Macy’s has a couple of real problems. It is trying to figure out who its customer is and why they shop in such different ways. The other problem is that they do not understand the millennials, who are now coming of age and have significant spending power. These young people are the future of retailing – and they clearly do not want to shop in department stores.
Millennials feel that shopping in department stores is a chore. It is dull and unexciting. Sadly the stores do not help themselves – the theatre is gone, replaced by sale signs, and there is little encouragement to linger. I think there should be coffee bars in every store – it does not have to be Starbucks, it could be Illy or Senor Valdez—there has to be a place to linger and meet friends. When shopping for apparel, the millennials shop by consensus, and they have to have a place to rest.
While shopping in department stores is boring, cool brands like Nike have found ways to create an engaging experience for young people in their stores. For example, Nike introduced the NAC Club (Nike Athletic Club) in its stores, where actual exercises are done in the store. It may be disruptive, but it is also fun. At one time, Home Depot had kids build a bird feeding station in their stores. It bought teen-agers and their parents into the store–everybody had fun and the proud feeling of building something themselves. Department stores have to challenge themselves to create experiences young people enjoy. Maybe stores should devote an evening to honor a singer, dancer or musician that would encourage more visitors the stores. I am excited to see the development of Macy’s Backstage this coming fall. I believe it is patterned after Nordstrom’s Rack, a successful off-price chain that is rapidly expanding throughout the United States. However, this doesn’t solve the problems the full line store is experiencing.
We are dealing with a period of deflation of apparel – which I think will get worse when Primark enters the US. H&M and Forever 21 are already driving down prices and making life difficult for the teen retailers such as Abercrombie and Aeropostale. This downward price pressure will on get worse as these fast fashion retailers continue their aggressive expansion by taking space in empty stores with their attractive and cheap wares. The constant promotion of apparel in department stores masks the fact that most merchandise is overpriced and has to be on sale to be priced properly. Recently handbags, shoes and accessories were an easy substitute for purchases of dresses and separates. But now those reliable categories are saturated. Too many closets now have too many handbags and shoes.
On Macy’s first quarter earnings conference call, CFO Karen Hoguet, gave a litany of reasons why the company missed their sales targets. They reported a drop of 0.7%; including lease departments the drop was 0.1%. The first reason was the strong dollar, which discouraged foreign visitors to shop aggressively in cities like New York, Chicago, Las Vegas and San Francisco. It appears the Russians are not traveling to the US because of internal political problems, and the Chinese are feeling the impact of an economic slowdown. The European, Japanese Brazilian and other countries already slowed over the last two years. The strength of the US dollar has made it more expensive to visit America for many foreign travelers.
The second reason cited for the sales slowdown was that the company is on a learning curve regarding how to handle the omnichannel environment. That may be tough to explain, but the company announced that some of their better stores will have an assortment of better merchandise – they are trading up. That should be interesting, since it will again require reorientation and infusion of selling staff in order to make the quality customer feel more welcome among the heavily promoted mostly private labels at Macy’s. On the selling floor, Macy’s has been squeezing the lemon dry, now management has to be realistic and retrain their associates to give better, more caring, service.
The third reason given for the missed sales targets was the slowdown of the ports on the West Coast. This affected all retailers. Probably Macy’s a little more, because of the Bloomingdale stores. Mrs. Hoguet said that customers missed the deep discounts on merchandise that came from the Western ports. Bloomingdale’s extended their friends and family off-price event in order to capture these missed sales. I can’t help thinking that maybe less merchandise headed for the markdown racks would be a good thing, but Mrs. Hoguet indicated otherwise blaming less inventory for lower sales.
The fact that General Merchandise, Apparel and Footwear (GAF) sales were lower than expected was cited as a fourth reason for the shortfall. That is a fact, millennials are not buying as much apparel – in fact, this group in general disdains ownership.
Finally, as a fifth factor Mrs. Hoguet cited the weather. Sadly, the year before we also had brutal weather and while I hope, 2015/16 will be better, I am pessimistic that the cycle will turn that quickly. It was a terrible winter, but customers shopped for what they needed – especially mattresses and furniture, and they also purchased active wear. They bought what they needed, having a strong weather driven disincentive to just go shopping.
Macy’s management has excellent merchants. They must open their eyes to the possibilities and opportunities that only a dominant retailer like Macy’s has. They must find new ways to make the customer comfortable and welcome. In my opinion, going upscale is not the answer for Macy’s. Taking a realistic look at the number of sale events and recognizing that a) most customers no longer believe the sale signs; b) everybody is now invited to every “friend and family” event; and c) couponing will not build a healthy business well positioned for long term growth. This is what Macy’s really needs to do.
For the record, Macy’s had a disappointing quarter. As a result of the below plan sales, the company exited the quarter with too much inventory (+2.7%). This makes for a difficult road ahead. Macy’s management believes that it can achieve its earnings projection of $4.70 to $4.80. I hope so. The trick will be to do so without squeezing the lemon even harder by cutting more staff.