“Hope springs eternal” was the advertising theme this spring for Macy’s Inc., which was appropriate for a company that now owns the largest collection of U.S. department stores, a retail format whose demise has been predicted for decades.
The format may date to the nineteenth century, but there is plenty new at Macy’s, starting with the company’s name, which was slated to change from Federated Department Stores on June 1. On the same day, the company planned to adopt the ticker symbol “M”, a coveted single-letter descriptor that many believed was being reserved by the New York Stock Exchange for software giant Microsoft Corp.
For M to be a hit on Wall Street, Macy’s will have to continue to foil those who say the department store cannot survive in the era of Wal-Mart, specialty retailers and the Internet. Company executives say they plan to use increasingly feature-rich web sites, better online selection and faster delivery to complement the 859 Macy’s and Bloomingdale’s stores around the country.
The company has committed $230 million to the direct-to-consumer channel, mostly to build two big, high-tech distribution facilities designed to ensure faster delivery of a bigger assortment of products. At the same time, the web sites are adding items, including a new line of home products from Martha Stewart, and new features, some aimed at making Macys.com more appealing to younger women.
“We see Macys.com as far more than a selling site,” Peter Sachse, chairman of the Macys.com unit, told analysts in April. “We see it as the online hub of the Macy’s brand.”
The most coveted customers
While some customers will make purchases online, Sachse said the site will offer a range of features-from customer reviews and side-by-side item comparisons to listings of in-store events and credit card bill payment-designed to build loyalty to the brand and drive customers into Macy’s stores.
Like many retailers Macy’s has discovered that its best customers shop both online and in stores. “When our customers shop online and in stores they spend 20% more in stores than the average in-store shopper, and 60% more online than the average online shopper at Macys.com,” says Sachse (pronounced SAH-she).
While the brick-and-click strategy is hardly new, there have been few retailers to try it with the size and resources of Macy’s, and the longstanding ties to the middle class woman shopper who is the department store’s traditional customer. Company research shows 98% awareness of the Macy’s brand among women between the ages of 25 and 54 and with incomes of $35,000 or more.
Company executives refer to “her” when they speak of Macy’s typical customers, and with good reason. Macy’s says 63% of its $22.4 billion in sales last year were in women’s apparel, shoes, lingerie, accessories and cosmetics. Men’s and children’s departments accounted for another 22%.
“Macy’s is going to be the one that defines Internet retailing for that kind of merchandise because they’re the only ones that can afford to make mistakes along the way,” says Michael Levy, marketing professor at Babson College and co-author of the textbook “Retailing Management.” “The great thing about big companies like that is they can mess things up and they don’t go out of business.”
That means Macy’s is likely to be around for a while, and that what it does will not only be worth watching for other department store companies like Neiman Marcus Group Inc. and Dillard’s Inc., but also for specialty retailers in such categories as apparel, home furnishings and jewelry.
A bigger role for the web
Federated, now Macy’s, got to be the biggest owner of traditional department stores-which leaves out discounters like Wal-Mart Stores Inc.-through a string of acquisitions culminating in the 2005 buyout of the May Co. At the time, May owned 491 department stores, and several hundred specialty stores that Federated sold off.
But being the biggest department store owner is a dubious distinction today, given that department stores accounted for only about 7% of nonautomotive U.S. retail sales in 2004, down from 11% a decade earlier, according to consulting firm A.T. Kearney. Federated continued the winnowing by closing about 80 of the May stores in 2006, and company chairman Terry Lundgren told analysts he might have closed more but for contractual obligations.
While the Bloomingdale’s brand survives at 37 stores, Bloomingdales.com and the Bloomingdale’s By Mail catalog, a key part of the company’s strategy is to build Macy’s as a national brand. That means national advertising on television and in print, and bigger ad spend on the Internet.
“Our core woman shopper, like the rest of us, is spending a larger and larger part of her media day online,” says Anne McDonald, chief marketing officer. “We need to increase our time there, just as she increases her time there.” One sign that’s happening: online ad impressions for Federated and Macy’s more than doubled to 12.8 million in March from 5.5 million a year earlier, according to Nielsen/NetRatings’ AdRelevance report.
It also means turning Macys.com into a web site that can hold its own against the best of the online competition, while driving more traffic into Macy’s stores. Most of the $230 million the company has allocated over the past year for the direct-to-consumer business will go into two initiatives: building two new distribution centers to fulfill online and catalog sales only and upgrading the web site to make it more appealing and more closely tied to the Macy’s stores and brand image.
The first of the new distribution centers opened in April in Portland, Tenn., and will ship orders to customers in the Midwest and South. The plant covers 600,000 square feet, can be expanded to 1 million square feet and will employ more than 500 when fully operational. A similar facility to serve the West is scheduled to open in 2008 in Goodyear, Ariz. The Chester, Conn., center that fulfills direct-to-consumer orders in the Northeast could be next in line for an upgrade, company officials indicate.
Martha and more
The larger and more modern facilities will allow Macy’s to expand its online selection, which today amounts to 38,000 products and 170,000 SKUs. Over time, that is expected to grow to more than 300,000 SKUs, says Kent Anderson, president of Macys.com.