Now Trending: Reflecting on Macy’s store closures
When Macy’s announced in early September that it planned to close between 35 and 40 underperforming stores, the move certainly made headlines. Unfortunately for Macy’s, it also made sense. Because, as most analysts and industry observers can attest, it only reaffirmed a storyline that has been developing for many years now: department stores are in trouble.
Sales numbers continue to drop. Macy’s announced in August that second-quarter revenue was down 2.6% and profit dipped 26% — the latest disheartening news in a longer-term trend of shrinking market share. While closing underperforming locations and exploring new options in new markets is a healthy part of any national retail brand’s portfolio, the latest store closure announcement is clearly not business as usual. While Macy’s is understandably framing this move as part of natural turnover, the reality is very different. The pressures that have brought Macy’s to this point have been building for almost 25 years, and are the result of both tectonic shifts in the retail industry and strategic missteps by the department store giant.
Macy’s loss of market share over the last two-plus decades has been incremental, but what had been a slow drip has begun to accelerate in recent years. Along with other department store brands, Macy’s is under assault from all sides. Discount stores like T.J. Maxx have gained ground, while higher numbers of easy-on-the-wallet fashion brands like Forever 21 and H&M have been making an appearance in shopping malls. A dramatic increase in the overall square footage of outlets — along with a trend to locate those outlets closer to the traditional urban markets — have all taken a toll on department stores. Another issue is that department stores, which built a well-deserved reputation for selling almost anything, have greatly decreased the diversity of their inventory over the years. Consumers are now purchasing items like appliances from specialty stores, which were once sold primarily or exclusively at department stores.
The result of that competitive erosion has been dramatic. Consider the fact that the average sales-per-square-foot in the stores that Macy’s is closing is under $100. Those numbers are disastrous, and are certainly a worrying sign with respect to other stores in the Macy’s portfolio.
To its credit, Macy’s has been trying to improve its in-store experience, enhancing their technology selection, boosting high-end offerings, and initiating strategic partnerships with brands like Best Buy. Macy’s has also acquired Bluemercury, a high-end skincare and beauty retailer, with an apparent eye toward replicating J.C. Penney’s successes integrating beauty retailer Sephora into its stores.
But while Macy’s might be making changes, it is fair to wonder if those changes are substantive enough to make a real difference in the brand’s trajectory, or if they are essentially just rearranging deck chairs on the Titanic. At a time when consumers have a wealth of shopping options, it seems unlikely that the presence of Best Buy inside a Macy’s store is going to be a difference-maker. This seems less like calculated strategy and more like a brand casting about for any new way to possibly drive traffic.
The likelihood, however, is that if Macy’s is going to survive and thrive, it must make much more dramatic and fundamental changes. Large 150,000-sq.-ft. to 200,000-sq.-ft. stores selling mostly apparel and a few home goods is no longer a formula for success. To be fair, Macy’s is hardly the only department store brand that has been sluggish to respond and adapt to an evolving marketplace. To some extent, implementing big changes in the department store sector is a little bit like the cliché of turning an ocean liner around: it takes time, and a lot of it. And, when changes have been made, they have been largely ineffectual. In many cases, the solution has been to close more departments and just add more apparel. The consequences of that approach are now becoming more clear. Like an ecosystem with insufficient biodiversity, the department store sector has made itself far too vulnerable to emerging competitive pressures. The evolution of new discount fashion retailers and the nibbling away at market share both from brands like Target on the low end and luxury brands at the high end has been damaging. [pb]
Why has Macy’s and its brethren been slow to change, and why have they seemingly resisted making the kind of fundamental changes that are necessary for long-term success? Perhaps they are not sure what moves to make, and maybe the urgency has been somewhat lacking because of the financial backstop of the value of the real estate Macy’s owns.
Macy’s does not seem inclined to stand pat going forward. The retailer has indicated that it plans to continue to expand its own new discount brand Macy’s Backstage in the mold of Nordstrom Rack. But it remains to be seen whether Macy’s Backstage can be similarly successful. Nordstrom Rack’s ability to leverage the Nordstrom name and luxury brand has been a real asset, and there is some skepticism in the industry as to whether or not Macy’s new discount brand can succeed without that cachet. Macy’s also has nearly eight times as many stores in its portfolio, with a much higher percentage of underperforming assets. Macy’s currently has over 800 locations in 45 states, many of them in B markets or less than optimal locations. That liability may also limit its ability to execute a large-scale discount repositioning. Recognizing that dynamic, a number of big shopping mall owners have been spinning off the secondary malls they own and getting them off the balance sheets.
Macy’s has made some noise about exploring a REIT option, selling some of its prime properties, or selling real estate assets and subsequently leasing the space back, but those strategies are really little more than delaying tactics and would ultimately just amount to a chain that is cannibalizing itself. The bottom line is that Macy’s attempts to reinvent and reposition itself — whether they involve dramatically trimming its portfolio or committing to establishing its higher-end inventory options — will take time. None of that will be easy, and it will certainly not be quick. But for one of America’s most iconic department store brands, it may be the only way forward.
Nick A. Egelanian is president of Siteworks, a strategic retail real estate consulting firm providing highly targeted retail and mixed-use development consulting services to retailers, developers, owners and municipalities. The firm applies its knowledge of specialty and commodity retail shopping centers throughout the United States and internationally — along with leading research, development, and leasing capabilities — to provide real-world solutions to the ever-changing issues facing today's increasingly global, post-department store era retail industry. To learn more, visit siteworksretail.com or connect with Nick at [email protected].