Macy's plans suggest it's becoming a discount department store

Dive Brief:

Incoming Macy’s CEO Jeff Gennette, speaking at the Bank of America Merrill Lynch 2017 Consumer and Retail Technology Conference on Tuesday, said the department store will take a page from the likes of Kohl’s and J.C. Penney and bring in more stores-within-stores; It plans to boost the number of its own Bluemercury concessions and expand Lens Crafters to 500 stores, according to accounts from CNBC and The Street.
Bluemercury’s approach is closer to that of Sephora and Ulta, which have shaken up the beauty industry by doing away with the old-fashioned department store beauty counter. Gennette said the retailer is similarly expanding self-service racks in its shoe departments, akin to shoe buying at many off-price retailers.
Gennette also said, according to notes from the Fly, that while Macy’s will always be “promotional,” it’s changing up how it presents good deals to customers. It’s expanding its “Last Call” clearance areas from 10 of its stores to another 30 locations this year. In place of one-day sales, which Gennette says have undermined Macy’s fashion authority, the department store will introduce “Macy’s Money” coupons (like “$10 off of $50”) rather than brand-specific discounts, which have rattled Coach, Michael Kors and others.

Dive Insight:

Gennette said on Tuesday that he and other Macy’s executives “don't have our heads in the sand,” painting a picture of a department store that is sharpening its focus and solidifying its approach as a middle-market or even a discount retailer.

Considering that 10% of Macy's 43 million customers account for half of its sales, and two-thirds of those core customers also shop at off-price retailers, it's understandable why Macy's is making moves to mimic those retailers’ presentation and approach. Its customers are already taking it upon themselves to go on a treasure hunt through racks and shelves rather than relying on customer service from associates — who at off-price retailers are seen mostly staffing dressing rooms and checking out customers across banks of cash registers.

Off-price retailers continue to take market share from department stores, presenting a more formidable challenge than e-commerce, which is often cited by analysts as department stores’ biggest problem. Moody’s Investors Service projects off-price sector sales to rise between 6% and 8% this year, while operating income could grow at least 4%, thanks to increased top line sales, an expanding vendor base and more efficient supply chain operations. At the same time, Moody’s expects department stores to be this year’s worst apparel performers, facing continued profit and same-store sales declines. It’s not clear what the moves described by Gennette would do for Macy’s off-price Backstage effort, a latecomer to the space.

Furthermore, the shift to more self-service cuts into the notion of department stores as full-service retailers. While it’s working at off-price outlets, it fails to take into account emerging research that members of Generation Z — whose oldest members are now 16 to 21 years old — prefer shopping in physical stores and appreciate communication and assistance from store associates, according to research from Euclid Analytics emailed to Retail Dive. While Macy’s at the moment caters to a much older demographic, Gen Z already makes up a quarter of the U.S. population — more than either Baby Boomers or Millennials.

CFO Karen Hoguet said the company is highly focused on trimming expenses, and Gennette added that the company’s debt reduction and investment grade will be a "high priority” this year. Hoguet also said that there "no sacred cows" in the company’s real estate plans. The retailer last year said it would close 100 stores, and some observers say that’s just the tip of the iceberg. Most recently, Macy’s sold off the historic department store building in downtown Minneapolis for $59 million in cash to 601W Companies, which plans a mixed-use redevelopment for the building. It’s not clear whether that's the kind of structure that would be considered a “sacred cow,” or if the designation could even apply to the retailer’s sprawling iconic Herald Square location in New York.