At what price comes off-price?

Macy’s off-price venture should be profitable quickly with its initial openings, but could ultimately come at some cost to the business and to suppliers, according to experts reacting to the retailer’s announcement Tuesday that its first four off-price stores will open in the metro New York area in the fall. The off-price chain will be called Macy’s Backstage. Parent Macy’s Inc. already operates the Bloomingdale’s outlets.

Sources described the Macy’s division’s decision to get into off-price as inevitable, with Macy’s regular brick-and-mortar business slowing, competitors like Nordstrom Rack and Saks Fifth Avenue Off 5th well into the game, and TJ Maxx continually grabbing market share.

They also view Macy’s off-price maneuver as representing a major strategic move by the retailer, of the caliber not seen since its acquisition of May Department Stores Co. in 2005. While concerned that going off-price would be a blow to the regular price model and possibly siphon some business from the department stores, they see Macy’s, with its strong vendor and real estate relationships and clout, becoming a formidable player in the sector relatively soon.

The off-price stores are expected to be profitable due to the low cost operations and lower building costs compared with the much larger department store format; the likelihood that Macy’s markets the stores heavily, and that they become a strong attraction for consumers. Having the four locations all in the metro area enables Macy’s to cost-efficiently advertise through economies of scale. In addition, Macy’s, with several department stores in the area, knows the territory and the demographics well, providing an edge with the merchandising and marketing.

“This is a $28 billion company that is promoting its brains out, runs one-day sales every other week, and is struggling in that the top line is not growing,” observed Mark Cohen, a marketing professor at Columbia Business School, providing his thoughts on what motivated Macy’s to get into off-price.

“Macy’s may have as many as a couple of hundred stores that they ultimately have to close, that have increasingly lost their productivity. The C and D malls are increasingly problematic,” he said. Cohen raised the possibility that Macy’s converts some of its underproductive department stores into off-price, though he added that conversions could be challenging due to lease covenants, square footage differences between department and off-price stores, and distribution issues.

“It’s about time. That was my first reaction,” said Isaac Lagnado, president of Tactical Retail Solutions. “This has been around for ages for them to do. This is a very good portable format that can really travel, and 30,000 square feet is a good approach. Macy’s has access to so much merchandise and has longstanding relationships. They will be able to get special buys at incredible prices. They have always been good at that.”

Lagnado  likes the Macy’s Backstage name. “It clearly indicates it’s a secondary label, if you will, but carries the Macy brand equity. Macy’s late in the game [but] can put up a very good fight quite quickly.”

“Macy’s must rebuild growth. They are in a growth plateau. They had to do something,” added Craig Johnson, president of Customer Growth Partners. “But Macy’s is smart locating their outlets not in outlet malls but in neighborhoods where people live and work. There is less footfall in both regular and outlet malls. People are shopping more off mall. All of these places [chosen by Macy’s Backstage] have a population of from at least a quarter-million to more than one million people nearby. These are good locations. There are already some competitors there, such as TJ Maxx or Marshalls, but that’s OK. It means that destination is a proven off-price shopper location.”

The pilot store locations are Sheepshead Bay (2027 Emmons Avenue), Brooklyn; Queens Place in Elmhurst, Queens; the Lake Success Shopping Center in New Hyde Park on Long Island, and the Melville Mall in Huntington, also on Long Island.

Analysts noted that the size of Macy’s Backstage stores, at 30,000 square feet on average, are comparable to Nordstrom Rack, and of a size that would qualify Macy’s Backstage for lots of locations.

“These are great test bed locations,” Johnson said. “There has been some fearing that off-price might cannibalize your regular business, but what Rack has seen, when they are located within a few hundred yards from Nordstrom, they both do great. There is some overlap of customers, but mostly different customers and customers that are new to overall corporate franchise. For Macy’s, this will be mostly additive. And there will be a lot of testing, editing of the assortment and figuring out how they want to pitch, with a bigger or smaller home section, for example, or maybe pitch it more to Millennials.”

Cohen did have some concerns. “Just how much business can you do under a Macy’s banner off-price before you find it completely impossible to do any regular price business under your original brand?” he asked rhetorically. “Macy’s regular-price business is still a substantial part of their enterprise.” He called the off-price strategy “a necessary path of the moment but not a particularly wise one, long-term.”

Macy’s said Macy’s Backstage will sell women’s, men’s and children’s apparel, shoes, fashion accessories, housewares, home textiles, intimate apparel and jewelry. Each store also will include amenities, such as free Wi-Fi and “a suite of spacious fitting rooms.” One location will test a café.

“Off-price is much different today than just a few years ago,” observed Robin Kramer of the Kramer Design Group. “If you visit Woodbury Common, the stores are well designed and well merchandised. It’s an elevated experience that certainly projects some of the brand image. Aesthetically, off-price is much more competitive these days.”

Macy’s Backstage merchandise will include clearance goods from Macy’s stores, as well as special buys from fashion brands. The merchandise will sell at between 20 percent to 80 percent off the original and comparable prices for similar merchandise.

“We believe we can deliver a whole new level of value to customers who appreciate fashion and love to hunt for a bargain,” said Peter Sachse, Macy’s chief innovation and business development officer. Macy’s Backstage, he added, will have “continuously updated and fresh merchandise assortments focused on delivering current fashion with incredible prices, day in and day out.”

Macy’s Backstage business will not be driven by promotional events, and Macy’s coupons will not be accepted in the off-price locations.

“Backstage is a new retail concept that the Macy’s team has built from scratch over the past six months,” Sachse said. “As with all of Macy’s innovations, we will test and learn to see what resonates most with customers so we can adjust before rolling out additional locations.”

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