One of the most talked-about events of the last half-decade was the August 2005 Federated-May merger. It created a $27 billion juggernaut which had the potential to restore the department store business to its past glory. By converting 500 May stores to the Macy’s and Bloomingdale’s brands, selling off non-core businesses, and revamping its merchandising and brand efforts, Macy’s hoped to reverse the channel’s share erosion by improving margins and attracting its core customer back to the store. How well has the strategy worked?
What’s In a Name? Back in 2003, Federated Department Stores had already begun to consolidate the number of its nameplates to better leverage its marketing efforts. After the merger, when it sold off May’s Bridal division and Lord & Taylor, it continued to convert remaining stores like Robinsons-May, Filene’s, Strawbridge’s, Hecht’s, Kauffman’s and many others to either Macy’s or Bloomingdale’s. The company, renamed Macy’s in June 2007, now operates 850 stores under the two nameplates in 48 states/territories. Macy’s Today Like most traditional department stores, Macy’s carries many designer, national and private label brands. Price levels range from designer to moderate.
Key merchandise categories include female accessories & innerwear & cosmetics (36% of sales), female apparel (26%), men’s & children’s & other apparel (22%) and home/other (16%).
Macy’s Chairman and CEO is Terry Lundgren, 58, a self-made industry veteran who started his career at Federated’s Bullock’s (later Bullock’s Wilshire) and subsequently worked himself up to top management, remaining at Federated his entire career except for several years in the late Eighties and early Nineties running Neiman Marcus.
The Transition Begins The reduction in number of store names and closing of underperforming stores made lots of sense and saved millions in overhead for Macy’s. However, it wasn’t enough. As competitors like Gap, Kohl’s and Target eroded its market share, the company did little to transform the department store business model into something that could grow and flourish in the increasingly competitive retail environment. The department store channel kept shrinking, and the competition for traffic kept intensifying. Sales declined every year since the merger, after peaking at $27 billion in 2006. By the end of the most recent fiscal year, same-store sales had declined in all but 6 of the past 36 months.
Improving The Shopping Experience Twenty years ago, no self-respecting fashion enthusiast would go a week without visiting her favorite department store. There’s an old story about an elderly New York woman who was preparing her will. She decided on cremation, and wanted her ashes scattered over Bloomingdale’s. “Why Bloomingdale’s?” her attorney asked, surprised. “That way,” the woman responded, “I know my daughters will visit me twice a week.” Lifestyles and shopping habits have changed so much that most people don’t even find that story funny anymore. Macy’s management decided it needed to make some major changes to meet the needs of the changing apparel consumer.
New Direction In early 2008, the company announced a new initiative, called “My Macy’s,” intended to strengthen local market focus and enhance selling service. It consolidated many of its buying and store management divisions to facilitate this enhancement, using new technology to customize brand, product, size and color for specific geographic markets. Although central buying, merchandise planning, senior management and marketing functions are still located in New York, with corporate and back-office functions remaining in Cincinnati, Macy’s stores are now grouped into 69 geographic clusters averaging 10-12 stores each which carry regionally-selected product. The program was tested in 20 markets in 2008 and then rolled out nationally in mid-2009. The initial results have been very successful.
Financial Performance has already shown signs of improvement. In the fourth quarter, Macy’s managed to cut expenses, gain market share, and use technology to implement its My Macy’s initiatives. Although total sales dropped in the fourth quarter, margins increased. Management recently raised the sales and profit outlook for fiscal 2011 by $.20 per share to between $1.75 and $1.80 per share.
The Stock, which hit a two-year low of around $5.50 in November 2008, has almost completely recovered to its pre-recession price level of the mid-twenties. Comps have increased for the first three months of the new fiscal year.
Strategic Objective Several years into the merger, Macy’s has shrewdly used the recession to begin a transformation into what it wants to be, a profitable department store retailer focused more intently than ever on the consumer. It hopes to grow and gain share, eventually transforming the department store channel into a growth sector.
Which brings to mind another story. A department store executive is walking down the street when a funeral procession drives by. He stops, bows his head for a minute, and then continues walking. His companion, touched by the gesture, commented “That was very nice of you to respect the deceased like that.” “Well, sure,” responded the executive. “That was another customer we’ll never be able to replace.”
If Mr. Lundgren has his way, that joke will no longer seem funny a year or two from now, either.