It could have been a terrible year for Macy’s.
‘Could have been worse’ is a sentiment that many retailers would be happy to get away with when looking back at the past year. But it’s a 'glass half full/glass half empty, take your pick' assessment when it comes from Jeff Gennette, CEO of ‘the world’s largest department store’.
Macy’s omni-channel transformation progress - or otherwise - has been a frequent focus on diginomica over the years, but the COVID crisis and its impact has seen the retailers’ performance come under increased scrutiny.
That being the case, the firm’s full year numbers this week puts a lot in context and emphasizes the mixed messages coming from the US retail institution. For full year 2020, sales of $17.3 billion were down year-on-year from $24.8 billion, while net income dropped from $3.94 billion to $564 million. That said, Q4 (ended 30 January 2021) saw Macy’s turn a profit - $160 million - for the first time since the pandemic started, although that’s still down $340 million on the same period last year. Still, digital sales grew 21% year-on-year in Q4 to $3 billion, accounting for 44% of total sales, up from 30% a year ago.
Room for growth
So ‘could have been worse’ is certainly true, but equally there’s a lot of room for improvement, especially if the retailer’s objective of hitting $10 billion in digital sales by the end of fiscal 2023 is to be attained. Gennette sees this as an inevitable direction of travel, but admits that the firm needs to be bolder in its approach:
Whether retaining our core customer or acquiring the next-generation of new ones, the pandemic has accelerated the shift to digital. With lots more [people] trying out digital channels and a meaningful portion expected to continue purchasing predominantly online post COVID…our experience in 2020 increases our conviction to take bolder actions to drive our business forward as a digitally-led, omni-channel retailer.
That said, there have been digital transformation successes under the auspices of the firm’s flagship Polaris strategy, announced a year ago this month and which has already seen a shift in CapEx spend towards digital platforms and supply chain overhauls. This digital focus has also succeeded in winning new customers, with Q4 digital-only customer numbers up 50% year-on-year to 6 million, while of a total of 7 million new customers during the quarter, most were sourced via digital channels, says Gennette:
When you look at those customers, they are much more young and more diverse than what we've had historically. Four million of those 7 million came in through digital. So obviously, with the digital engine that we have, that has opened up lots of new customers to us that are shopping more on digital or now experiencing new brands digitally. When you think about the 4 million new customers that came in through digital, that was a 36% increase versus the previous year.
Digital-savvy customers have also been attracted by Macy’s partnership with online ‘buy now, pay later’ platform Klarna, announced back in October, he adds:
That also has been a nice accelerant for us in terms of new customers. When you think about all the new customers that we've had coming from Klarna, about two-thirds of those were previously unknown to Macy's, so new customers and also predominantly under 40 - 45% of those are under 40 again versus the 27%/28% for Macy's in total. So on the customer front, I guess we definitely have some momentum. It's good to see younger customers coming in, they're responding to our values and our products, and really the big engine here [is] they're coming in through digital.
Firing up Polaris
With 2020 behind it, the trick Macy’s now needs to pull off is to take ‘could’ve been worse’ and turn it into ‘doing much, much better’. The key to that is to accelerate and expand on Polaris and its six pillars, the first of which is the self-evident “win the customer with fashion and style” mantra. Next up is the need to deliver clear value which includes sharper hyper-personalized communications to customers, explains Gennette:
We have made significant strides in improving our customer value proposition. For example, we overhauled markdown capability, including adding a new location level tool in advanced analytical powered algorithms, the first of several major pricing capabilities we are adding to our merchandising function.
There’s also a focus on loyalty, monetization and personalization enabled by the Star Rewards Loyalty program, he adds:
Looking ahead, we see a lot of promise in our ability to expand our monetization engine, while cultivating greater customer engagement with more relevant and personalized content and offers. Taken together, we believe these actions will drive more customers into our Star Rewards and credit card programs and up to $60 million in monetization income in 2021.
Third up is a need to excel with Macy’s digital shopping experience, probably the most critical pillar given the public goal of $10 billion online revenues by the end of fiscal 2023. Gennette says:
To build on this momentum and realize our goal of growing digital sales to $10 billion within the next 3 years, we will continue to make fundamental investments, while delivering new, immersive, content-driven experiences for customers. For example, we are launching a refreshed homepage with curated visual content and more precise search and browse functions as well as a more intuitive bag and checkout experience with broader ways to pay.
There will also be a focus on expanding the digital footprint in key retail categories, he adds, citing beauty as a case in point:
We are creating immersive online experiences so customers can discover new products to shop with confidence. These experiences augmented, with virtual reality. Virtual consultations, which we have staffed with our own beauty consultants, are already showing tremendous power. Digital growth in our beauty category within Macy's in 2020 grew more than 60%. This elevated digital experience in beauty is only the beginning. We will carry our learnings here into other categories in 2021 and beyond.
What about the stores?
For the ‘world’s largest department store’, an important question is what happens to the firm’s store fleet? There's been considerable rationalisation here already and further closures to come, but it's the case that digital sales per capita are two-to-three times higher in markets where there are Macy's stores, while the growth rate of digital sales drops meaningfully when a branch is closed in an area where there are multiple stores and significantly when it’s an area with only one store in it.
The message is clear - stores are critical nodes for digital growth, so the fourth Polaris principle involves repositioning the remainder of stores along omni-channel lines. At present, around a quarter of all digital business is fulfilled from stores, including Buy Online, Pick-up In Store, curbside pick-up and same-day delivery.
For this to work, the fifth Polaris pillar kicks in - modernizing the retailer’s supply chain and technology infrastructure, says Gennette:
We are hyper-focused on building a supply chain that can handle more sales volume and reduce friction for customers on fulfillment and returns, while managing and reducing our delivery expense. Through these actions, we are also better managing and placing our inventory to meet customer demand and to minimize markdowns. We expect these efforts will deliver higher productivity in our customer fulfillment centers and in our stores, lower delivery expenses and improved customer service across our network. We know customer expectations in this area are rising and we are committed to meeting their demands.
And finally there’s been an addition to the original Polaris thinking with the breaking out of modernizing the underlying Macy’s technology platform for frictionless customer experience. This comes in three tranches, says Gennette:
First, a modernized technology platform to support a friction-free customer and colleague experience. Second, a revamped data and analytics foundation to drive growth and profitability through all of our decisions. And third, and the most critical to our success, a performance-driven operating model, enabled by clear incentives for our colleagues.
Working against those pillars, there are two big digital initiatives on the near-term horizon, says Gennette:
One is to continue to improve the functionality of the site, remove all the friction; the other is to be much more experiential and then really look at the fullness of our ability to tell stories and brand stories.
Beyond that, in the second half of 2021, expect to see the roll out of customization tools for products, as well as live stream shopping experiences, he adds:
We're also going to be having a total site redesign. That is a multi-year project, but the first incantation of that is going to be launched for the fourth quarter. So that's also going to be in time for the Holidays. We've got other plans that are looking in the future years, but those are the ones that are on the docket in experience for 2021.
We have the aspiration, the fortitude and the agility to successfully transform our legacy business in the months and years ahead.
As mission statements go, that’s a reasonable goal, but one that comes at a high price. This year CapEx of $650 million will see spend on supply chain and technology transformation will be up 2.5 times from recent years, with the expectation that this will further increase “over time”.
In common with other retailers, Macy’ digital revenues enjoyed a COVID-related boost over the past year, but with the emergence of the Vaccine Economy the expectation is that this will stabilise on a “more normalized growth cadence” as customers begin to return to physical stores, which are expected to account for 65% of business in 2021.
That said, ongoing international travel restrictions are an unknown factor for a retailer that has a heavy tourism-driven revenue dependency.
That all contributes to the upper end of predictions for full year 2021 still being at least 15% than 2019. In which case, Gennette may still be reaching for that ‘could be worse’ commentary this time next year.