There is good news and bad news when it comes to Americans’ balance sheets. The good news is we’re getting healthier because we’re saving more money, and the national savings rate is back up to 5%. That’s also the bad news, because we’re saving our money rather than spending it. That keeps the retail business limited and caps economic growth. We continue to see evidence that while things are getting better, this economy remains fragile as the once red-hot Chinese economy slows, and people here at home worry about their jobs and finding work. I caught up with one of the leaders in retailing, the CEO of Macy’s, to find out what’s happening. And while Terry Lundgren, has yet to see a real pickup in spending, he’s not waiting around for it. Instead, he’s expanding into China and growing his online business, waiting for some of that savings to pour back into the economy. Our interview follows, edited for length and clarity.
Q: What are you seeing right now in terms of the consumer?
A: The consumer is saving more aggressively than they have in the past. He or she is spending in certain categories like housing, home improvement and automobiles. They’re going out to restaurants. But it’s not adding up to dynamic growth for the U.S. GDP. So it’s actually pretty sluggish. And we’re not getting our share. So there’s not a lot of activity on the apparel, accessories, footwear side of the business. We’re benefiting when somebody buys a house — they often will buy furniture and mattresses and things of that nature. But we’re just not seeing them in the rest of the categories (in which) we had hoped they would be spending by now. Tourists are also not here because of the strong dollar making things expensive.
Q: A lot of people are also talking about these off-price competitors — the cheaper outlet versions. Is that part of the industry taking market share?
A: Yes. The consumer has been trading toward these off-price alternatives, and we’re actually getting into that business at Macy’s for the first time. We’ve had Bloomingdale’s outlet stores in the past. We’re continuing to open more of them. But for the first time, we’re opening Macy’s Backstage Stores so that we can participate in this off-price, in some cases discontinued merchandise, from a prior season offering that some of these other stores are benefiting from.
Q: Gaso prices have been declining, putting more money in pockets. And we’re expecting them to put that money back into the economy. But they’re not. What’s holding people back?
A: People are saving more than they have in the past. And I think some of those big-ticket items are eating up not only their ability to spend, but their time. I do believe that they’ll circle back over time once they’ve got their house, their car, repaired their home, or put in a new patio, etc., and purhase more broadly in the discretionary category. This economy doesn’t work unless consumption is robust in a fairly broad way because it drives GDP growth. It’s two-thirds of the economy and it’s driven by consumption. And so for us to see jobs, and the productivity of those jobs, be robust, it has to be because consumption. But it has not been as strong as we would have expected it to be. Once they start spending again, that will create more jobs and put more money back into the economy.
Q: Do you think they’re worried about their medical care? Is that why they’re saving so much more money?
A: They have been spending more on health care. That’s one of the categories where you’re seeing consumer spending increase. And I suspect that that will continue to happen throughout the balance of the year.
Q: You lowered your guidance for the rest of the year. Are you expecting promotions and expenses to weigh on things going forward?
A: I lowered my sales guides because of our sale of our adjacent property to our Brooklyn store, and … because of the weakness that we’ve had in the first half of the year. I’m making sure we don’t buy inventory for a higher plan than what we can expect to sell through. And so those are the precautions we’re taking as we guide for the second half of the year.
Q: But should we expect some promotions and sales?
A: This last quarter I actually took a major promotion out of the June period, a friends and family event, and frankly, it hurt us. What you’ll see is a very similar calendar at least in the case of Macy’s and Bloomingdale’s in the second half of the season. So yes we’ll be as promotional as we were last year.
Q: Let me turn to the China story. You entered an agreement with Alibaba to bring a Macy’s to China consumers.
A: Yes, the Fung Retailing Group. it’s gonna be 65% owned by Macy’s, 35% owned by Fung Retailing Group. They have a tremendous amount of experience in China. They have 1,000 stores already in China, specialty stores and vast knowledge. And we’re gonna set up a business there that’s going to be an online business working with Alibaba and their online division. And we’ll launch this fall season.
Q: China is the story of the moment for markets and the global economy because people are worried that the economy there is actually slowing. Perhaps this is actually not the time to enter China?
A: I actually think, Maria, this is the best time to enter because if you’re already there and you’ve had the benefit of the last several years of growth, it’s a challenging time for you. I think this is a good time for businesses like mine that were not there, but actually can build from a lower base. And, without any question, that’s where the middle-class consumer of the future is going to reside.
Q: There has been a lot of intervention by the Central Bank there. At one point they closed and stopped trading in Shanghai because they wanted to stop the bleeding. Do you worry that there’s too much government intervention in China?
A: This is a moment in time that there’s a lot of chaos and turmoil. If you were in China as I was three years ago, and attending some of the meetings with the president and other governments leaders, you know that while there’s going to be rocky moments along the way … they really do believe in a 7-year plan. They’re going to make mistakes. We all are. And with a growing economy like they have, we’re complaining about the growth slowing down. But it’s still growing at a rate significantly faster than the U.S. economy.
Q: Let me ask you about brands because that’s one thing that’s very important to the Chinese are logos and brands. But recently people have been saying, “Look, you don’t want to show excess. You don’t wanna wear the logos.” I know Michael Kors and Ralph Lauren are two very popular brands sold at Macy’s. Do you see a weakness there?
A: Whenever you see Ralph Lauren results or Michael Kors’ or Calvin Klein’s results, you can assume that we’re not far off of what it is they’re reporting about their businesses because we’re the largest customer. And when any of these big brands slow down, that affects our business. But I would never count out brands like this. These brands have had such a history of performance not just with us, but around the world.
What we all have to do is excite the customer and find product that they don’t really have, but, in fact, do want. There’s going to be a point in time where they’re going to go to their closet and say, “You know what? I really do need something new here and fresh.”
Q: What’s the catalyst to get things moving again?
A: Customers have to feel better about their financial situation because of the savings rate, which is higher than it has been traditionally. If you go back in time, Americans have had savings rates at the zero level for many years. Now that range is up to about 5%. At some point they’re going to say, “We can afford to splurge again.”
I also think frankly that fashion has to stimulate some of that activity, and we haven’t had a great deal of new fashion cycles that demand to change your wardrobe. And finally, I think you’re starting to see some real growth again.
Q: Where does the growth come from at Macy’s?
A; We’ve made one acquisition in the last 10 years and that was Blue Mercury. We’re opening 10 more of those. We’re the seventh large Internet company in America. And so we clearly have an advantage in the online space in terms of competing with other pure play online retailers.