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Macy's reels from a $3.6 billion quarterly loss, but promises "the most powerful digital Fall ever"...apparently

Stuart Lauchlan Profile picture for user slauchlan July 2, 2020
Macy's, owner of 'The World's Largest Store', clocks up a massive loss for Q1, but CEO Jeff Gennette has a glass that's not only half full, but running over with digital optimism.

(PIxabay )

Along with the overuse of ‘unprecedented’ and ‘new normal’, the biggest cliché to emerge from COVID-19 in the retail sector is a desperate executive-level clinging to the notion that there’s a massive acceleration towards digital that is somehow going to turn around the fortunes of brands bleeding red ink onto the balance sheet. 

That said, particular kudos to Jeff Gennette, CEO of Macy’s, for outrageously blind optimism in the wake of the US retail institution turning in an eye-wateringly appalling Q1 loss of $3.6 billion yesterday. Is he deflated? No. Is he downcast? No. Is he deluded? Well, what he says is: 

We think this is going to be the most powerful digital Fall ever…We’re going to do more business on digital than ever. 

That’s accelerated acceleration by anyone’s standards. I said earlier in the week that were certain retailers who could be confidently predicted not to have the right digital defenses in play to mitigate the worst of the COVID effect. H&M was up there as one of them. So too, most definitely, was Macy’s, whose omni-channel transformation journey over the past few years has been the bumpiest of rides

Storing up troubles

Of course, the enforced store closures didn’t help during the quarter, although the pre-COVID Macy’s had been executing on its own shutdowns on that front via its ‘garage sale’ of real estate around the US. With lockdowns lifting around the country, store doors are re-opening and Gennette says there are more “encouraging signs” there than had been modelled by the firm, which must by now surely be accustomed to starting from the worst scenario and working back? 

But even that encouragement comes with massive caveats on how reliably productive the "modest improvements" coming from the physical element of the omni-channel mix can be. Gennette notes: 

First, the COVID-19 pandemic is still in full swing in some parts of the country and while we do not expect another national shutdown, we do anticipate a regional impact as consumers are encouraged to stay home…Second, while our stores have re-opened, many of the malls in which we operate are closed or maybe re-closed in areas with COVID-19 resurgence. And in the malls that are open, many of the other stores and services remain closed. This does impact our store traffic.

Third, we are seeing that our large urban and flagship stores are opening more slowly than the earlier stores. There are two reasons for this. First, these stores are located in dense urban areas that were most affected by the pandemic; second, [there is] the virtual disappearance of international tourism spending, which we do not expect to recover anytime soon.  

To be fair, there’s nothing like getting your excuses lined up early, but the third point is one that is going to be a genuine differentiator with Macy’s - and not in a good way. The firm’s stores, particularly flagship outlets in the likes of New York - where it boasts The World's Largest Store - and San Francisco, are part and parcel of the US tourism experience, something to check off the list after you’ve done Broadway and Time Square.

But if there are no tourists flying in to spend their Euros, Yen and Pounds Sterling on 34th Street, there are going to be no more miracles emerging from that address for a long while yet. As Gennette observes: 

When you look at kind of the magnet or flagship [stores], many of these doors have re-opened, certainly, but many of the services, particularly restaurants, theaters, entertainment…have not re-opened, so that’s affecting some traffic…When you look at the magnets and you look at the flagships, that’s where the tourism business has really been done, both domestic, which is definitely curtailed, as well as international tourism, which has disappeared.

All about the digital 

That being the case, it’s all about the digital for the moment. Gennette says digital sales penetration for Q1 was approximately 43% of total, but adds that there was "a low single-digit reduction in year-over-year digital sales" rather than a rise. And that’s when the stores are closed! 

So it’s back to looking ahead to the Fall - roughly around the time of a putative COVID second wave? - when apparently digital growth in the "high teens" can be expected. As per the ‘glass half full’ aspect of the CEO job description, Gennette is sticking to his line that digital is something to be pleased about: 

By all metrics - sales, traffic, conversion, mobile engagement and new customer acquisition -  we’re pleased with the results of our digital business. And it’s encouraging to see that the newly-acquired customers coming into brands through dot com are younger and more diverse than our core customer. We’re working hard at strategies to retain these new customers and, over time, convert them to omni-shoppers, which are our most valuable customers. 

Behind the scenes, a shake-up of the overall digital operation has continued throughout the COVID crisis. Back in February, the firm announced the closure of its San Francisco dot com operation and the consolidation of the digital workforce into facilities in New York and Atlanta. A new Chief Digital Officer came on board in March in the shape of Matt Baer, previously VP of E-commerce at Walmart, who is currently building out his team. 

Meanwhile the digital components of Macy’s wider Polaris multi-year business transformation program announced earlier this year will get particular attention in light of the events of recent months, says Gennette: 

Polaris is the right strategy for us, but the COVID-19 pandemic intensified and accelerated customer behavior shifts that were already underway and the sales impact has caused us to re-think where best to invest our resources. So there are parts of the strategy in Polaris that we will accelerate. Digital is certainly top of the list, [as is] personalization [and] having a very flexible and efficient supply chain. There’s parts of the strategy that we will continue, but perhaps re-focus tactics like loyalty. 

Macy's plan
(Macy's )

Black Friday comes earlier every year...

And with COVID necessarily still factored into planning for the rest of the year, there will be an emphasis on digitally-enabled safe fulfilment of business. In 2019, around 9% of online orders were fulfilled via store pick-up. The introduction of curbside collection during lockdown has seen that figure rise to the extent that Gennette expects stores to act as fulfilment hubs for nearly a third of online business by the time his envisioned digital boom comes to pass in the Fall. 

That is going to mean planning for a different form of omni-channel engagement as the all-important Holidays season draws nearer - that of dealing with the Anxious Customer.  Again, Gennette is inevitably optimistic that Macy’s is on the case: 

We have a very strong game plan about how we’re going to keep this trend of digital going. When you look at the stores, I would tell you that [anxiety among customers is] a big concern of ours. When you think about Black Friday, if you think about the 10 days before Christmas, what does that mean in terms of traffic if people are nervous about gathering with crowds? 

Everything is on the table right now. We’re working with our merchant and our marketing teams on options within the marketing calendar to reduce pressure points on big volume days and we’re learning a lot from the re-opening of our stores. Most of stores will not have any issues. But our biggest magnet stores during the Black Friday timeframe is the piece that we’re looking at. In a planful way, how do we kind of even out demand? What does that mean for the whole Cyber Week timeframe? Are there opportunities for us to pull some of that demand earlier? 

And given that, like Christmas, Black Friday comes round quicker every year, there’s not much time to get affairs in order. Gennette says:

Our safety valve on this is how big can we get the digital business? We obviously have a very developed omni-fulfillment network about how we satisfy that demand. Curbside pick-up is going to be a big secret weapon for us this Holidays season that we didn’t have last Holidays season….The speed and the safety of curbside pickup, we think that’s going to be huge for this Holidays season if [customers] are not comfortable to walk into a store. What we’ll do with store fulfillment is going to be big.

We [will] have all of our extra service where they pick up if they want to buy something online and have it shipped to a store or it’s being pulled from store inventory, that’s actually at your service. We’ll be able to really keep the social distancing there with line control right at that main door. So if they do come into the building, we’re going to be able to protect even the most nervous customers with crowds and their concerns about that. That’s how we’re looking at it – but it’s still a work in progress.

My take

What is there to say? They just reported a $3.6 billion quarterly loss! 

Still, I’ll give Gennette credit for over-delivering on his ‘glass half full’ remit. Indeed his glass positively runneth over as he declares that Macy’s long history means that it’s weathered many a crisis before now: 

Spring 2020 will certainly go down as one of the most challenging seasons in our company’s history, but along with this challenge comes opportunity. We’ve known for some time that the US is ‘over-retailed’. As we see the competitive landscape shift, we know that there’s opportunity for us to pick up market share….we’re ready to compete.

At a time when the best that can be said of that competitive landscape is that at least Macy’s hasn’t joined the ranks of retail institutions filing for bankruptcy protection - yet -  that declaration will either strike you as inspirational or in denial. Take your pick - the customer, anxious or otherwise, is always right! 

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