How do you make a rabidly competitive retail marketplace even more challenging for a department store chain? Well, you could tear up the road system that brings customers to its stores, including the street fronting its downtown location. That should make things more challenging.And that's precisely what happened to ZCMI in 1997, says Richard H. Madsen, chairman, president and CEO of the Salt Lake-based chain of 14 stores.

"The Main Street construction of underground parking (for the new Gateway Tower West at South Temple) from January until mid-November of 1997 contributed heavily to a $2 million sales loss for our flagship store during the year," Madsen tells ZCMI shareholders in the company's annual report published this week.

"Extensive construction projects continue in the form of light rail and I-15 freeway improvements at a tremendous cost to us and to all Salt Lake City businesses."

Moreover, things aren't going to improve anytime soon. Madsen points out that the freeway construction, which affects all of its Wasatch Front stores, will continue over the next three years. "Stores that were easily reached and customer friendly have become much more difficult to locate, let alone shop," he says.

The Utah State Tax Commission reports that gross taxable retail sales of department stores were down 6 percent last year from 1996, a year in which alternative shop-ping styles, such as through catalogs and the Internet, made further inroads on traditional retailers.

"(They) are making huge strides toward becoming not only viable alternatives but primary methods of shopping," Madsen said, "offering customers time and travel convenience and increasingly simple credit options, all at the touch of a button."

If that weren't enough, Madsen points out that Utah and Idaho have been "rediscovered" by regional and national retailers who have been opening stores at a rapid pace in the area.

"As a matter of fact," Madsen said, "the market is over-serviced in our industry niche and there may not be opportunities for everyone who would like to do business here. Who will survive and who will fade away with the outgoing century?"

Madsen said such questions are "part of the corporate reality we find ourselves in in May of 1998 . . . but only part."

Other critical factors in the fiscal '97 sales downturn are consumer debt reaching high levels and the overall slowing of the area's economy.

But Madsen notes that ZCMI was created in an even more difficult era, 1868 pioneer Utah, and it proved to be a "visionary solution" to the needs of the people at that time when Brigham Young decided a cooperative, or department store retail institution, was the answer.

"I believe ZCMI still is the solution in an equally difficult retail environment," he told the company's 1,575 shareholders.

Madsen notes that despite the downturn in sales, shareholder value in ZCMI's stock increased more than 20 percent during fiscal '97, trading in a range of $12.50 in the first quarter last year to a high of $14.63 in the third quarter and $14.50 in the fourth.

It has sold as high as $15.37 1/2 this year and most recently traded (May 8) at $14.62 1/2.

Sales and other income for fiscal 1997, ended Jan. 31, 1998, totaled $257.47 million, down from $259.59 in the previous year. Net income of $209,000 or 9 cents per share, was down from $1.83 million or 84 cents per share the previous year. In its management analysis, the report says net income decreased because sales decreased and expenses increased, as well as other factors.

ZCMI's annual meeting of shareholders is scheduled for Wednesday, May 20, 2:30 p.m., in Memorial House in Memory Grove.