By Amanda Kaiser
with contributions from Casey Hall
 on November 4, 2015

HONG KONG — Macy’s Inc. is one step closer to becoming a global retailer.

The American department chain has just launched its e-commerce pilot program for China through Alibaba’s Tmall, the latest development in the retailer’s international expansion plan and the first fruits of its new venture with Hong Kong-based Fung Retailing Ltd.

Macy’s store on Tmall, which went live Nov. 1, sells an assortment of apparel, accessories, home products and luggage from a selection of brands including Charter Club, Alfani Red and Inc. International Concepts. Prices range from 699 renminbi, or about $110 at current exchange, for a small Giani Bernini handbag to 1,099 renminbi, or $173, for an Anne Klein blazer. The goods, roughly 2,000 stockkeeping units specially selected to cater to Chinese consumers, ship from Hong Kong to mainland China. Macy’s is expecting e-commerce sales in China of about $50 million in 2016.

Terry J. Lundgren, Macy’s chairman and chief executive officer, said he has been looking at retail options for the store in China for 10 years. While the company is going the brick-and-mortar route in the Middle East — Bloomingdale’s already has a store in Dubai and both Bloomingdale’s and Macy’s plan to open in Abu Dhabi in 2018 — Macy’s opted to go a different route in China and focus on online activities. Lundgren, in Hong Kong for a cocktail to inaugurate the new site, said the retailer’s research on consumers and their rapid embrace of mobile technology led him to decide that e-commerce was the best strategy for Macy’s in China.

“It became more and more clear that the online business would be significant, no doubt, but perhaps even more so than in the United States. And we’re the seventh-largest Internet company in America right after Netflix and we may be number six this year,” he said during an interview at Fung Retailing’s offices. “We have a very powerful and very robust online business in America. This is something we do very well.”

Macy’s and Fung Retailing revealed their plans for the online store in August, at which point the parties said there were no plans for physical Macy’s units in China. Lundgren reiterated that e-commerce is the focus for now, but once the retailer has more experience selling to Chinese consumers in China, it might think about opening more brick-and-mortar stores.

“Why not start this way [with e-commerce] and then decide what the store should look like — if we need a store? And, you know, maybe the store will look different,” he said.

Sabrina Fung, executive director of Fung Retailing, said the two parties are “trying to figure out the new retail format that the Chinese consumers are looking for” and tap into the needs of China’s growing middle-class. She stressed the importance of thinking about omnichannel options, like allowing consumers to order Macy’s products online and pick up their goods at other Fung-managed retailers like Toys ‘R’ Us or Kent & Curwen, or giving them the option to browse items in a store and order them online to be delivered. “We don’t know at this point if it’s [going to be] a store or not,” she said.

Lundgren said Macy’s spent time in consumers’ homes in China and conducted a “tremendous” amount of research.

“We’ve learned that they know the Macy’s brand,” he said, noting that the Macy’s stores at Herald Square in New York and in San Francisco attract many Chinese tourists. He added that the store’s Thanksgiving Day Parade and starring role in the iconic film “Miracle on 34th Street” have also helped boost Macy’s name recognition among Chinese consumers, who until now have been able to order goods online through Macy’s U.S. site.

“We have definitely seen the Chinese consumer spending more with us over the last five years,” Lundgren said, declining to give numbers. “Familiarity with our brand here will actually help the education process about their desire, willingness and understanding of shopping at Macy’s in America.”

Lundgren said Macy’s is hoping to tap into China’s fast-growing middle-class consumer base much the same way it does in the United States. He added that he sees a positive side to the economic slowdown in China.

“I’d rather start with a slower economy and then be able to build from that base,” he said.

China and the Middle East are the two markets Macy’s is targeting for its global push. Lundgren said he has looked all over at various countries, but he’s not finding other locales with the necessary mix of elements to support the Macy’s business. He said any new target country would need to have a growing population of consumers able to afford the retailer’s products, the proper environment for new stores and a dearth of supply from existing retailers.

“I don’t see a lot of voids,” he said.

This is Macy’s second stab at e-commerce in China. In 2012, the retailer invested $15 million in VIP Store Co. Ltd., a Chinese-based e-commerce company to sell Macy’s private-label brands online. Ultimately the project fizzled.

“The start-up business just never materialized so it never was anything significant,” Lundgren said.

Another storied American retailer, Neiman Marcus, launched an online business for China a few years ago. It subsequently altered its logistics strategy, ultimately opting to ship directly from the U.S. rather than from warehouses in China. Neiman Marcus still maintains a China-specific Web site with Mandarin translation, size conversion charts and customized creative. In 2013, Neiman Marcus staged a fashion show on Shanghai’s historic Bund waterfront to drum up publicity for its recently launched Chinese e-commerce Web site.

Lundgren said he believes Neiman Marcus is a good retailer, but he was not familiar with the specifics of the store’s China project.

Analysts warned against drawing parallels to Neiman Marcus’ foray into China.

“By looking at the failure of Neiman’s full-price strategy in China, Macy’s can see they really need to offer Chinese consumers products which have both quality and price advantages. Neiman’s failure in China does not predict a pessimistic outlook for Macy’s. After all, Macy’s has a very different level of consumer recognition in China than Neiman Marcus,” said Chan Zhang, a consultant at SmithStreet Solutions. Zhang said Macy’s has done a good job reaching out to Chinese consumers by marketing itself on local social networking platforms and offering Chinese passport holders discounts at its stores in the U.S.

Benjamin Cavender, senior analyst at China Market Research Consulting, noted that the Chinese retail market is changing quickly — a factor that could play into Macy’s favor.

“First, consumers are much more brand-savvy now and are looking for a wider variety of products. Second, now that payment platforms are much more integrated, it is a lot easier for consumers to buy from overseas via Chinese Web sites using Chinese payment mechanisms,” Cavender said.

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