Macy's Then and Now: 2016 to 2017

Although Macy's foot traffic has been steadily decreasing, its online sales during recent months are growing. Macy's took a lesson from this juxtaposition and initiated a restructuring in which it plans to "focus resources on strategic priorities, improve organizational agility and reduce expense."The 2016 holiday shopping season brought no joy to Macy's. The embattled retail chain saw a 2.7 percent slump in holiday sales from the previous year. Coming on top of a 30 percent drop in its share price in 2016, Macy's troubling financials have catalyzed a movement to adopt a fresh approach for the legacy department store. In addition to a massive restructuring throughout the organization, including the closure of 68 store locations by mid-2017, the company is aggressively allocating resources into its digital strategy. Below, we take a look at the conditions that led Macy's to this decision, and its chances for achieving sustainability this year.

Racing the Clock

In February 2017, Standard & Poor's downgraded Macy's credit rating to BBB-, the lowest investment-grade rating. In the words of S&P analyst Helen Song, "The downgrade reflects our view of the company's weakened operating performance and competitive standing given the ongoing industry challenges, such as sustained low customer traffic, increased price transparency, and unrelenting competition from online, fast-fashion, and off-price retailers." This blow to Macy's credit rating underlines the fact that the company's window of opportunity for financial survival is rapidly closing.According to a Macy's press release, the latest store closures are part of 100 that were announced in August 2016, and they include the layoff of over 10,000 employees. Furthermore, the company has announced new plans to institute operational economies, eliminate layers of management, and cut non-payroll spending. As of February 2017, Macy's share prices are down by 54 percent from their June 2015 level, and a promising acquisition bid by Canada's Hudson's Bay Company fell through.

The Larger Context of Department Stores in 2017

Macy's is not the only department store struggling in today's retail environment. Total sales at all department stores in the United States fell by 5.6 percent in 2016, while Amazon enjoyed its most profitable holiday season ever. U.S. consumers spent $385 billion online in 2016, and that number is projected to skyrocket to $632 billion by 2020. The average retail growth in the United States during the first half of 2016 was 2 percent overall, while e-commerce growth during the same period was 16 percent.As Business Insider points out, the concept of physical department stores is losing relevance in this era of online shopping. Customers no longer need a one-stop physical location that supplies everything from jewelry to apparel to appliances. There are specialty stores with more information and wider selections. Shoppers can access almost anything they want online from digital leaders Amazon, Alibaba and others. In BI's words, "It seems like the tide is inevitably turning against the department store concept as a whole."In writing about Macy's, Helen Song comments on the overall landscape of current American shopping preferences, "We believe weak operating trends in the department store sector are ... a symptom of secular change in consumer spending habits."

Declining In-Person Sales Lead to Focus on ecommerce

Although Macy's foot traffic has been steadily decreasing, its online sales during recent months are growing. Macy's took a lesson from this juxtaposition and initiated a restructuring in which it plans to "focus resources on strategic priorities, improve organizational agility and reduce expense." Macy's plans to fund this digital push in part with the $550 million it expects to save from closing stores, together with an additional investment of $250 million. It's clearly a time for an all-or-nothing gamble, as Macy's puts every available resource into increasing its capabilities in the ecommerce space.

Reorganizing Leadership

Some new leaders are taking the helm in 2017 to spearhead Macy's effort to increase its digital agility. In January 2017, Macy's fired its Chief Growth Officer Peter Sachse, a 34-year veteran of the embattled company. Just two months later, longtime Macy's executive Jeff Gennette was named President and CEO, and he immediately advocated several new pathways for the chain. These include "upping the in-store experience," bringing in dining options and more exclusive brands, while also focusing on the discount end of the business.

Taking a Dual Approach to Physical Stores

Gennette's response addresses a somewhat risky tactic that Macy's is embracing in its fight for economic survival: a dual approach to improving customer experience. As it closes some stores, the retailer is tilting the remaining locations in one of two directions. The stores will either feature high-end products and superb personal service or become clearance discount centers offering super-low prices.

Taking the High Road

Catering to high-end shoppers seeking a luxury experience, Macy's is using digital to personalize its approach. MyStylist@Macy's personal shoppers meet customers as soon as they walk in the door, offering one-on-one assistance in choosing products. Digital ordering options also give customers the chance to order online and pick up items in their local stores. Connect@Macy's kiosks let shoppers choose from inventory not displayed on shelves, suggesting color and style combinations to appeal to millennial customers.These digital innovations are part of what Macy's refers to as its "Top Door" strategy. It's also striving to create an immersive wellness and salon experience within upgraded locations. In summer 2016, the company added its recently acquired upscale beauty retailer, Bluemercury, to several flagship locations, as well as enhanced experiential features such as spa and salon services.In an interview with Fox Business News, newly appointed CEO Jeff Gennette seems to underline the Top-Door strategy as he explains why the company is closing some stores that are still profitable: "They do not represent a customer shopping experience that reflects our aspirations for the Macy's brand." Gennette explains that the company plans to focus resources on "a winning customer experience." He says that this experience will be a combination of in-store shopping at a few winnowed stores with the "highest potential" and an aggressive digital and mobile upgrade.

Reaching out to Discount Shoppers

At the same time that Macy's is broadcasting its move to a premium customer experience, it appears to be attempting to cover all possible retail niches by simultaneously appealing to off-price shoppers. The dissonance in Macy's brand identity is evident, as Business Insider notes in March 2017: "Macy's is morphing into a discount store." In late April, the site sent one of its reporters to Macy's flagship store in New York City's Herald Square. The reporter noticed that off-price and clearance sections of the store were attracting the most customers, while the fine jewelry department had the least amount of traffic. Furthermore, the visual appearance of much of the store was chaotic and similar to other discount outlets such as T.J. Maxx.Business Insider commented in April that "off-price retail is one of the only bright spots in the [brick and mortar retail] industry." On this side of its dual identity, Macy's is applying digital innovation to reduce the number of salespeople. It has installed self-service options in shoe departments and cosmetic counters, discontinuing individual assistance for choosing products and, instead, allowing customers more choice and quicker access to inventory via digital signage.To meet the low price challenge, Macy's has rolled out a discount brand called Backstage, which offers reduced pricing of up to 80 percent in stand-alone locations, as well as within larger Macy's stores. Many locations also feature a section called Last Act, in which clearance items of different types are gathered together in a single department. Hoguet commented that this strategy will be increasing in Macy's future. "I think you're going to see more of that enter into the Macy's logic," she said in the CNBC interview.

Digital Challenges Facing Macy's

As Macy's pursues its ambitious attempt to maintain store locations that appeal to both ends of the retail market, it faces a uniquely complex digital transformation. It needs a user-friendly dashboard that is accessible across various platforms, and it needs to deliver products to its consumers at a reliably fast rate.The millions of dollars that Macy's plans to invest in its digital strategy promise a potential halt to the company's downward trajectory. In late April 2017, Bloomberg Intelligence analysts praised Macy's mobile commerce app and called it "best in class" in a comparison with nine other retailers. They noted its superiority across nine metrics, including the ability to do an image search, make shopping lists, transact purchases and scan products for details.

A Good App Still Needs Users

While Macy's app is winning critical praise, its usage is inconsistent. Macy's website was visited by nearly 3.5 million shoppers on Black Friday in 2016, while the app was accessed by only 300,000 users. These numbers don't match the proportion of today's mobile shoppers. As Bloomberg points out, "Retailers must offer compelling apps to boost market share," because nearly one-fifth of all online sales are conducted via mobile devices, and by 2020, 42 million Americans will go online only via mobile. Nonetheless, the millions that Macy's plans to plough from its shuttered stores into its digital business may help it weather this make-or-break year.Seasoned analyst Walter Loeb takes a skeptical view of Macy's chances, but he doesn't consign this legacy chain to history quite yet. Instead, he states that in order for the company to stay viable, "The Macy's customer must be invited to come back for a more exciting experience." A well-considered digital strategy, grounded in a solid business plan, may well be the driving force that infuses Macy's future with the necessary excitement. It's a financial cliff-hanger serial worth following.