Macy's:
Transitions in American retail

Aug 2016, Blake Kim, Intern

 

Macy’s recently announced that it will be closing 100 of its stores, or 12% of its store base, which was met with great fanfare and a 17% jump in its stock share. Why?

Simply put, this was a long time coming, and investors knew it. In an increasingly digital world, returns on traditional brick and mortar retail have been under pressure for quite a while. Department stores are already the weakest sector in retail, and consumer habits are swaying towards online retail behemoths like Amazon (see Walmart’s recent $3.3 billion purchase of Jet.com as further proof of this shift).

The consequences of these big shifts in American retail have not gone unnoticed, as multiple big retailers like Sports Authority, once the nation’s largest sporting goods retailer, have failed to adapt and gone bankrupt. Office Depot has closed 400 stores with plans for 300 more closures, and even Walmart has been cut down on store locations. With E-commerce sales growing in 2015 by 14.6% to $341.6 billion, and forecast to grow by an average annual rate of 9.32% over the next five years to $523 billion in 2020, opening more stores is no longer the most efficient and effective strategy to grow sales.

Even in America, which has more retail square footage than Australia, the UK, Germany, and Mexico combined, there are limits to how much physical retail spaces can grow. And with the digital E-Commerce disruption of the past decade, the retail landscape has gone through a fundamental shift.

In this new world of retail, department stores are no longer just stores, but are points of sales, distribution centers, and most importantly, brand experience portals, bringing together a myriad of colors, smells, textures and sounds – all to convince us to part with our hard earned dollars.

As the largest department store company in the US by retail sales, with a market cap of $12.2 billion, we think Macy’s decision to close 100 stores was a smart move in the right direction. While all the stores chosen for closure were cash positive, they also had declining sales or profitability, with some locations worth more in real estate value than as retail locations.

In the bigger picture of things, Macy’s believes that a big chunk of lost revenue from the 100 closed stores will ultimately be absorbed by online and nearby stores, which is a 3% reduction in annual sales or $1 billion.

With this in mind, Macy’s has a new business strategy that they have labeled M.O.M 2.0. The My Macy’s program is evolving from localization to personalization, Macy’s is shifting from “omnichannel to omni choices,” and is seeking to engage customers by making Magic Connections. In this context, store closures make even more sense.

While online first E-Commerce brands like Warby Parker have discovered that they need to open physical stores so people can touch the product, traditional brick and mortar brands like Macy’s are aiming to offer greater choice, personalization, and relevance to customers through a mix of traditional and digital channels.

Successfully activating M.O.M 2.0

Today, most customers’ first interactions with brands, including department stores, are online. According to Bloomberg, 75% of Millennials research brands online before buying in person, while a recent MasterCard study found that 8 in 10 consumers now use digital even while shopping. Traditional selling points are no longer as a relevant, as only 18% of modern consumers consider traditional promotions to be very important, whereas “value,” “company track record,” and “convenience” all ranked as top desired attributes.

Retail growth for brands like Macy’s will therefore come from pursuing a strong omnichannel (or Omni Choice) strategy that seamlessly integrates a robust and tightly branded digital presence with an agile supply chain and stellar in-store experience. Further evidence, comes from Walmart whose research shows their best customers are those who shop both online and off. Walmart’s customers who only shop in store spend about $1,400 a year and the online-only shoppers spend $200. Those who shop both spend about $2,500 per year.

Macy’s will need to really understand who their customers are, both today and the next generation. Millennials might be the first digital natives, growing up with the internet and smartphones, but the Gen Z population was born with an iPhone in their hands, and an 8 second attention span. According to Forbes, 70% have used a mobile shopping app in the last month and 94% prefer browsing digitally vs in-store. Creating Magic Connection has never been tougher.

From our experience, we’ve seen that successful omnichannel brands are those that have a comprehensive understanding of their brand and put it at the heart of their customer experience. Macy’s has been at the forefront of America retail for 158 years, and so the smart money is that they’ll be able to pull it off – only time will tell.