living will have any counterclaims against Macy’s, Michael L. Sibarium, a partner with the law firm Pillsbury, said in a telephone interview.
“And we don’t know what role if any yet J.C. Penney is going to play, if they’re going to be completely left out of it or at some point they might get dragged in,” said Sibarium, who is based in Washington.
Macy’s and Martha Stewart Living may settle out of court, according to Lewin.
“My bet is Macy’s gets tens of millions of dollars in damages in a settlement, Stewart begins her new relationship with J.C. Penney and Macy’s moves on and gets a bigger and better celebrity,” he said.
J.C. Penney probably calculated the risk and cost of a Macy’s backlash, according to Gilliam, the retail consultant.
“They had to have thought that Macy’s would object and maybe that is what Penney’s wants,” she said. “They probably figured it would take a certain war chest to pay off Macy’s and that is what they’re doing.”
The case is Macy’s Inc. v. Martha Stewart Living Omnimedia Inc., 650197/2012, New York State Supreme Court (Manhattan).