Where is Macy's going?
The department store is on the move, away from the mall, into new merchandise categories — and toward some fierce competition.
Daphne Howland/Retail Dive
Macy's calmed a lot of investor feathers this week with a first quarter performance that beat most expectations and a plan to rehabilitate its faltering business.
It's been a bumpy road that, as CEO Jeff Gennette acknowledged, has been greatly smoothed by the U.S. government's support of consumers and swift vaccine rollout. After a tough year when stores were forced to close for a while and both supply and demand were scrambled for even longer, the department store reported year-over-year improvements in sales, comps and profits. Even its Polaris turnaround strategy, an ambitious plan waylaid by the pandemic, is back on track. Macy's now faces the thorny issue of making good on these plans, which send it smack into some stiff competition from mass merchants like Target and off-price masters like TJX and Ross. Embedded in Polaris are several disparate moves: expanding its off-price Backstage business within its stores and in more stand-alone locations, with the goal of ending the year with 270 total; establishing smaller full-line stores at strip centers; retooling its website; expanding in-demand categories like home; and getting into in-demand categories like pet supplies, toys, wine, and health and fitness. The individual elements of Macy's plans seem pragmatic to many observers, but, taken together, not everyone sees a well-rounded strategy. Its venture deeper into off-price and its merchandising expansion in particular make sense, but invite a host of questions.
Going Backstage It's easy to see why Macy's got into off-price retail a few years ago and why it's now doubling down on that effort: Those retailers have eaten department stores' lunch. Macy's is expanding its Backstage operations not only within stores but also, increasingly, as stand-alone locations, opening 33 new ones in the first quarter and adding to its final goal.
"Off-price is a sensible pivot, and where Backstage stores have been opened in existing Macy's stores, the concept seems to do well," GlobalData Managing Director Neil Saunders said by email. "However, it does not drive much trade into the full-price part of the business. As such, it is only a partial solution and does not address all of Macy's underlying issues." The move is also detrimental to its brand, which itself needs burnishing without such distractions, according to Sanford Stein, founder of Retail Speak. "Going off-price has very short-term gains and long-term losses to whatever their identity is," he said by phone. "It's a tactic to attempt to push some of their own stuff that would normally end up at T.J. Maxx into their basement themselves. But it doesn't do the brand any justice. Nordstrom was able to go off-price, outside of their store and maintain the cachet of Nordstrom. Macy's isn't doing that. They have to first decide what it is that they really want to be." Macy's may very well be eyeing Nordstrom, which says that customers who shop at both its full-line and off-price Rack stores are their best customers, according to Wharton marketing professor Barbara Kahn. "So what can Macy's do here to compete?" she said by email. "One way the department store differentiates itself from the Target's and the TJ Maxx's is that cross-shopping possibility – so to the degree they get their full-price assortments right, with the right brands and the right fashions, they can differentiate there. [Gennette] talked about how apparel/fashion is picking up – and if they can get that merchandising/fashion/style right, they will have something over Target – I think that's where they have fallen off in recent years – especially with too much of a focus on sales/discounts in their full-price stores." Aiming for the bullseye?
With apparel sales growth sliding and more brands, especially at the high end, eschewing department stores to sell more on their own, Macy's simply has to sell other merchandise, analysts say. "They are picking up those other categories like toys, pet, food and wine, health and fitness – which are more like the Targets and Walmart's – than they had featured in the past," Kahn said. "But since that's what customers ARE buying, it absolutely makes sense." Saunders noted that Macy's has already accomplished such diversification with toys through limited offers, especially at the holidays. "Part of the solution for Macy's is to develop some very strong own-brands across a variety of old and new categories." "Pivoting into other categories can generate some easy growth if a good offer is created in store, mainly because existing customers will engage with it," he said. "However, to generate significant long-term gains in new categories, which arguably Macy's needs to do to offset the decline of core categories, a much more focused strategy is needed: Macy's needs to ask itself what its customers want, how it can differentiate from the competition, and how it can create a cohesive offer. Without such a strategy there is a very real danger that Macy's will end up being a hodgepodge of categories and products which don't gel." In fact, Macy's expansion into new categories pits it against mass merchants like Walmart, Amazon and Target. Target in particular has spent the last several years conquering a slew of categories with private label launches and new partnerships, to the point where several observers see Target as a fresh alternative to the department store.
"If Macy's offers the same products as everyone else then there is no particular reason to go there," Saunders said. "Target gets this completely, which is why it constantly introduces new own-brands and partners with interesting DTC brands who want to launch in retail. Target is a place of discovery, just like department stores of old were. Part of the solution for Macy's is to develop some very strong own-brands across a variety of old and new categories."
That should start with what Macy's is pulling away from now — apparel — before taking stabs at new categories, Stein said. Target has been so successful — several of its private labels are billion-dollar or multibillion-dollar enterprises on their own — because it is strategic, he said. "They get good at a particular category, and they take the playbook of that category and go on to the next, so they're always going from strength to strength," he said. "And they're always listening intently to their consumer. When you read the Macy's press release about pet care and whatever else they had listed in there — wellness, toys — none of that makes any sense. You start talking about the pet category, dominated by Petco and PetSmart, where you bring your dog to the store and walk around, is that going to happen at a Macy's? Or maybe you're connected to Chewy. Who is going to decide, 'I'm not going to do Chewy this month, I'm going to go to Macy's and see if I could get a better deal?'"
But when Target first announced its revamp, investors were unhappy, and its share price took a hit, Stein noted. Target CEO Brian Cornell had the intestinal fortitude to ride that out, according to Shawn Grain Carter, professor of fashion business management at the Fashion Institute of Technology. "He's a brilliant merchant, let's start by saying that Brian Cornell has turned Target around like nobody's business," she said by phone. "They still have some kinks to work out, but he ran with it when all the Wall Street guys were saying to him, 'You don't have the time and the luxury to invest in human capital, you can't do blah blah blah, you got to keep reporting your earnings and your revenue, and you got to do it the same way everyone else is.' And he said, 'I'm making these investments in my people, in the necessary software and in redoing these stores, because we're going to give the Target customer the best experience ever.' And boy did he show them." And, now, it's Macy's turn. "As has happened in the past, Macy's talks a good game and has some sound ideas," Saunders said. "But it tends to fail in execution. So it really needs to put these plans into action and demonstrate that they work."