Macy’s CEO Terry Lundgren wants to make something clear: 90 percent of Macy’s and Bloomingdale’s transactions happen in store.
“A lot of people don’t believe that or understand that,” he said during the company’s fourth-quarter earnings call on Tuesday. “I want to point that out, because physical stores still play an important role, and while we feel good about our digital investments, more experimentation with in-store tech is priority for 2017.”
As Macy’s follows through on plans to close 100 underperforming stores this year, the struggling retailer is seeing double-digit growth in online sales. The company reported a decline in fourth-quarter sales of four percent, to $8.5 billion. In fiscal 2016, total sales fell 4.8 percent, to $25.8 billion.
While Lundgren touched on the opportunity to improve the Macy’s online and mobile experiences, as well as flesh out capabilities like free shipping and in-store returns, his update focused much more on Macy’s evolving in-store experience. Lundgren, who will step down as CEO and be replaced by current president Jeff Gennette in March, listed a series of steps Macy’s is taking to overhaul its existing stores to improve conversion rate.
“The answer lies in the conversion of consumers in store into sales,” said Lundgren. “We’re seeing in-store customer browse then buy elsewhere. 2017 will be about trying various formats that we believe will improve conversion rate.”
Macy’s CFO Karen Hoguet said that changing consumer shopping habits had a bigger impact on in-store sales than expected and that the company is now undergoing “dramatic changes in how we operate business.” Hoguet expects no financial improvement in 2017, as the company tests new store strategies before rolling them out nationally, a time-consuming process.
As Macy’s regroups, here’s a look at what a future store will look like.
With women’s apparel and ready-to-wear its top-performing categories, Macy’s is planning to double down on its private brand and exclusive brand offerings. Exclusive items from brands like Tommy Hilfiger, Rachel Roy, Hugo Boss and Kipling account for 20 percent of apparel sales, while private in-house brands like Bar III account for another 20 percent.
“It requires a change in the way our merchant team works, but we’re looking to forego approval processes and speed along the supply chain to get new in-season items in stores faster,” said Lundgren.
Macy’s isn’t the first to shift its schedule to mirror customer shopping habits: it’s the crux of the see-now-buy-now movement that has swept the luxury market. The company’s merchandising team is adjusting to operate on these brands’ schedules, in order to have the newest collections in store.
“It takes a very talented merchant team who understands what customers want six months from now,” Lundgren said. “But we’ve started changing the way the team works with anticipating product delivery: You have to commit upfront without touching or seeing the product, and forego the approval process. It requires trust. If we wait, we’re getting leftover product, and that would be a disaster.”
Macy’s is rolling out a discounting strategy to all categories that will keep marked-down items away from full-price items. So far, this has been tested for shoes and women’s apparel, where third and second markdown items are moved to a clearance section, Macy’s Backstage.
“The price on the ticket should typically be what you pay,” said Hoguet. “We’re figuring out ways to move away from coupons altogether, which will take longer, but cleaning up price formats on the floor will help regular-priced sales overall.”
The category hit hardest by Macy’s markdowns is handbags, one of the worst performing categories of the quarter. At Macy’s, handbags have been bogged down by discounts. and as a result, brands like Coach and Michael Kors have pulled bags out of Macy’s. Lundgren blamed a too-quick category expansion on the dilution of the category, which now has more supply than demand. Macy’s hopes that plans to reinvest in higher-quality, more expensive products and slim down its handbag category will revive it.
“When you’re backed up with inventory, somebody wants to reduce the price, then others match, then it gets away from you a little bit,” said Lundgren. “Getting that supply and demand back on track is the first answer, as well as a focus on the product itself by adding more quality product and covering higher price points.”
Updated stores to fit a new mall landscape
In November, Macy’s announced a partnership with real estate developer Brookfield that involves the company creating and implementing a 24-month plan for 50 Macy’s stores within their shopping centers. It will include complete redevelopments of some locations. Lundgren said that the in-development Macy’s stores are in “top-tier malls,” where the surrounding household income average is in the six-figures.
Hoguet said this could lead to “mix-use” Macy’s stores in the future, featuring more services and entertainment. Business Insider reported earlier this month that it could mean an expansion of Macy’s in-store restaurant, Stella 34 Trattoria, currently located in the Macy’s flagship in Herald Square.
As developers look for alternatives apart from the department store to anchor shopping centers, Macy’s stores need to bring something more to the table than the traditional in order to not be eclipsed by younger, trendier options, like Eataly, Whole Foods, Primark or Equinox.
“Malls are thinking differently about how their anchor tenants are,” said Ken Morris, principal at Boston Retail Partners. “Something like a grocery story isn’t traditional, but you think about who’s visiting a grocery store every day, and you get that spillover. Restaurants, too, are a better destination. Malls and retailers both need to think outside the box to attract people.”