Retail's rough, but keep calm and carry on with omni-channel transformation - Macy's and Nordstrom show how

Two US retailers reported their quarterly numbers this week, with Macy’s and Nordstrom providing confirmation of the economic upheaval in the retail sector as well as emphasizing the need to keep calm and carry on with omni-channel transformation programs.

Good news, bad news for Macy’s as digital sales declined 5% year-on-year for Q2, although digital sales are up 37% on a 2019, pre-pandemic baseline. But in common with other retailers, Macy’s push to find the most effective Vaccine Economy omni-channel balance has been badly impacted by the macro-economic crisis.  CEO Jeff Gennette noted:

During the quarter, Macy’s brand customers across all income tiers slowed and shifted their spend, persistently high inflation drove higher prices and food and fuel and in turn led to higher interest rates than the softening market. As a result, overall consumer discretionary spending and sentiment weakened compared to the prior year…Customers also exhibited more traditional pre-pandemic shopping behaviors, including more in-store shopping.

But, he argued, the work that the retailer had put in on its Polaris transformation strategy in earlier quarters left the firm better equipped than many of its rivals:

We came into the second quarter prepared to compete in an industry that was largely over inventoried. During the quarter, we observed that all retailers were working to shed their excess inventory, setting the industry up for higher permanent markdowns and promotional levels. The industry-wide inventory levels along with the slowdown and consumer discretionary spend resulted in elevated inventory levels within certain categories…The improved use of data analytics enabled the team to respond quickly and adjust our inventory flow accordingly. We ended the quarter with inventory levels up seven percent.

Overall, Gennette concluded, Macy’s has experience in riding out this sort of storm:

We’ve successfully navigated in whether these type of challenges and economic downturns before. Today, we are better positioned with our advancements in technology and data science that enable us to meet customer demand while protecting our bottom line. We continued to enhance the customer experience with investments in personalization, our digital platform and physical optimal expansion, all supported by investments in our colleagues. Our people enhance our competitive advantage and we’re retaining and attracting the talent needed to advance our strategy. Our position as a leading omni-channel retailer across the value spectrum, as well as the efficiencies we’ve built into our business through Polaris have allowed us to respond effectively to the changes in consumer shopping behaviours across income tiers, channels and categories.

Investing 

There is still work to be done, he added:

We are continuing to ramp up our digital capabilities, including personalization that increases engagement with our customers and optimizes our omni-channel experience. We are optimizing our online platforms to provide better digital experiences. Following the redesign of our mobile app in 2021, we have seen strong conversion and growth with active app customers up about 17%.

Gennette also pointed to the Macy’s media network as making progress:

Macy’s media network is growing year-over-year across revenue, advertiser and campaign count. Recently we’ve started to test more engaging advertising experience through onsite videos on our Desktop platform, offering brands to tell their stories with engaging content.

All of this will require continued investment, but this is seen as a necessary price to pay, confirmed CFO Adrian Mitchell:

Our financial health, our talented team, and our continued investments in new capabilities, particularly those related to the use of data science and pricing have allowed us to thoughtfully navigate through this period of uncertainty…Our investments in simplifying our technology infrastructure and growing our data analytics capabilities is designed to accelerate the speed of decision making within our operations and simplify the complexity that existed within our technology infrastructure. This will ultimately lower the cost of doing business.

Digital marketplace is another high return investment that is all about assortment and brand expansion under a curated platform and without the inventory handling costs. And finally, personalization is necessary to increase the relevancy, quality, and frequency of our interactions with our customers in order to drive incremental sales and margins.

Meanwhile...

Over at Nordstrom, digital sales were up six percent year-on-year, contributing to an overall revenue increase of 12% and now accounting for 38% of total sale. But CEO Erik Nordstrom admitted that the macro-economic pressures that the firm had avoided in the earlier part of the year had begun to take their toll in July. That’s resulted in a lowering of guidance for the rest of the year, but, like Macy’s investment in new omni-channel capabilities continues to be a priory. Nordstrom said:

We continue to advance our digital capabilities, working to further extend our heritage of customer service and personalization to a digital world. We are scaling our styling program and offering a range of digital services, including stylist-inspired looks, virtual style boards, and online styling appointments. While we still see the highest number of customers engaged with our in-person styling, we are seeing rapid growth within these digital services. Digital styling customers are also highly engaged, spending five times more than an average Nordstrom customer.

And again, in what is becoming a familiar refrain across the retail sector, CEO Nordstrom concluded with a rallying cry:

Though we face uncertainty as the consumer shifts, we have a seasoned team that has successfully managed through a range of business cycles. We have continued to build on our legacy of being a market leader in customer service that is always a result of our teams putting the customer at the center of everything we do.

My take

Two sets of financial updates that confirm wider trends of (a) consumer behavorial changes in a period of economic uncertainty and (b) commitment to the need to continue to invest in omni-channel capabilities to ride out the storm and be ready to take advantage of what comes next. Now is not the time to pull back on transformation programs to save some short term cash, however tempting the prospect may be.