Digital reverts back to pre-pandemic levels at Macy's even as bricks-and-mortar sales continue to decline

As the Holiday season kicks in, US bellwether Macy’s performance is indicative of the transformative trends in the sector in the Vaccine Economy, as the digital hyper-growth of the COVID crisis gives way to more sustainable levels.

For its most recent quarter, Macy’s saw brick-and-mortar sales decline one percent year-on-year, while digital sales declined 9% over the same period. Relative to 2019, brick-and-mortar sales declined 9% and digital sales rose 35%.

Digital traffic remained relatively consistent, but conversion softened, which CEO Jeff Gennette concludes suggests that while discovery is still occurring online, there has been a shift to in-person transactions:

Regardless of where our customer ultimately makes a purchase, we strive to provide the best omni-channel experience throughout their journey. We are making digital investments to authentically communicate and serve their lifestyle needs whenever and however they choose to shop with us. That includes the introduction of personalization and live shopping, as well as the ongoing refinement of existing online platforms, including our mobile app where we registered an 11% rise in active customers on a trailing 12-month basis. Compared to our average Macy's customer, active app users spend more per transaction and per year.

It’s all about striking the necessary omni-channel balance to be a modern department store, he adds:

The concept of a trusted one-stop shop is timeless. It works, but only if it reflects the preferences and needs of our customer, and we have transformed our entire organization to do just that…We are committed to providing quality, fashion newness, timely flows and relevancy through first, curation of premium-owned and market brands, which we bring to life at Macy's through our owner style platform. Second, a disciplined approach to inventory, reflecting conservative buying and a healthy receipt reserve that ensures flexibility when our customer pivots and signals new interests. And third, a modernized supply chain and pricing science tools, which yield higher turnover, gross margin return on investments and higher cash flow. 

Omni-intiatives

The headline, he argues, is that Macy’s is very focused on omni-channel:

What I'd say on the digital versus the same within the omni-channel stack is that digital is reverting back to kind of a mix between where we were pre-pandemic and where we were during the pandemic. So when you look at our digital penetration of the business in '19, it was 25%. During the pandemic, it was 40%. We're now calling 2022 at 33%, down from our initial estimation that it was going to be in the 37% range. So that has downshifted. We do expect that we're going to have a strong performance [compared] to 2019 across every quarter, and we're mapping on that. When you see what our trend was in digital in the third quarter versus 2019, we were up 35%.

While declaring himself pleased with Macy’s progress, Gennette emphasises there’s more to do:

Our customers are savvy and they have a lot of options. Our team is aligned on what it takes to be successful and relevant today and into the future. This includes, one, an improved shopping experience for all customers through reducing friction across omni touch points; two, more personalized offers and loyalty communications; three, a compelling mix of private label and branded product; and four, speedier checkout and delivery with the right service when our customer needs it.

A good example of new activity is the late September launch of Macy's digital marketplace, he says:

Marketplace features a collection of new brands, products and categories from third-party sellers, representing a low-risk way to introduce customers to new options without shouldering inventory liability. While not the first to do this, we believe our curated offerings will keep existing customers on our platform while bringing in new ones. Units-per-order are above the Macy's average, and we are seeing customers cross-shop with mixed bags, including owned, vendor direct and marketplace items which is encouraging. And similar to Toys "R" Us [concessions], it further cements our status as a one-stop shop.

In the physical world, Market by Macy's, introduced in February of 2020, has a major role to play in the omni-channel market ecosystem vision, he adds:

These off-mall stores are 25,000 to 50,000 square feet compared to our full line average of roughly 185,000 square feet and offer a highly curated immersive shopping experience that celebrates discovery and convenience. Market by Macy's conversion rates are generally higher than that of our full-line stores, and these locations continue to outpace their respective trade areas and acquisition of new customers.

Today, we operate eight Market by Macy's. As we evaluate potential new locations, we are looking at areas where we have a strong digital presence, but no physical footprint, where it no longer makes sense for us to keep a full-line store and Market by Macy's can act as a replacement. A good example is the Market by Macy's in St. Louis, Missouri, which opened last week and is a mile away and less than 1/5 of the size of its mall-based predecessor.

He adds:

Clearly, omni-channel sales is what we're really focused on. When you look at wherever we have a sale or wherever we have a store, you have higher concentration of digital sales being done in those ZIP codes. So it really is this kind of irrefutable loop that goes on with customer activity. 

Holiday expectations

In the middle of October, Macy’s noted an unexpected slowdown in sales, which continued into November. This has been attributed to a shift in Holiday shopping patterns, suggests Gennette:

When we think about last year, the consumer was flushed with cash. and there was a pull forward of demand on well-documented inventory constraints. This year, it's about hearing about a glut of inventory. They are under a tighter budget feeling the impact of inflation on non-discretionary items and beginning to deplete their savings.

With that in mind, we believe they are waiting until closer to holiday to make purchases, especially as there is an extra day, which is a Saturday, between Thanksgiving and Christmas. We now expect Holiday shopping patterns to be similar to 2019 and are taking the appropriate actions to support anticipated higher peaks around Black Friday, Cyber Week and the two weeks before Christmas.

What happened in the last couple of weeks of October was not a downshift in traffic. We didn't see less traffic coming on the websites or in our stores, which we now track through retail next. What we saw was a drop in conversion. And so that conversion was a market difference, not from what the trend had been from the previous weeks, but from what we were up against in 2021.

That's what kind of showed us this idea that there might have been a supply concern and that with the supply concern being off the table, we go back to usual demand patterns. We're watching it carefully to see which way we're going.

My take

That last comment about the changed consumer Holiday actions chimes with data that’s emerged from Salesforce’s Shopping Index. Check out our report on that here for more insight on what looks to be a highly significant shift in retail behavior impacting not just Macy’s, but the entire sector.