Macy's New North Star
Can the department store's reboot of its previous turnaround plan please both investors and customers?
Macy's has set a new course toward survival in a turnaround strategy dubbed "Polaris" that plays on its longstanding star logo. The new course is a little like the old course, a 2017 turnaround strategy named "North Star," but it's decidedly Earthbound. Ancient Phoenician and Greek travelers were among the first to use the stars in the sky to navigate; Macy's appears to be using the stars on Wall Street.
In a press release and investors day presentation this week, the department store outlined a complicated new brick-and-mortar scheme, massive supply chain overhaul, e-commerce and loyalty upgrades, and merchandising strategy, all the while emphasizing cost restructuring designed to return the company to profitable growth.
The financial piece is notable. Executives say the moves (which entail shuttering 125 stores, letting go 2,000 employees and consolidating operations, including the closure of its number two headquarters in Cincinnati) should generate annual gross savings of about $1.5 billion, fully realized by year-end 2022. Costs of executing the changes would run $450 million to $490 million, most of it to be recorded in fiscal 2019.
Investment analysts, by and large, smiled. "[Macy]'s multifaceted plan attractively outlined necessary, prudent, & painful changes across stores, product, supply chain, mobile, marketing, and vendor relationships," Cowen & Co.'s Oliver Chen wrote in emailed comments.
But the strategy is complex, beginning with the company's new vision for its physical stores.
'The place where good ideas go to die'
Macy's CEO Jeff Gennette made it clear during his third quarter conference call with analysts that the company was having some tough conversations with mall landlords. In addition to assessing which of its stores are unproductive, the company worked to determine which malls would be viable in the future.
This week, the results are in. Macy's is exiting underperforming malls, in favor of so-called A malls and off-mall locations. Cowen's Chen called the closures "prudent," noting that Macy's executives said they "did attempt to accelerate top-line growth in these stores, albeit without much success."
Retail analyst Nick Egelanian, president of retail development firm Siteworks, believes the closures won't stop at 125 and calls the current plan "a good down payment" on what he says will ultimately be some 400 to as many as 600 across its entire fleet.
The entry into off-mall retail, meanwhile, is a new tack. In addition to bringing on more freestanding off-price Backstage locations to "lifestyle shopping centers" (sometimes known as "strip malls" or "community centers"), Macy's has developed a new store concept for such areas, "Market by Macy's." The first in the concept, spearheaded by Macy's Brand Experience Officer and Story founder Rachel Shechtman, opened this week in the Dallas suburbs. The company said it plans to test more this year.
For some reason, the stores aren't being called "Story," and in fact, Bloomberg reported this week that the company is pulling back on the concept, a rotating merchandising tactic that generated excitement in its original version, developed by Shechtman in New York City's Chelsea neighborhood. (Macy's didn't respond to Retail Dive's request for comment on its Story plans.) It also differs from the retailer's in-store "Market @ Macy's" shops, according to a spokesperson.
"Moreover, given the downward trajectory of the brand, it's mystifying to me that they haven't given Rachel a shot at converting an entire Macy's store — just one — over to a STORY, experiential model. What have they really got to lose at this point?" Doug Stephens, author of "Reengineering Retail: The Future of Selling in a Post-Digital World," who had encouraged Macy's board and executive team to buy Story just months before they did, said in an email. "What they've done instead and continue to do is confine and marginalize the whole concept and the potential it might have offered. Unfortunately, Macy's seems to be the place where good ideas go to die."
Off-price, on trend
Macy's hasn't been able to ignore the rise of off-price, which has decimated department stores' apparel market share in recent years and shows little sign of diminishing.
On Wednesday, Gennette demonstrated confidence in the company's off-price operation, Macy's Backstage, which launched nearly five years ago. The CEO cited "the tricks that we've learned being great students of our competition."
The off-price effort has yielded results. Cowen notes that Backstage stores-within-stores enjoy 5% comp growth, and that its Backstage standalone stores have brought 22% of new customers to the Macy's brand. Polaris plans call for building seven more standalone Backstage stores this year.
But in doubling down on off-price, Macy's may be playing with fire, according to Egelanian. Indeed, he believes they should abandon it, he told Retail Dive in an interview.
"They're going to get clobbered by TJX, Ross and everybody else in that space," he said. "Macy's can't be a meaningful player in off-price. Remember who they're competing with — they're competing with people who have it down to a science."
Is off-mall off the wall?
Beyond its treatment of Story or its prospects in off-price, Macy's strip-center play holds both potential and risk, observers say. While many traditional malls are dying, the lifestyle center model is doing well, according to Ray Wimer, a professor of retail practice at Syracuse University's Whitman School.
"They feed into that convenience factor, they're easier to get in and out of — it works on the way to take the kids to soccer, that kind of thing," he told Retail Dive in an interview. "I don't know if that's enough of a draw even if there's a convenience factor, though. I'm sure it will save them on rent. I'd like to see more data. But if they're selling at that higher price point and you're thinking you're going to be in a center that's close to a Target or Kohl's or a TJ Maxx or Ross, the consumer is going to price compare unless it's truly unique or exclusive."
Kohl's kept coming up in discussions with analysts. GlobalData Retail Managing Director Neil Saunders said that discount department store hasn't been able to make it work, despite the advantages. "Kohl's, which also operates on many strip malls, is a case in point that success is not guaranteed: while their locations are better than those of most other department stores, their performance has been lackluster of late because the offer is not good enough to entice consumers into buying," he told Retail Dive in an email.
Others are more blunt. Brian Kelly, president of Brian Brands, said in an email that the new format "sounds like a Kohl's knockoff with food and beverages," and that its "hyperlocal attitude is impossible to do consistently."
Egelanian made similar comparisons, and has little faith in the maneuver. "Going to strip centers is a waste of time," he said. "So they're going to compete with Kohl's now? This has been Macy's problem all along — what's the gimmick of today. They need to just get down to the hard part of being a retailer and that is being in the best 150 malls in America and getting out of the Midwest."
True North
Macy's executives kept their emphasis on cost savings and financial returns, which was red meat for their Wall Street audience this week.
That could mean that the real essence of the Polaris turnaround may be found deep in the heart of the operation. Still, little was said about customer service, for example, which has been a weakness in Macy's stores. Even its loyalty program was discussed in terms of customer acquisition and retention, rather than customer connection.
“We all know the problems that have plagued Macy’s, that they’ve been disrupted out of business, but that’s not the main problem. That they’re over-stored, but that’s not the main problem. It all comes down to a customer relevance problem, which is a brand problem. You didn’t hear about things like human beings — the only place that I saw that come out was the loyalty program, when it was about ‘access occasional customers’ and maybe ‘get new ones,’ which feels really antagonistic.”
Gabor and others, even those doubtful about the Polaris strategy as it's been described so far, do give props to Macy's for the effort. Now comes the execution.
"Overall, I think this is the last roll of the dice for Macy's," Saunders said. "I give credit for them doing something bold and for grasping that change is needed. However, to succeed they have to be serious about these plans and they have to change their whole approach — especially with regard to shopkeeping flair and skill. Macy's does not have a good track record on this front, so the company has a lot to prove."
For some observers, the department store won't be able to navigate out of its predicament with Wall Street clouding its trajectory. "I think Macy's will survive in one form or another, but I don't know if they can get there without going private," retail consultant Sanford Stein, author of "Retail Schmetail," told Retail Dive in an interview. "They're in much better financial straits than J.C. Penney, but the changes they need to make require the kind of pain that investors won't take. Macy's has to make fundamental, transformative changes to survive, the cost of which Wall Street can't or won't stomach."