Macy’s Strategy, 5 Reasons it's Working
A long standing question is when are we finally going to see the death of the department store? While pundits say the end is near retailers like Macy’s and Nordstrom say there is no end in sight. To be fair department stores have faced challenges to their mere existence for decades now. It’s been decades since Sears was the largest retailer in the world in 1969. So what has changed? It’s not that the category is dead but what has changed is who’s winning share.
Big box retailers like Walmart and Target have really become the new department stores of today selling everything from electronics to clothing. Walmart is the second largest retailer of clothing in the United States after Amazon. In the past many parents would have went to Sears on a Saturday afternoon to get their kids ready for the new school year. Now they just drive to the closest Walmart and get everything they need.
If the category isn’t dead and consumers still value one stop shopping which they do then what does it take to win in this category? While many thought the COVID-19 pandemic would spell the end of Macy’s, the exact opposite has happened to the surprise of many. Macy’s 2021 sales were up 41.0% over 2020 to reach $24.5 billion and were nearly flat to 2019 levels.. Macy’s also brought in 7.2 million new customers in the fourth quarter of 2021. Investors took notice, pushing the stock up an eye popping 143% last year. If you are curious about why Macy’s is proving its critics wrong, here are five reasons Macy’s strategy is working.
1. Stores are an asset. If you still think stores are dead or dying then perhaps you should stop shopping in them. Only 16.1% of retail sales in the United States are made online and many of those sales are completed at a store. Consumers like to shop online and then hop into their car and grab their groceries either in-store or at curbside. Sometimes you don’t want to wait for a few days for a package arrive or you tire of checking the shipping status of that item you bought last week. There are also millions of consumers that live in apartment buildings or homes where they are concerned about their packages being stolen.
Then there is the issue of returns. Returns are easily one of the biggest headaches of all when it comes to online shopping. We have all spent time on a Sunday afternoon printing packing slips, assembling merchandise back into boxes and then venturing outside to find the right carrier to ship back our goods. It is estimated that 16.6% or $761 billion of goods sold in 2021 in the United States will be returned. Stores make it easier to return goods and it is cheaper for the retailer when merchandise is returned to a store since it cuts down on shipping costs.
Another benefit of having stores is that retailers often find their digital sales are higher in areas where they have stores. Digitally native mattress retailer Casper disclosed in its 2020 IPO filing that in 2019 in cities with Casper stores, sales grew twice as quickly. Macy’s has found that its digital sales per capita are three times higher in areas where it has stores. The ease of returns is likely one contributor to the sales bump and another is that stores are effective marketing vehicles. With the cost of digital marketing increasing stores are billboards that call on consumers everyday to come in and take a look at what’s going on inside.
One of the biggest issues with traditional department stores is there are too many of them and a lot of those stores are too large. With the advent of online shopping people make more purposeful shopping trips. They do their research online and they can be in an out of a store much faster because they know exactly what they are looking for. This is part of the issue with starting off in a world where there was no online shopping then adapting to it. What do you do with hundreds of stores that are too big and many more you simply do not need? Macy’s has tackled this issue by deciding to close 125, or a fifth of its lowest performing stores by 2023.
2. Lucrative brand partnerships. One of the most effective ways to bring traffic into a retail store is to add a popular brand that can pique the interest of your existing customers as well as bring in new customers. Macy’s achieved this by adding Toys “R” Us merchandise to its website in August of 2021. Toys “R” Us was a popular brand but it was saddled with debt leading it to file for bankruptcy in 2017. But consumers still love the brand and see it as one of the preeminent destinations for toys for children. That is one of the reasons why both Amazon and Target have sold Toys “R” Us merchandise in the past.
After adding Toys “R” Us merchandise to its website Macy’s found the partnership attracted many new Millennial parents who after shopping for toys bought higher margin products at Macy’s. Macy’s is now adding small Toys “R” Us shops in 400 of its stores this year. “Our partnership with Toys “R” Us has been instrumental in attracting new customers to the Macy's brand,” said Jeff Gennette, Macy’s CEO. “Of the customers that shop Toys “R” Us, 25% were new customers to the Macy's brand, and 93% of these toy customers cross-shopped other categories.”
On the back of this successful partnership Macy’s is is also adding fine jewellery retailer Pandora to 28 of its stores this year bringing the total number of Pandora stores within Macy’s to 33. This move will help Macy’s to attract a younger customer base. “In November, we launched Pandora in five stores,” said Gennette. “The fine jewelry business in those stores saw an incremental 23% increase in sales growth over 2019 from the new assortment. Pandora attracts younger customers, and we will now expand to 28 additional locations in 2022.”
Store within a store concepts continue to be part of the playbooks of successful retailers. Target is adding small Ulta Beauty shops to 800 of its stores and Sephora is adding small Sephora stores inside of 850 Kohl’s stores. As department stores have gotten older their customers often age along with them. That then presents the question of how do we attract a younger customer that has a higher lifetime value while at the same time not alienating our older but loyal customer base. These tie ups with brands that are popular with Gen Z and Millennials can help to resolve this issue. Gap’s partnership with Kanye West is another example of how a retailer is trying to revitalize their image to appeal to a younger consumer base through a partnership.
3. More off-mall locations. While the majority of retail sales still happen offline where those shopping trips are taking place is changing. As big box retailers like Walmart, who are often located in off-mall locations, continue to grow so does the traffic in those locations. With this in mind several retailers are shifting their store network to off mall locations. Gap, a long-time mall staple, is planning to have 80% of its sales from its Gap and Banana Republic brands come from “off-mall, strip, outlet and online formats” by 2024. “Our strategy is rooted in moving away from traditional malls,” said Gap CEO Sonia Syngal. “We have sharpened our real estate strategy so that our stores will be where our customers want to shop today.”
Signet Jewellers which owns the Kay and Zales chains echoed a similar sentiment. “The foot traffic for off-mall locations is better than what we’re seeing in the mall, certainly in this time. It’s really important, and we see that shift continuing,” says Joan Hilson, Signet’s CFO. Hilson says that its move off mall is “an opportunity for a better economic model.” A survey of retail CFO’s taken last year found that close to a third were planning to reduce their presence in malls. Macy’s is also part of this group with plans to open more off mall locations. “We continue to believe that the best malls in the country will thrive,” said Gennette. “However, we also know that Macy’s and Bloomingdale’s have high potential [off]-mall and in smaller formats.”
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4. Strength in digital. With the COVID-19 pandemic running rampant retailers had no choice but to get better at digital. While you may still think of Macy’s as an out of date department store it has made gains in its digital business. Macy’s digital sales were up 12% in 2021 and are up 36% over 2019. Digital sales represented 39% of Macy’s sales in the fourth quarter of 2021.
One of the things Macy’s did to increase its digital sales was to launch a refreshed version of its mobile app in October which now has among many things, personalized homepages, improved design and navigation and an improved search function. Consumers reacted positively to the update with active users up 21% in the month after launch. “During the fourth quarter, Macy's app had the largest quarterly gain in downloads across our peer set with an 81% increase in downloads over the third quarter of 2021,” said Gennette.
Tie ups with brands like Toys “R” Us has also been helpful in spurring digital sales. Customers that shop across channels (digital and in-store) at Macy’s are more loyal, shopping 3 to 3.5 times as much as customers that shop in just one channel. They also spend 2.5 to 3.5 times more money than customers that only shop in one channel.
Macy’s stores also feed digital sales as consumers elect to shop with retailers where there is easy and convenient in-store and curbside pickup. Macy’s, like retailers such as Best Buy and Target, uses its store network more efficiently by fulfilling orders from its stores. 28% of Macy’s online orders in the fourth quarter of 2021 were fulfilled from stores.
Macy’s is also turning its website into a marketplace with third party sellers. When you shop on Amazon there is merchandise Amazon buys and resells at a markup (first party sales) and there are goods third party sellers sell directly to you. These sellers are often small to medium sized businesses sometimes retailers you have never heard of and they pay Amazon a commission on every sale. At some point Amazon realized it could make more money by creating a marketplace of third party sellers and last year 56% of Amazon’s unit sales came from these sellers.
These online marketplaces are seen as a new way for many retailers to increase sales and margins. Walmart, Target and Macy’s are all working on growing their own marketplaces. For Macy’s like other retailers a marketplace is a way for it to increase their reach without the accompanying investment in inventory since third party sellers typically just pay a commission on every sale and own their own inventory. This structure also generates higher margins since the marketplace owner doesn’t have to worry about things like markdowns to move slow moving inventory.
Macy’s is planning to launch its own marketplace before the end of 2022. “When we look at our search results, there are things that we simply don’t carry or carry in enough depth that customers were searching for on our macys.com or bloomingdales.com websites,” says Adrian Mitchell, Macy’s CFO. “The digital marketplace gives us the ability to carry a complete experience with many more items available to the customer without necessarily carrying the physical inventory. It allows us to enter into categories we’ve not been in. It allows us to be deeper in categories where we’re much leaner.”
Macy’s goal is to have a $10 billion digital business by 2023 an increase from 2020 when its digital sales were $7.6 billion. Investors see so much potential in Macy’s digital business that activist investor Jana Partners suggested Macy’s spin it off into a separate business similar to the way Saks spun off Saks.com. But Macy’s has decided not to pursue this course of action. “We found that the combination of our profitable digital platform with our national footprint will deliver greater value to shareholders than a separation of our digital and physical assets,” said Gennette. “Management knows that stores and online are part of the same ecosystem and that the business works best when both are fully aligned and part of the same entity,” says Managing Director of GlobalData Retail, Neil Saunders. “What is in the interest of Wall Street investors making short term gains, is not necessarily in the interest of the long-term health of the company,” Saunders said.
5. New store formats. In the last few years Macy’s has launched several new store formats. They include Market by Macy’s, freestanding Macy’s Backstage stores and Bloomies which is a smaller take on the traditional Bloomindales department store. Macy’s is going to open 10 smaller store format stores this year. The first Market by Macy’s opened in 2020. These stores are much small than a Macy’s full line department store which can over 200,000 sq. ft.. They have a curated assortment of merchandise including products from local brands and they are located in off-mall lifestyle centres. “We’re incredibly excited about the new store growth potential that we see in off-mall [stores],” says Mitchell. “A 30,000- to 50,000-square-foot Macy’s—one that’s in neighborhoods and power centers closer to where the customer lives, where the soccer game is, where work may be, where the grocery store is located—is the next evolution in our physical footprint.”
Smaller store formats are certainly the way to go since the days of shoppers wanting to spend hours roaming through a sprawling department store are long gone. What remains to be seen is if Macy’s can right size its network of nearly 800 stores (across all banners) in time to stave off the never ending competition for every consumer’s dollar.