Macy's store closure program highlights the digital shift in retail

Profile picture for user slauchlan By Stuart Lauchlan August 11, 2016
Summary:
Macy's announcement of 100 store closures is indicative of the unstoppable shift to digital in the US retail market, a shift that also impacts on the likes of Nordstrom.

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

Macy’s is closing a further 100 stores, now more valuable as real estate properties than retail outlets, as the US’s largest department store chain pitches a future as “America's preferred omni-channel shopping destination”.

Chief Financial Officer Karen Hoguet insists that the chain wiill continue to have presence in 49 of the top 50 US markets based on population, but argues that the changing nature of the retail sector demands a change of approach:

All of our stores except a very few are cash flow positive, but not all of our stores fit today with our desired long-term retail footprint. While our weaker performing and less well located stores are cash flow positive, many of these don't produce acceptable returns on investment and often don't represent a customer shopping experience that reflects our aspirations for the Macy's brand. And as we all know, market demographics change over time, and this country is over-stored given evolving customer shopping habits.

We decided to be proactive and to close a larger number of stores this year. This will bring the shopping experience to a consistently higher level and concentrates Macy's stores in locations with better potential. We believe we can benefit from right-sizing the company.

As to the new realities of the retail landscape, Hoguet says Macy’s is conscious of the new demands:

Our company is committed to being tomorrow's leader in omni-channel retailing. We will strike the right balance between stores and digital. And the closing of 100 locations will get us to where we think we need to be, all while maintaining a significant physical presence in virtually every major market across America.

Fortunately, our company has the critical mass to offer all of the options that our customers want in terms of stores, websites and mobile apps, in terms of expedited shipping, buy online pickup in store, and same-day delivery in many markets, in terms of offering a range of exclusive product choices supported by great experiences that are the hallmarks of both Macy's and Bloomingdale’s.

She adds that the digital side of Macy’s is in growth mode:

Our digital business had a strong quarter again of double-digit growth both at Macy's and at Bloomingdale's. We are benefiting from new releases on our mobile apps and other technology improvements that are driving increases in conversion. Our investments are focused on removing points of friction, and our Net Promoter Score has improved on our digital business two points year over year. For example, we've been able to auto-provision our customers' wallets to make it easier to use coupons and other promotional offers. We've also improved navigation to make it easier and faster to shop.

Nonetheless the closure of 100 physical stores sends a powerful, and unwelcome, message that needs to be handled with care.

Meanwhile at Nordstrom

Of course, Macy’s is not the only ‘legacy’ retailer facing these challenges. as Michael Koppel, Chief Financial Officer at Nordstrom, notes:

We recognize that the shift towards e-commerce is having an impact to our financial model. As we accelerate investments to support changes in customer expectations, our expenses, particularly in technology, supply chain, and marketing, grew faster than sales.

We are streamlining corporate headquarters and executed on a number of initiatives that will enhance the customer experience and improve our operating model. In technology, we're on a path to modernize our platform and increase the productivity of delivering features that will improve the customer experience.

For example, this year, we implemented new technology solutions that support our expanded loyalty program and online search engine. These modernized platforms enable us to serve customers in a more personalized and relevant way.

Nordstrom bag
That loyalty program is a prime example of the way Nordstrom is adapting, argues co-President Blake Nordstrom:

Nordstrom Rewards serves as a powerful tool to drive incremental sales and trips. Even more importantly, it gives us an opportunity to strengthen relationships with customers. In response to feedback for more flexibility in joining our program, we've expanded it so that all of our customers can earn rewards regardless of how they choose to pay. We're encouraged with the strong response. We now have around 6 million total Rewards customers who shopped with us over the last year, up significantly from 4.7 million last quarter.

What matters being able to deliver a personalized and convenient experience for ever-more-demanding customers, he adds:

To meet their evolving expectations, we are making digital enhancements to better serve customers no matter how they choose to shop with us. We have several initiatives underway that include new mobile features, improvements to our website, and enhanced selling tools. In the second quarter, we've made ongoing improvements to our mobile app, including features that enable customers to shop their store of choice and shop for items based on a visual search. This Fall, we are piloting a mobile feature that gives customers the ability to reserve merchandise online and try on in our stores.

That combination of online and offline is a balance that needs to be struck, says Nordstrom:

We view it together, both the stores and the online, as one business. And it's, over time, becoming more and more merged, because the customer doesn't view that as two different experiences. But, that said, there are products and experiences in the store and online that the customers desire and deems as good service, and it's a fluid thing.

The danger though is that online becomes a more appealing option for a firm that has its own vast real estate portfolio. PeterNordstrom, President-Merchandising, alludes to this when he says:

A big part of our success is online as we're able to add to our selection there. That was really helpful. Customers liked that a lot.

I think one of the things that happens slightly on the downside of that is the context it creates for some stores. There's so much more available online than there might be at any given store. So I think our ongoing challenge is to do the best we can to make sure each store has the best possible product offer that it has, and the kind of stuff that customers ask about are the things that are hard to get.

My take

Two prime examples of US retail brand giants facing up to the potential and the challenges of a digitally-enabled shifting market landscape. Macy’s has taken a bold stance here with its store closure announcement. Whether it can transform its offline presence to meet its omni-channel ambitions remains to be seen, but the prospect of the likes of Nordstrom having to follow suit is hardly beyond the realms of the imagination.