For years, as competitors like Sears and JCPenney struggled, Macy’s has provided the example to emulate. With its strong customer relationships and targeting skills, great locations, and positive reputation, the legacy department store seemed stable. Yet as the tides keep turning, even Macy’s keeps losing customers to discount competitors and online convenience, and its recent moves reflect its realization that it needs to make some radical changes if it hopes to stay alive.
Perhaps the most notable announcement was that it would be closing 100 of its 728 stores, throughout the country, because those locations were more valuable as real estate investments than as retail stores. The move clearly results from investor pressures; Macy’s stocks have lost approximately 40 percent of their value over the past year. The stockholders insisted on the sale of the real estate introassets and also called for new leadership, leading to the arrival of a new CEO. In selling the sites, Macy’s hopes to earn revenue that it can plunge into improving and enhancing its e-commerce channel.
Although this decision reflects its efforts to compete better with Amazon, Macy’s faces nearly as much competitive pressure from low price chains such as Marshalls and T.J. Maxx. Even as Macy’s has tried to address this market with its Backstage stores, traditional retail locations continue to suffer from a lack of motivation to get customers to visit the traditional department stores.
Such developments are bad news for some of the tenants within these stores, such as the cosmetic brands that have long relied on the streams of customers walking past their centrally located counters in department stores. For example, Estée Lauder (which also owns the Clinique and MAC brands) takes in approximately 30 percent of its global sales through department stores, and a full 9 percent of its revenues result from sales in Macy’s stores alone. The closure of 100 Macy’s stores thus is certain to have an influence.
And the cosmetic brands already are dealing with their own store troubles. Competition from dedicated retailers such as Ulta and Sephora have made it hard for them to keep up their sales through department store counters. Some analysts even predict that the current state of things will drive companies such as Estée Lauder to move more of their products to specialty retailer locations. If that trend becomes sufficiently prominent, the department stores would be left with gaping holes in the center of their stores, where the beauty counters used to be.
The trends for department stores like Macy’s thus appears to be entering into a negative cycle, where diminishing sales lead to closures and reduced offerings, which seem likely to diminish sales even further. Can they change course?
Discussion Questions:
- Why are department store retailers like Macy’s feeling a sales pinch?
- What are they doing about it?
- What implications does it have for Macy’s partners in the supply chain?
Sources: Rachel Abrams and Sapna Maheswari, The Wall Street Journal, August 11, 2016. See also Sharon Terlep, “Estee Lauder Offers Downbeat View as Department Stores Struggle,” The Wall Street Journal, August 19, 2016.