With its just-revealed “Polaris” three-year strategy, retail experts and industry analysts credit Macy’s Inc. for implementing massive store closings and staff cuts, attempting to “reinvent” ready-to-wear and for exploring off-mall opportunities and new brick-and-mortar concepts.
There’s also a “market ecosystem” pilot in the works involving clustering Backstage freestanding, off-price stores and the new Market by Macy’s concept around Macy’s stores in three markets.
“By October, we will have everything in place with the ecosystem market in Dallas, Atlanta and Washington, D.C.,” Macy’s Inc. chairman and chief executive officer Jeff Gennette told WWD. He said a total of 12 stores will be in the pilot and that Macy’s will be able to gauge customer response and make adjustments quickly.
Additionally, Macy’s is monetizing real estate, including having an office tower built atop the Herald Square flagship, and even testing customizing clothing with a third party so, for example, one can change the neckline or the length of a dress.
Wall Street showed a degree of confidence in the Polaris plans following Macy’s investor conference on Wednesday, lifting the retailer’s stock by $1 to $17.44, or 6 percent. Through the restructurings, Macy’s expects annual gross cost savings of $1.5 billion to be fully realized by year-end 2022.
“Macy’s is shrinking to grow and trying to do it all at one time instead of piecemeal,” said Dana Telsey, ceo and chief research officer of the Telsey Advisory Group. “You’ve got to reinvent yourself, but it’s not easy to adapt such a big ship. There certainly isn’t going to be sales acceleration but there can be a margin enhancement over time. You need to have compelling product and capture consumers of all different generations and marry that with a value and convenience and experiential environments. They are trying all different things and working to reinvent. We will get signs over the next six to 12 months” of progress with Backstage, the private brands, the impact is of closing stores and migration of sales to online. “This is a work in progress. Macy’s couldn’t stay the same.”
However, other industry pundits suggested Macy’s must do more to climb out of its hole and questioned certain tactics being taken to make the business relevant and profitable again, and that all of the structural changes and innovations underway are overdue.
“They needed to do this since they took over May Co.” in 2005, said one former Macy’s executive. “They kept a lot of those stores open thinking they could protect market share but they should have been closed.
“I remember in New Jersey, they had three Macy’s stores in this one same area — a former Abraham & Straus, a former Stern’s and a Macy’s, and they had one manager for all three. That poor manager was running back and forth, store to store.”
Janet Joseph Kloppenburg, president of JJK Research Associates, characterized Polaris as “an OK program…There is no question Macy’s needs to close those 125 stores. But previous cost savings programs were never enough to get the top line and earnings built up enough.
“I feel like this may be more of the same. While they are maximizing their highly productive stores, I think the risk is losing focus by testing a new concept,” she said of the Market by Macy’s store opened in Texas, with lifestyle merchandising, a mix of national and private fashion brands, food, an apothecary and a rich events calendar, including crafting classes and wine testings.
“They should focus on the businesses they have and make them more profitable,” said Kloppenburg. “In a world of too many stores, why test a new brick-and-mortar concept? Why not put the investment into the digital channel? Everybody has to innovate and innovate more often, but they should innovate within existing infrastructures. Macy’s has a huge base of brick-and-mortar.”
“When you get right down to it, the real question is what does Macy’s stand for other than the one-day sale,” said Mark Cohen, director of retail studies at Columbia Business School and an outspoken critic of Macy’s. “First and foremost, they have to figure out what Macy’s is and demonstrate they can execute to whatever that is.”
“Macy’s has got hundreds of stores in ‘B’ and ‘C’ malls. They haven’t invested any money in them,” Cohen added. “They’re tired, worn out and shabby. If it’s not Macy’s killing the mall, the mall is killing Macy’s.”
He characterized Backstage as a “cheaper version of an already overpromotional Macy’s,” adding, “Backstage is doing well but Macy’s is not. Is Backstage leveraging the enterprise in total? No. Is it going to chase TJX off the map? Not a chance. Chasing other people’s success is never a successful strategy.”
On Tuesday, Macy’s disclosed that it will cut 2,000 positions, close 125 stores and shut its dot-com headquarters in San Francisco and its corporate offices in Cincinnati, as part of the Polaris three-year strategy. The approximate 125 stores account for $1.4 billion of Macy’s $24 billion in annual sales and includes the previously revealed 30 stores currently in the process of closing.
“There should be a lot more closings than 125 over three years,” said Cohen. “They have to right-size the ship well beyond what they are doing.”
“There is another side of the story that has to be considered,” said one retailer familiar with the Macy’s Inc. business. “How will the vendors be affected? There will be a ripple effect here.”
“With that project in Dallas, say they do four or five million in sales and roll out 50 locations. That’s maybe $250 million in sales. What does that really mean to a $25 billion business?” the source asked. “It’s great to try new things and if you fail, you fail. That’s OK. But the Macy’s core business is really in trouble. And putting an office building on top of Herald Square isn’t going to help your core business.”
“The retail environment is moving faster than we are,” said Gennette at Wednesday’s investor conference. But now the company is “clear-eyed about the challenges in front of us.” He said Macy’s is “redefining what a department store can and should be.”
“This is a very tough time in our organization. There are many organizational changes and campus closures. We’re saying goodbye to many good colleagues and close friends.”
The process of reducing costs and duplicative work is “painful but necessary” and Macy’s will come out “more agile and better fit to compete,” Gennette said.
He didn’t mince words addressing Macy’s issues. He said people have been dispersed over too many campuses. The organization structure has been too unwieldy. The fixed cost base grew faster than sales. The store fleet has been too large and the business has been overly reliant on the best customers.
Gennette admitted “2019 did not play out as I intended. Quarter-to-quarter performance was inconsistent.”
He said Macy’s is anticipating negative comp store sales this year due to the trajectory of business, malls continuing to see declining business and traffic, and disruption at Macy’s through its structural changes.
Gennette did put to rest speculation that Bloomingdale’s or Blue Mercury could be spun off. “Blue Mercury and Bloomingdale’s are important parts of the Macy strategy,” he said.
“Reinvention of ready-to-wear is one of our greatest opportunities,” said Patti Ongman, chief merchandising officer. “We have the number-two market share behind Walmart, at about 5 percent.” But with the under-40 market, Macy’s share is only 3 percent, she noted. Specifically, Macy’s is under-penetrated in active, swim and denim.
“For under 40, the biggest opportunity is to make the shopping experience easier in our stores. We have many brands she loves but can’t easily find them. She wants to shop in stores the way she shops online.”
New lifestyle zones mixing activewear, denim and sportswear and some accessories targeting customers’ under-40 zone were installed in six stores and are rolling out to 70 more this year. Also, two private brands addressing the same demographic will be introduced this year.
“We will stabilize rtw sales in 2020 and return it to growth in 2021,” Ongman promised. She said 100 vendors are being added to the spring 2020 assortment; inventory will be reduced by $200 million by 2022; new processes to manage open-to-buy and inventory receipts are being introduced, and the buying and planning organization is being streamlined. The goal is to “give customers fresh product and declutter the stores.”
Macy’s top 10 brands — Ralph Lauren, Coach, Clinique, Michael Kors, MAC, Lancôme, Chanel, Calvin Klein, Tommy Hilfiger and Estée Lauder — and Macy’s private brands together represent 55 percent of the retailer’s annual volume. Macy’s top four private brands — INC, Alfani, Style & Co. and Charter Club — will each achieve $1 billion by 2025, she said. With INC. and Style & Co., “we’ve completely reworked our assortment architecture — given each a distinctive DNA, so it doesn’t look alike.” The company expects private brands to represent 25 percent of sales by 2025.
She characterized fragrance, women’s shoes, dresses, handbags, men’s and women’s sportswear as “hero” businesses representing 40 percent of sales and 50 percent of the margin contribution.
Leased businesses represent 5 percent of Macy’s volume and include Burberry, Mango, Finish Line, Justice, Sunglass Hut, Lenscrafters and Boss. “We are looking to expand luxury leased partnerships which continue to perform well,” said Ongman.
Dot-com, accounting for $6 billion in annual volume, is growing vendor direct and expanding same-day delivery. Last year, 1,000 vendors and 1 million stockkeeping units were added, and the app was updated with a new look and features including augmented reality and product recommendations.
Doug Sesler, Macy’s head of real estate, sees Macy’s taking in $100 million a year on average over the next several years through developing “pads” of typically less than an acre to house a bank, a Starbucks or some other business and through larger developments such as in the Burlington Mall in the Boston area, where eight or nine acres will become a mixed-use development.
At Herald Square, a 1.5-million-square-foot office tower with an express elevator to a sky lobby overlooking the Empire State Building will sit atop of the store.
Michelle Israel, senior vice president of Macy’s Backstage and Bloomingdale’s Outlets, said 50 Backstage departments will be added to Macy’s stores, bringing the total to 261. In addition, “The focus is back to freestanding locations. We will build seven freestanding off-mall Backstage stores,” this year, on top of the six opened three years ago.