Byline: David Moin

NEW YORK — Macy’s is breaking new ground — literally and figuratively.
Pressed to find growth opportunities, Macy’s last week launched two riskier, costlier prototypes: its first off-shore store, in San Juan, Puerto Rico, and its first scaled-down department store, in West Palm Beach, Fla.
It wasn’t just another parade of new units.
The Puerto Rico site is potentially the model for Macy’s sites outside the continental U.S. and projected to be among the top 10 volume producers in the 90-unit Macy’s East chain.
And the 100,000-square-foot Florida unit, with 90,000 square feet for selling, bears a higher fashion quotient that’s edited for a younger appeal, playing up such vendors as Doll House, Necessary Objects, Hard Candy, Kenneth Cole, Paris Blues, as well as Nautica, Polo, Tommy Hilfiger, DKNY and its private labels INC and Alfani. The store also contains trendier displays and a layout that’s easier and quicker to shop than any other Macy’s. It’s considered a “market filler” for regions where Macy’s already operates a cluster of traditional department stores, in the 200,000-to-300,000-square-foot range, and already has a hub of advertising. Macy’s officials believe they can capture greater market share with little customer transfer, around 5 percent, versus 15 percent if it were a full-lined store.
The Florida store is compact, on two levels, with sight lines clear across each floor, and has a home department that’s more like a better gift boutique. The store is envisioned for alternative developments, like open-air centers and newer strip centers that cater to local lifestyles, as well as traditional malls, and for people who want to get in and out of the store fast. There’s even more attention to architecture, with a domed ceiling and natural lighting that fits in with the upscale ambience of the City Place center, which the new Macy’s anchors. City Place, which also officially opened last week, is an outdoor mixed-use retail, restaurant, residential, office and entertainment complex with a center courtyard and large fountain and the feel of a European village. At West Palm, Macy’s spent more per square foot, $210 versus an average of $170, to build a handsomer store, or close to $20 million in total.
“We are seeking to grow a worldwide name like Macy’s,” stated Hal Kahn, chairman and chief executive officer of Macy’s East, during an interview at the Puerto Rico store, last week, just prior to Wednesday’s grand opening. “The major renovation push of Macy’s East is over. We’re looking to expand and are testing a lot of different concepts.”
With America overstored, the U.S. department store industry nearly tapped out of growth opportunities other than through acquisitions, and the outlook for comp-gains rather paltry (department stores expect two- or three-point gains in the fourth quarter), companies must get creative and be receptive to new formats for growth.
Kahn, a department store principal for about 20 years with about two dozen Macy openings under his belt, is aware of the sector’s challenge. “If we keep our head in the sand for too long, we won’t be prepared when the sun comes out again. In the future, there will be some winners — and a lot of losers” among department stores, he said.
Puerto Rico seems like a winner. The 1.8 million-square-foot Plaza Las Americas mall in San Juan is something of a retailing gold mine. Macy’s primary competitors, J.C. Penney and Sears, operate their highest-volume units there. Sears, with over 300,000 square feet for a full-line store, automotive center and a home appliance and electronics store, posts $125 million in sales annually; Penney’s exceeds $100 million in its 350,000-square-foot, sources said. Penney’s confirmed its Plaza Las Americas store is its highest-volume unit and Sears said its unit ranks among the highest in the chain. Neither company would specify volumes at Plaza Las Americas.
It’s surprising Macy’s didn’t move in sooner. Retailers on the island say the population has enormous propensity to shop. Even though income levels are generally low, shoppers have dollars to spend on clothes since housing and food expenses are largely subsidized. There’s no sales tax, except on fine jewelry, and an underground economy provides more discretionary dollars. However, there’s also an excise tax of 6.6 percent on goods not made in Puerto Rico, raising some prices.
“Hispanics dress up for any occasion,” said Jaime Fonalledas, president and owner of Plaza Las Americas. He also said, “Bringing the family together is very important to us,” translating into more gift-giving. “There’s a better level of sales and longer shopping seasons for holidays, such as Christmas or Mother’s Day.”
“If U.S. retailers want to expand overseas, they can’t take a cookie-cutter approach,” said Ricardo F. Gonzalez Lucia, a retail consultant Macy’s hired to help set up the Puerto Rico store. Lucia ran the former Gonzalez Padin department store, and helped Macy’s East stage a Puerto Rican apparel vendor fair at Macy’s Herald Square, to help stock the Macy’s store.
“Puerto Rico is thought of as a tropical climate year-round, but there is a changing of the seasons, maybe not so much as how the leaves change in the United States in the fall, but we do have a changing color palate.”
Also, “Puerto Ricans don’t only just wear halters. They dress up just to go shopping. There is also some layering. Sweaters are a business for people who travel,” he said, noting many Puerto Ricans visit the states at least once a year to see family. “But the knits should be very light.”
Martine Reardon, Macy’s East executive vice president of marketing, said Puerto Ricans are heavy spenders, particularly on apparel, and don’t shy away from buying on credit. “Shopping is a big recreational opportunity for them,” she pointed out.
The competition, Sears and Penney’s, is also pumped up with enhanced assortments. In Puerto Rico, they carry brands they can’t get their hands on in the States, and it’s most apparent in the cosmetics area at Sears, which includes Lancome, Estee Lauder and Calvin Klein. Sears also sells some better apparel labels, including Liz Claiborne and Calvin Klein underwear, while Penney’s features XOXO, Joe Boxer, Jones New York, August Silk, Chaps and CK Jeans.
Likewise, Macy’s is looking for big business right off the bat, but well below Sears and Penney’s. The chain is shooting for at least $70 million in first-year sales, to rationalize the money and time spent to build it and to further offshore growth. “If this is a home run, it certainly encourages us to open other stores here in Puerto Rico, in South America or elsewhere, but nothing is on the drawing board,” Kahn said.
The Macy’s corporation, including the Macy’s East and Macy’s West, is apparently already moving ahead on its more specialized department store concept, while the international ambitions may take more time to gel into bigger realities. Two scaled-down Macy units are planned for California next fall, in Redding and Montebello, both around 100,000 square feet. And according to Macy’s East president and chief operating officer Jim Gray, areas on the East Coast are being considered, including Coral Springs, a fast-growing pocket of Florida that could fill in the south Florida market, falling in between Macy’s Plantation and Aventura full-line stores. The West Palm Beach store fills a gap between stores in Palm Beach Gardens, eight miles north, and Boynton Beach, 14 miles south. “Hopefully, it’s the prototype to do more. It forces us to edit our assortment to provide the best of the best.”
Gray also said that parts of New England, where previously full-line stores would have been considered parasitic to existing units, have potential. A strong possibility for a second overseas Macy’s lies in at the Plaza del Caribe mall in Ponce, Puerto Rico. It’s also owned by Fonalledas.
These out-of-box maneuvers by Macy’s are running up higher-than-normal costs. The company spent $55 million to build the 275,000-square-foot Plaza Las Americas unit, which has three floors, and 255,000 square feet for selling. That’s about 30 percent more than the typical cost to build a full-line Macy’s, and it’s largely due to costs of shipping materials and supplies.
Asked how much volume it would take to turn a profit, Kahn replied, “We have to do north of $70 million to be happy.” He projected sales “way north of $300 per square foot” against the chain’s average of $289 a foot, and average total volume of around $50 million per store. On the first day of shopping, a private event Oct. 23 that drew 14,000 shoppers, the store did about $500,000 in sales, exceeding expectations. There was also a strong response to a credit card campaign, with a 24 to 25 percent response rate, compared with 8 percent typically on the mainland, according to Reardon.
“We will take a year to reflect and study this [Puerto Rico] store and then assess the further expansion of Macy’s beyond continental United States,” Kahn said. “We’re going to get market share. We’re feeling dominant going into this from day one, without being arrogant.
“Since 1981, when I became a department store principal, I’ve opened 21 stores. This has been the most difficult. It involved the most market research, the most trips; it’s the biggest opportunity in terms of volume, the most expensive to build, the most expensive to operate, the most difficult to figure out in terms of the assortments and sizes.”
For example, the store intentionally didn’t stock coats, and to Kahn’s surprise, “The first day, the number-one requested thing was coats. That tells us that people want to find everything and anything at Macy’s.”
There are other challenges. “Logistically, you have to figure two to three weeks’ delay in getting the goods.” And that’s compounded by suppliers being more into shipping winter goods currently, than the resort goods required for the Puerto Rico market.
In addition, Kahn stressed, “We have to be careful not to offend people here,” noting that holidays are taken very seriously by families, meaning that scheduling staff is trickier. Labor laws are different from the mainland, requiring further flexibility by Macy’s. “We’re in the U.S., but culturally, this is another country,” Kahn observed.
“This store is very expensive to operate and advertise,” Kahn said, adding that there will be 60 percent more sales staff, with “the entire management empowered to make pricing and replenishment decisions on the spot. There is more on-site management and 60 percent more sales staff than typical Macy’s.” Also, about 75 percent of the 41 executives manning the store are bilingual.
Another big difference: The store won’t be as promotional as U.S. stores and won’t run one-day sales, though that’s not to say Macy’s won’t have markdowns and sales. However, eliminating a lot of price promoting offsets the higher costs of increased service and one-day sales would be tough to run since they typically promote sweaters and coats that aren’t carried to the same degree in Puerto Rico.
“The message is fashion, fashion, fashion,” Kahn said, rather than sale, sale, sale.
He explained that with Macy’s being the highest priced anchor in the mall and among the higher-level apparel stores in the mall, with the exception of Banana Republic and possibly a few other brands, the store is skewed to cosmetics, shoes, jewelry, dresses, juniors and sportswear. Large sizes is another opportunity, where there has been initially a “tremendous amount of requests,” despite the stereotype that Puerto Rican women are petite.
“This organization has been working for 2 1/2 years on this project, with over 70 executive committee meetings, not to mention all the sub-committee meetings.” Macy’s parent, Federated Department Stores, actually started thinking about opening in Puerto Rico 10 years, with the Miami-based Burdines. But after Federated bought Macy’s in 1994, the thinking was redirected to Macy’s.
Shifting to the West Palm Beach experiment, Kahn described the unit as “more upscale, more lifestyle-oriented, and younger than typical headquarters stores, but not playing to the Worth Avenue crowd.” He said the store is strongest in shoes, cosmetics, apparel and “giftable” home products, and unlike other department stores, has more of its own character, rather than the character of the brands it sells.
“It gets away from vendor shops, with more lifestyle, more service. It’s more generic. It’s more the way shoppers shop without having the vendors take over the space. You won’t find dresses, women’s world [large sizes], moderate sportswear, and there is just a little bit of home that is gift-oriented.”
“We would be thrilled if we did north of $20 million or $22 million in the first year,” Kahn said.
Asked if West Palm Beach means Macy’s was getting into the specialty store arena, Kahn emphatically replied, “No. We’re in the department store business. We’re not looking to get into the specialty store business. On the other hand, if these new concepts are viable and Federated is willing to fund them, then God bless them.”
Aside from potentially pumping up the volume, the prototypes pump up morale. Even though the green light for more overseas or scaled down units hasn’t been given yet, the projects have galvanized the organization, increasing morale at a time when much of retailing suffers from malaise, in sales volume and spirit.
But the Macy’s team seems genuinely pumped up, particularly Kahn. “It’s exciting when you spend two years planning something, directing the organization and seeing the organization rise to the occasion,” Kahn said. “I am proud of what our organization has accomplished. It’s the biggest high in the world.”