Can Macy’s Save Itself?

February 12, 2020

Source: Knowledge @ Wharton

It’s Saturday night and the bass is thumping in the cosmetics department at Macy’s in Lenox Square, a destination shopping mall in the upscale Buckhead district of Atlanta, Georgia. Drawn to the party-like atmosphere, shoppers stream into the glittering store, searching for new spring arrivals and any remaining after-Christmas bargains. Merchandise on the floor is plentiful, as is the sales staff.

About 10 miles away in the suburb of Decatur, the scene inside the Macy’s at The Gallery at South Dekalb is starkly different – and a little sad. The mall’s anchor tenant since 1968 is closing, and a final clearance sale is underway. Fixtures are being disassembled, clothes are piled on tables and the feel is more thrift store than department store.

The store is one of 125 that will shutter under a company plan announced earlier this month that also includes shedding 2,000 corporate jobs, consolidating offices, restyling successful stores and expanding its deeply discounted offerings. The closings represent a fifth of Macy’s locations, and the layoffs account for 9% of its corporate employees.

“We will focus our resources on the healthy parts of our business, directly address the unhealthy parts of the business and explore new revenue streams,” Macy’s Inc. chairman and chief executive officer Jeff Gennette said in a statement ahead of the company’s annual investors meeting. “Over the past three years, we have shown we can grow the top-line; however, we have significant work to do to improve the bottom-line. We are confident the strategy we are announcing today will allow us to stabilize margin in 2020 and set the foundation for sustainable, profitable growth.”

Overall sales have been sliding at Macy’s for years, prompting losses in market share. The company expects its strategy to save about $150 billion annually, which will be fully realized by 2022.

Experts are dubious the plan will work, saying it might be too little, too late for the legacy retailer.

“It seems most of what they are trying to do is cutting cost, which is OK. But if that’s most of what they are trying to do, we’re going to see serial rounds of this. It’s a downward spiral, and I think at some point there is a need for a new way to think about the business and move forward,” said Santiago Gallino, Wharton professor of operations, information and decisions.

Barbara Kahn, a Wharton marketing professor who specializes in retail, said only time will tell if the strategy will work, and Macy’s is already behind. Target, Nordstrom, Costco, Walmart and other retailers have responded faster to changing consumer behavior by trimming waste, revitalizing stores and exploring new brand partnerships.

“It’s a downward spiral, and I think at some point there is a need for a new way to think about the business and move forward.”–Santiago Gallino

“Macy’s does have a difficult road ahead because they have to please consumers, which should eventually increase top line results, but they also have to please investors, which is about bottom-line results,” she said. “So, they need to invest and manage costs at the same time.”

According to Mark Cohen, a former retail executive with Sears and other companies who is a marketing professor at Columbia University’s Graduate School of Business, leadership problems are at the root of the retailer’s woes. “I know this sounds awfully critical, but Macy’s is a rudderless mess. Current and past management is truly clueless as to what to do to successfully position the company for the future.”

Cohen said Macy’s biggest problem is that the retailer cannot articulate what it stands for. He sees no evidence of the “magic” in “The Magic of Macy’s” – the store’s longstanding tagline. The $600 million renovation of the flagship store in New York City’s Herald Square was mostly a waste of money, he said, because the store is still a mishmash of products from the same, tired labels.

“I think they are merely putting a Band-aid on a serious, enterprise-threatening wound. It’s not even a short-term fix,” Cohen said of the strategy. “This isn’t going to influence customers in any meaningful way that I can see, and a continued lack of performance, which is inevitable here, will certainly not garner applause from investors.”

Online Sales Aren’t the Threat

The professors agree that it’s too simplistic to blame the so-called “retail apocalypse” that began around 2010 on competition from online sales; most of retail still happens at brick-and-mortar stores.

In the announcement, Gennette said Macy’s will expand its digital platform, which currently generates $6 billion in annual sales, and build a technology hub in Atlanta.

“E-commerce is merely adding fuel to the fire that’s immolating Macy’s,” Cohen said. They did jump into internet retailing early on and are doing a reasonable amount of volume, but pretty much all macys.com represents is what’s on sale this week in their newspaper insert. Clearly, many existing customers are shopping at macys.com rather than their local, often shabby Macy’s store.”

That points to one of Macy’s biggest problems, according to Kahn. Retailers that are surviving in the current retail environment understand that they need to offer an inviting physical space to lure customers off their couches and into the store.

“Macy’s does have a difficult road ahead…. [They] need to invest and manage costs at the same time.” –Barbara Kahn

“Macy’s hasn’t consistently given consumers a reason to shop in their stores,” she said. “They often don’t have the best prices, the best merchandise or the best experiences. If consumers can find what they are looking for somewhere else, why would they go to a second-choice alternative?”

Gallino is doubtful that much will change inside the Macy’s stores that will remain open.

“After reading the announcement, it isn’t clear two years from now what it’s going to be,” he said. “I would infer the stores are going to look pretty much the same. I think that the situation traditional retail stores [are facing] requires some creativity with the physical presence, [a deeper] rethinking where the value is.”

In his classes, Gallino often uses the example of Best Buy, a retailer that was on the brink of failure a few years ago but managed to turn its fortunes around through a carefully crafted strategy that included closing stores, expanding online sales, carrying new brands and partnering with established ones. He contends that Best Buy was in an even tougher spot than Macy’s is now, but the store was able to save itself not only through cost-cutting but re-invention.

“E-commerce is merely adding fuel to the fire that’s immolating Macy’s.”–Mark Cohen

Part of that re-invention involves using data analytics to better understand what customers want. A deep dive into data doesn’t appear to be part of the Macy’s strategy, which the professors think is a mistake. For example, there’s plenty of data that shows customers want to explore new, cutting-edge brands. That’s a strategy that has worked well for Target, which has done a number of capsule collections with designers ranging from Isaac Mizrahi to Marimekko.

Betting on Discounts

Macy’s said it plans to expand its off-price Backstage sections over the next three years by adding 50 store-within-store locations and building seven freestanding ones. Similar to Nordstrom Rack or Saks Off  5th, Backstage sections are racks of deeply discounted merchandise that draw shoppers in search of bargains. Cohen is critical of the approach because the unorganized rows of messy markdowns can have a deleterious effect on the surrounding merchandise. A flea-market atmosphere of bargains galore is a disincentive for value customers who would otherwise pay full price.

“Backstage is a toxic presence inside their stores,” he said. “Expanding this off-price, TJ Maxx wannabe is painting themselves into a corner they will never escape from.”

Gallino agreed, adding that it’s hard to justify the margins of a “garage sale-type layout” within high-rent Macy’s stores at premier malls. That strategy works for TJ Maxx, Ross and Homegoods because they are located in cheaper strip malls, and their stores aren’t as nice, he said.

“You will sell a ton of stuff if you go down the path of lower margins, but the concern is how you make a profit out of that,” Gallino noted.

But Kahn isn’t so quick to discount the approach. She said that if data bears out that customers want the off-price offerings of Backstage, then it’s reasonable for Macy’s to push into that frontier.

“If a consumer is concerned about going to a physical store for the in-store customer experience, then Macy’s has to deliver great merchandise and the best in-store experience, which is now about things like customization, concierge services, cool brands, fun in-store opportunities,” she said. “A lot of this is learned through careful examination of customer data, experimentation and rapid adaptation.”

“Macy’s hasn’t consistently given consumers a reason to shop in their stores.”–Barbara Kahn

Death of the Department Store?

The financial troubles facing Macy’s aren’t unique to the retailer, which has been around since 1858. American department stores are struggling in general, and many of them have disappeared or merged over the last 20 years, including Hecht’s, Gayfers, Parisian and Burdines. Department stores were once destination shopping venues, a place where customers could linger for hours over everything from a $40 bathmat to a $40,000 diamond ring. But shopping has become a more fragmented experience, with more sharply focused stores that cater to a specific clientele.

It begs a hard question: Is the era of the big department store simply over?

“The short answer would be yes. The department stores as we know them — I haven’t heard a good reason to think they are going to be here for the next 10, 20 years,” Gallino said. But he remains optimistic. “I’m hopeful some of these successful companies of the past will work around their businesses and make new propositions to their customers that are attractive and exciting.”

Macy’s and other big sellers must find ways to invigorate their offerings, give customers what they want, please investors and focus their brands —  and that’s a tall order.

“It may not be [over] if the department store can adapt,” Kahn said, pointing to Nordstrom as an example. “Nordstrom is constantly innovating. They are opening small format, showroom-like Nordstrom locals, as well as building beautiful flagship stores like the one that opened in New York City. I think there may still be opportunities if department stores can adapt and innovate.”

“You will sell a ton of stuff if you go down the path of lower margins, but the concern is how you make a profit out of that.”–Santiago Gallino

Cohen’s prediction is more dire.

“There’s no question that the department store genre has been and will remain in decline,” he said. “Not too long ago, the department store was the only game in town, then the powerful anchor to the mall.”

But over the years, management has eliminated broad categories of non-apparel items, cut staff to the bone and consolidated as a way to prop up profits. None of it has worked.

“Now a last man standing, Macy’s is barely able to stand upright,” he said. “The grand effort of the department store to provide its customer with great fashion, great value, great service and excitement is almost completely gone.”

For policymakers in communities like Decatur, Georgia, the store closures are another sign that the retail apocalypse is still a threat. At a recent Dekalb County Commission meeting, elected leaders said the Macy’s closing is a reminder that the county should focus on attracting industries other than retail, according to an article by the Atlanta Journal-Constitution.

“The age of disruption is here,” Commissioner Larry Johnson said.