Macy's shows signs of omni-channel life, but needs to sell the idea harder to sceptical Wall Street

Profile picture for user slauchlan By Stuart Lauchlan August 15, 2018
Summary:
Macy's CEO sees the omni-channel balance being achieved at last, but Wall Street investors remain unconvinced.

A woman holds a Macy's Inc shopping bag outside a store in New York

When seeking for a prime example of the struggles traditional retailers have had in a disrupted omni-channel economy, there’s been little need to look much further than Macy’s.

For the past few years, the Macy’s story has been one of declining sales, a degraded brand and real estate fire sales as the chain sought to offload underperforming stores.

But, but, but...is that signs of life we can see? Well, perhaps some progress as the firm topped estimates for its second quarter numbers, although the 14% slide in the share price that followed the results announcement makes it clear that investors remain dubious.

On the other hand, CEO Jeff Gennette is inevitably more upbeat, insisting that the firm is finally in sight of the elusive online/offline that it’s lacked:

The Macy’s competitive mode is robust digital growth, healthy brick-and-mortar, and a great mobile app...Our recipe for success is healthy stores, a robust e-commerce business and a powerful mobile app. Our customer wants a great experience anytime and anywhere she shops with us...Our strategies are really related to, how we're going to take care of a customer and that’s across anyway that she shops with us.

Gennette takes a longer term view than short term investors do, particularly when it comes to the question of pursuing the elusive millennial customer. This needs a blended approach, he argues:

You better be online and you better be in a way that you are top of mind for your customer. Your mobile app is going to be incredibly important in the future. So when you think about how the mobile app is being used as wallet and how transactions need to go through that, how it needs to be done is kind of [it’s] their guide to a store and all product categories and then how it gives them access to services or stylists or a style crew. Your mobile app has got to play all three of those buckets effortlessly, and at the same time removing friction in the customer journey between offline and online. Then you marry that with a healthy brick-and-mortar fleet, So, strong digital, really strong mobile app, and healthy brick-and-mortar that’s Macy's and other multi-channel retailers competitive moat, and that's where we are really focused.

As for the pursuit of the younger demographic, despite Genette’s habitual use of ‘she’ to describe his core customer, it’s to menswear that he turns for an example:

We’re very attracted to the younger consumer in certain businesses and we have opportunity and others. We know where that is. We know what we need to do and that’s what we're working on. If you look at the men's clothing that’s a great example. We are one of the headlines in terms of the men's clothing business and it’s amazing when you look at the amount of younger customers that are entering our store through men's clothing purchase.

We are very focused on the customer of tomorrow. While doing that, we want to make sure that we're not alienating the customer that’s already in our tent. And so, when you look at our payment terms and loyalty, if you think about the bronze program, you think about what we're doing with Backstage, vendor direct, those are all initiatives that will broaden our customer profile to get to younger customers.

Progress?

Focusing back onto digital, Gennette reels off stats that indicate a rate of progress, including a prediction that Macy’s will pass $1 billion in mobile sales in 2018 with sales up 50% year-on-year for the first half of the year. There are also plans for the Macys.com website to have a significantly expanded product assortment in time for the Holidays season:

This includes more selection of products from great national and private brands that Macy's is known for, plus the addition of new brands and categories that we know our customers will love. We're building on our merchandising strengths and adding selection where our customer already signaled interest.

There will also be further expansion of store pickup programs, adds Genette:

This includes Buy Online Ship to Store, or what we call BOSS, and Buy Online Pickup in Store which we call BOPUS. BOSS expanded to 50 stores in the second quarter and will be in almost every store by the end of the third quarter. We’re also refining BOPS to improve the customer experience. And to support both programs, we are nearly complete with the rollout of the at your service, service stations in every store to make pickup easy and quick.

The CEO also points to successes related to the Stars Reward loyalty program initiative launched last year:

There has been a meaningful positive change in behavior at the platinum tier, which are our best customers. We’ve hit a rhythm with the exclusive experiences we’re able to offer our platinum members. Access to VIP sections of the New York fireworks, exclusive cooking classes with local chefs in Miami, LA and San Francisco, a preview of Broadway shows, these are just a handful of examples of the unique experiences we can offer the Platinum customer.

And at the Bronze tier level, that was the tender neutral offering that we launched last quarter, we now have more than 1 million new members. These are new customers to Macy's. So, within the loyalty program, our best customers are spending more and new customers are coming into the program.

Bricking it

But it’s the bricks-and-mortar side of the business that Gennette admits excites him the most, ironic perhaps given the perceived burden that the bloated offline infrastructure has placed on the business in recent years. The talk now is of “trend improvement”, particularly centered on the Growth 50 store strategy. This involves 50 stores which are the first sites for rollouts of test initiatives, such as new tech. Basically these are 50 stores that are getting first shot at much needed significant upgrades. Gennette says:

The investment we’re making in these 50 stores is paying off, and supports our thesis that with the right talent and investment, our stores can be vibrant, productive, and profitable shopping destinations. I have visited almost every Growth 50 store over the past few months and I'm very encouraged by what I see. The stores look great, the merchandise is right, customers are engaged, and the teams are committed to win. The early performance of these stores is strong enough to give us confidence to line up the next batch of stores that will give get the Growth 50 treatment in 2019.

But it’s not just Growth 50 stores that are getting makeovers, he adds:

At Your Service Centers and Mobile Checkout are going to be in almost every store. Stores are receiving more fashion, a more edited assortment, and they are being allowed more localization. We’re also activating 60 Virtual Reality furniture locations in the third quarter. This significantly increases transaction size, and reduces returns. And importantly, it allows us to put big ticket in roughly half the amount of space.

The importance of tech investment can be seen in Macy’s taking of a stake in b8ta, which provides a ‘Retail-as-a-Service’ platform which will be used to expand The Market @ Macy’s pop-up shop scheme, currently in place in 10 Macy’s stores. Gennette explains:

[This] allows us to scale The Market @ Macy's faster. We’re excited by the impact of The Market and will be opening up two new Markets in the fall. One in Atlanta, and one in Los Angeles.

The benefits of savvy tech investment can pay back quickly, attests Gennette, citing Macy’s increased use of analytics as a case in point:

What we did over a year-and-a-half ago of consolidating analytics into one center of excellence that serves the business is really paying off for us, not only in all pricing decisions, [but in] looking at out date and expected sell-through and defining what we want to do with point-of-sale discounts, as well as markdown pricing and cadence of that helping us improve our terms margin and sales, but also what it means in terms of setting customer demand over a longer view.

What it means for what you need in the south in January, what you need in the North in February, and making sure that we're getting those analytics built into buy plans just based on history and forecasting. We’re in the early innings of this, but we have appetite to continue to use science really married with the art of a retail fashion business. And it’s that art and science that I think is what our success formula is going to be at both Bloomingdale's and Macy's.

All he has to do now is convince Wall Street.

My take

There are signs of improvement, but it’s still a pretty fragile one. Much was made of comparative improvement in same store sales. Fair enough, but when you’ve closed a whole heap of stores, you’re not exactly doing an apples-to-apples comparison, are you? And you’d certainly hope that you’d get a better set of numbers…

The Growth 50 initiative is all good-and-well, but it’s only 50 stores. Much of the Macy’s remaining fleet still looks tired and neglected. Of course that can change over time, but that’s the biggest problem facing Macy’s now - whether Wall Street has the patience to sit this out as a long game?

Gennette makes a good case for an omni-channel operating model being achievable and the digital investment is taking place, albeit at perhaps too slow a pace. But is it too little, too late? That’s a question we’ve been asking for several years so far. It’s one that I suspect we’ll still be asking at the end of 2018.