MACY

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Douglas College *

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4275

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Marketing

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Feb 20, 2024

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1. What are the strategically relevant components of the department store segment of the U.S. retail industry macro-environment? Political - Lockdown policies are implemented by governments as a political response to various circumstances , such as public health emergencies or security concerns. These policies restrict the movement of people and can have significant implications for the labor force. Economic - The transition to online shopping had greatly damaged the business model of many shopping malls as smaller retailers failed along with department stores, both of whom had experienced a decline in sales per square foot resulting from reduced customer traffic. - The onset of the coronavirus in early-2020 was projected to lead to a 3.3 percent decline in revenues for the entire 2020 calendar year as retailers were required to temporarily close stores . - The number of department stores declined 4.9 percent between 2015 and 2020, with COVID-19 hastening the decay of the industry with a projected 27.4 percent decline in department store revenues and a 3.2 percent decrease in profit margins for the industry segment - The spike in unemployment resulting from COVID-19 stay at-home orders and store closures was projected to result in an overall decrease in consumer spending which would harm the U.S. department store industry and other consumer sectors Social - The change in consumer shopping preference had especially impacted mall- based department stores. The business model of online-only retailers such as Amazon that involved low costs for land and buildings, real estate leases, inventory, store furnishings and merchandise displays, and personnel put tremendous pricing pressure on brick-and-mortar retailers. The low prices offered by many online retailers coupled with consumers’ desire for the convenience of online shopping has dramatically altered the value proposition for shopping malls and resulting customer experience . Malls, which once were a popular place to visit, shop, and pass time, were challenged as the closings of prestigious anchor stores and specialty stores made shopping at a mall less exciting for consumers. - Baby boomers had driven sharp demand increases in industries and products such as mountain bikes, golf courses and equipment, SUVs and Harley-Davidson motorcycles in the 1980s and 1990s and still made up the largest group of consumers in 2020 - A declining birthrate in the United States and many developed countries resulted in fewer shoppers for an increasing number of goods. - The focus by consumers on convenience and low prices grew stronger as age demographics declined in age Technological -The convenience of shopping for nearly every type of consumer good at Amazon or other online retailer sites had radically transformed the retail industry -Consumers had become to expect even the most highly differentiated retailers to have an online presence -Smartphone applications greatly enhanced the ability of consumers to make

purchases from any location at any time of the day Environmental - Industry Legal -Stay-at-home orders by state and local governments had created unprecedented challenges for all retailers 2. How have Macy’s corporate strategy choices strengthened or weakened its competitive position in the retail industry? *Five-point strategic plan: 1. Growth50 Initiative: The key feature of Macy's strategic plan was the Growth50 initiative. This initiative aimed to drive product and merchandising innovations in 50 select stores. The goal was to establish a new retailing standard that could then be rolled out to 50 to 100 additional stores per year. 2. Direct Vendor Fulfillment Model: Macy's implemented a direct vendor fulfillment model for online sales. This model allowed vendors to maintain inventory and fulfill online orders directly, enabling Macy's to expand the number of SKUs offered online. This move aimed to increase product availability and provide a broader selection to online shoppers. 3. Online Order Pickup: Macy's planned to offer customers the option to order items online and pick them up in nearby store locations. This feature aimed to enhance convenience for customers and provide a seamless shopping experience by allowing them to combine online browsing with the ease of in-store pickup. 4. Expansion of Macy's Backstage Stores: Macy's intended to expand its off-price Macy's Backstage stores. These stores, featuring discounted products, were seen as less vulnerable to competition from online retailers compared to the core Macy's stores. The plan was to increase the number of Backstage locations from approximately 150 to more than 200. 5. Loyalty Program Expansion and Mobile App: Macy's aimed to expand its loyalty program to encourage repeat business. Additionally, the company launched a new mobile app to improve the online shopping experience and make it more convenient for customers to engage with the brand. As of early-2020, the plan had produced few positive results with some analysts suggesting that the strategy was better aligned with the retail environment of 2010 than of 2020. In February 2020, Macy’s announced that it would close 125 store locations. 3. Is Macy’s generic strategy best characterized as a low cost, differentiation, broad, focused, or best-cost strategy? How well is this strategy working for Macy’s? What would a SWOT analysis reveal? Differentiation: Macy's strategic initiatives, such as the Growth50 initiative and product and merchandising innovations, aim to establish a new retailing standard and differentiate Macy's from its competitors. This focus on innovation and creating a unique shopping experience suggests a differentiation strategy. Best-Cost: Macy's also employs elements of a best-cost strategy. The implementation of a direct vendor fulfillment model for online sales allows for increased product availability and a broader selection, potentially providing value to customers. Additionally,

expanding the off-price Macy's Backstage stores is a cost-conscious approach, as these stores offer discounted products that may be less vulnerable to online competition. Strengths:  Adapt its business model to the online shopping environment  Focus on improvements in the online and mobile shopping experience: allowing Macy’s customers to make purchases online and pick-up merchandise in the store or buy online and ship to a store for pick-up resonated with consumers.  An expansion of its loyalty program to increase customer traffic and average purchase amount  The company’s off-price retail brands Backstage and Bloomingdale’s: defend against online retailers.  Direct vendor fulfillment was directed at reducing distribution costs across all Macy’s retail operations: housewares, furniture, and women’s apparel were additional turnaround initiatives designed to keep customers shopping once inside store locations.  The proliferation of such product categories both online and available in brick-and mortar stores required mall-based department stores to offer a highly differentiated experience or distinctive product line  Strong brand recognition and reputation. Weaknesses:  Declining sales and profitability in recent years. (The combined effect of the company’s ongoing poor performance and COVID19 store closes was expected to result in a first quarter 2020 loss of $905 million to $1.1 billion )  Some categories are not developed: Men’s clothing and footwear, children’s clothing and footwear, nongrocery food items, and toys and hobbies were all products that could be purchased at supercenter discount retailers such as Walmart and Target or wholesale clubs such as Sam’s or Costco  Dependence on the performance of physical stores in a challenging retail environment.  Impacted by the shift towards online shopping and changing consumer preferences .  Reliance on shopping mall traffic, which has experienced a decline.  Not have advanced technology compared to competitors, such as Walmart Opportunities:  Growing e-commerce market, allowing Macy's to expand its online presence and capture a larger share.  Expansion into new markets or international markets to diversify revenue streams (Dubai, Kuwat) Threats:

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 Competition from online retailers such as Amazon, or other companies such as Walamart, Target  Economic downturns impacting consumer spending.  The effect of COVID-19 pandemic.  The decline of retail sector 4. What does your strategic group map of the department store segment of the U.S. retail industry look like? Is Macy’s well positioned? 5. SWOT Analysis 6. Strengths 7. - Adapted to e- commerce needs 8. - High range of products

9. - Presence in malls and shopping centers 10. Weaknesses 11. - Doesn’t offer food or groceries like competitors Target and Walmart 12. - Not as advanced in technology and other services as other competitors The retail landscape in the United States in early 2020 may have been best characterized as rapidly changing with an uncertain future. The COVID-19 pandemic and stay-at-home orders by state and local governments had created unprecedented challenges for all retailers, but traditional brick and-mortar retailers had under pressure for at least a decade. The convenience of shopping for nearly every type of consumer good at Amazon or other online retailer sites had radically transformed the retail industry. Consumer needs continued to allow for variations in strategy that allowed for distinctive retailer approaches to meeting customer expectations. But consumers had become to expect even the most highly differentiated retailers to have an online presence in addition to their prestigious brick-and mortar locations. The change in consumer shopping preferences had especially impacted mall-based department stores. Nearly all shopping malls relied on strong department store anchor tenants to draw vast numbers of shoppers, who would also patronize smaller specialized retailers during their visits to a

mall. The transition to online shopping had greatly damaged the business model of many shopping malls as smaller retailers failed along with department stores, both of whom had experienced a decline in sales per square foot resulting from reduced customer traffic. Macy’s, Inc. had particularly struggled to adapt its business model to the online shopping environment with sales declining each year since its record sales of $28.1 billion generated in 2014. In 2018, Macy’s turned to 34-year company veteran Jeff Gennette to lead the company’s turnaround and transformation as CEO. In early 2020, Gennette was in the second year of his five-point strategic plan designed to reinvent the company’s business model and generate retail innovations. The key feature of the plan was its Growth50 initiative which strived for product and merchandising innovations in 50 stores that would establish a new retailing standard that could be rolled out to 50 to 100 additional stores per year. The company also implemented a direct vendor fulfillment model for online sales that nearly doubled the number of SKUs offered online since inventory could be maintained by vendors, not Macy’s. The third element of the turnaround plan was to allow customers to order items online and pick up merchandise in a nearby store location. Gennette also wished to expand the number of the company’s off-price Macy’s Backstage stores from approximately 150 to more than 200. Macy’s management had determined that the off-price store locations were less vulnerable to competition from online retailers than its core Macy’s stores. Expanding the company’s loyalty plan to encourage repeat business, making online sales available through its new mobile app, and better utilizing its strongest product categories like housewares and women’s apparel to draw customers to its stores were less sweeping changes that rounded out the plan. As of early-2020, the plan had produced few positive results with some analysts suggesting that the strategy was better aligned with the retail environment of 2010 than of 2020. In February 2020, Macy’s announced that it would close 125 store locations. By March 18, the company’s COVID-19 response resulted in it closing all 775 store locations. The company began reopening stores on May 4 and expected to have 270 stores open by the 2020 Memorial Day Weekend. The combined effect of the company’s ongoing poor performance and COVID19 store closes was expected to result in a first quarter 2020 loss of $905 million to $1.1 billion Company background: - Headquartered in Ohio - Second-largest department store chain with a market share nearly 16.3% in 2020. - 2018, launched a five-point turnaround plan to improve company’s performance. The Growth50 initiative was focused on 50 Macy’s department stores to revitalize in 2018, including store remodels, improved customer service, and increased product assortment. - The addition of STORY retail locations in 2018 supported sales growth for the company: STORY locations were smaller stores with an inventory assortment that was refreshed with new items every six to eight weeks. Engaging consumers through an opportunity to interact with products and collaborate. The value proposition for The Market @ Macy’s was similar, but entailed departments located within select Macy’s stores rather than operating as standalone locations. - Revitalization of the customer experience at Bloomingdale’s and Blumercury were also important elements of the turnaround efforts - A focus on improvements in the online and mobile shopping experience: allowing Macy’s customers to make purchases online and pick-up merchandise in the store or buy online and ship to a store for pick-up resonated with consumers. - An expansion of its loyalty program to increase customer traffic and average purchase amount

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- The company’s off-price retail brands Backstage and Bloomingdale’s: defend against online retailers. - Direct vendor fulfillment was the fifth major element of the plan and was directed at reducing distribution costs across all Macy’s retail operations: housewares, furniture, and women’s apparel were additional turnaround initiatives designed to keep customers shopping once inside store locations. THE SHOPPING MAIL EXPERIENCE: - The low prices offered by many online retailers coupled with consumers’ desire for the convenience of online shopping has dramatically altered the value proposition for shopping malls and resulting customer experience. - Malls: less exciting for customers - Physical malls: expensive to build - The most viable malls in 2020 tended to be upscale outdoor lifestyle malls that featured beautiful architecture and landscaping along with a strong mix of aspirational luxury brands. - Other malls that remained popular in 2020 were outdoor outlet malls that were located near major highways that provided deep discounts CHANGING CUSTOMER DEMOGRAPHIC: -A declining birthrate in the United States and many developed countries resulted in fewer shoppers for an increasing number of goods -The focus by consumers on convenience and low prices grew stronger as age demographics declined in age. - Online shopping met the discount pricing and 24-hour availability and convenience desired by Millennial shoppers. Smartphone applications greatly enhanced the ability of consumers to make purchases from any location at any time of the day. Retail sector growth and the impact of COVID-19. -The retail trade sector had grown at an average annual rate of 0.7 percent in the years 2015–2020 to reach $5.3 trillion in industry revenues - The onset of the coronavirus in early-2020 was projected to lead to a 3.3 percent decline in revenues for the entire 2020 calendar year as retailers were required to temporarily close stores. -Also, the spike in unemployment resulting from COVID-19 stay at-home orders and store closures was projected to result in an overall decrease in consumer spending which would harm the U.S. department store industry and other consumer sectors. Analysts believe that the retail sector would return to a strong 1.8 percent annual growth rate for 2021 through 2025 as COVI19 became contained and mitigated. Industry revenues were projected to increase to nearly $5.9 trillion by 2025. The declining sales of the department store segment of the retail industry The number of department stores declined 4.9 percent between 2015 and 2020, with COVID-19 hastening the decay of the industry with a projected 27.4 percent decline in department store revenues and a 3.2 percent decrease in profit margins for the industry segment. Analysts projected that the

department store segment of the retail industry would continue to decline by 7.5 percent annually, falling from $100 billion in 2020 to $67.7 billion in 2025. Profiles of the Largest U.S. Department Store Chains Target Corporation Target Corporation was the largest U.S. department store chain in 2020 with a market share of 50.1 percent and 2019 sales of $50.1 billion. Target has achieved explosive growth between 2015 and 2020, allowing its market share to increase from approximately 34 percent in 2015 to 50 percent in 2020. The company operated 1,868 stores across the United States and recorded sales of $78.1 billion in fiscal 2020. A large portion of the company’s sales was comprised of groceries, which lowered its sales of department store items to $50.1 billion. In fact, the company’s sales of department store items had declined at an annual rate of 2.2 percent between 2015 and 2020. The company had been able to increase overall sales in its supercenter locations through a reimaging plan that included store remodeling projects and the introduction of perishable and nonperishable foods to more store locations. This introduction of grocery items produced a comparable store sales growth of 5 percent. Gains in every market category was achieved coupled with a record high earnings per share increases. Key elements of Target Corporation’s retail strategy included: • Becoming the first U.S. retailer to offer same-day and drive-up fulfillment capabilities, coast-to-coast. • Remodeled more than 400 store locations by 2019. • In 2018, opened more than 24 small-store formats, with 30 more planned in 2019, in high-traffic urban locations and college campuses. • Focused on better guest services: increased minimum wage to $12/hour; raising again in 2019 to $13/ hour, with a goal of $15/hour by the end of 2020. • Focused on digital channels, where in 2018 comparable digital sales grew 36 percent. • Introduction of more brands, more than doubling a goal of more than a dozen in 2017, which was one reason Target Corporation was named by Fast Company as one of the world’s most innovative companies. Nordstrom, Inc. Nordstrom Inc. was the third largest department store chain in the United States with 380 total stores in 2020. Nordstrom Inc. had a diverse mix of retailing formats with 136 fillline Nordstrom department stores, 244 off-price Nordstrom Rack stores, and multiple e-commerce sites. The company’s greatest store concentration of Nordstrom department stores was in California with 35 full-price locations followed by Texas with 10. While Nordstrom was best known for its luxurious department stores, the company’s innovative online retailing platforms accounted for 46 percent of Nordstrom Holdings’ total sales of $15.1 billion. HauteLook was a rapidly growing online retailing site owned by Nordstrom Holdings that was an online private sales site. Truck Club was another personalized site that allowed men to purchase personalized clothing. The company had other small-format online retailing sites such as The Black Tux that allowed men to order high-quality, tailored tuxes that could be tried on at home and returned for further alterations. The Black Tux rentals could also be taken to a Nordstrom department store for alterations. The addition of specialty online retailing sites had allowed Nordstrom Holdings to achieve overall growth, its department store specific sales had declined by 5.8 percent annually between 2015 and 2020. The profitability of its department stores had also declined to less than a one percent margin in fiscal 2020. Sears Holdings Corporation Sears Holdings Corporation resulted from the 2005 merger between Sears Roebuck and Company and Kmart Holding Corporation. The merger produced a company with a network of approximately 1,000 Sears department stores and Kmart discount stores. Sears department stores were primarily mall-based, and Kmart locations were largely standalone stores. The merger was designed to strengthen two retail brands that had each been declining rapidly for decades. For nearly 100 years, Sears held commanding market shares in nearly every department store product category, from women’s, men’s, and children’s apparel to large

appliances and even automobile tires and batteries. Sears’s loss of sales in the department store industry began in the 1980s as a result of poor strategic positioning that prevented it from effectively competing with cost leaders such as Walmart and Target or with mid-tier competitors such as Macy’s or J.C. Penny. Similarly, Kmart had struggled since the 1980s to effectively compete against Walmart on price and merchandise availability. The introduction of the Walmart Supercenter in 1988 exposed problems at Kmart that included old, small store locations that were no longer located in high traffic shopping areas, supply chain inefficiencies and frequent out-of-stock store inventory, low employee morale, corrupt executive leadership, and a lack of price competitiveness. Sears Holdings filed Chapter 11 bankruptcy in 2018 to contend with its 21 percent annual sales decline, operating losses estimated at 6.7 percent of revenues, and outstanding $5 billion debt. Sears Holdings closed more than 500 store locations in the first year of its bankruptcy protection and operated only 182 stores in 2020. The company closed all stores in April 2020 because of the COVID-19 pandemic and had reopened 25 stores in May 2020 J.C. Penny Company, Inc. J.C. Penny Company operated 846 store locations in the United States and Puerto Rico and achieved total revenues of $10.7 billion in fiscal 2019. The company’s sales had declined steadily from a high of $20 billion in 2006 as a result of poor merchandising strategies and ineffective leadership. The company’s descent accelerated during the Great Recession of the late-2000s as CEO Myron Ullman failed to adapt pricing to the diminished purchasing power of consumers suffering the effects of the recession. J.C. Penny’s financial troubles grew worse under the leadership of former Apple CEO Ron Johnson who was hired in 2011 to turnaround the failing company. CEO Johnson envisioned a J.C. Penny that would compete with more upscale retailers. His strategy was based on instinct and, without market testing, Johnson change the company’s store designs, logo, advertisements, and pricing model to appeal to wealthier shoppers. Under Johnson, the company dropped its popular private label brands that were very profitable and had a loyal following among lowand middle-income customers. Johnson also ended J.C. Penny’s history of using coupons and clearance sales to attract shoppers. By 2012, with sales plunging 25 percent and the company deeply in debt, it was clear that Johnson’s strategy had failed to attract wealthy customers and had driven away its formerly loyal customers. In 2013, J.C. Penny turned to former CEO Ullman in to begin a turnaround plan and, in 2015, selected Marvin Ellison as CEO. Ellison had led the appliance division at Home Depot and expected to position J.C. Penny to take advantage of the collapse of Sears to increase sales of appliances at J.C. Penny. The plan failed to achieve success, with Ellison leaving to lead Lowe’s. The company continued to struggle to develop a value proposition that resonated with consumers and filed for Chapter 11 bankruptcy in May 2020. The company’s restructuring plan would involve the permanent closing of 30 percent of its store locations, but analysts believe it was quite possible that J.C. Penny would be liquidated and go out of business permanently. Macy’s, Inc. Strategic Situation in Mid-2020 With the company reporting a year-over-year sales decline of more than 45 percent from approximately $5.5 billion in Q1 2019 to approximately $3 billion in Q1 2020, there was tremendous uncertainty about the effectiveness of Macy’s turnaround and its ability to absorb the impact of COVID-19 on the retail industry. However, in comments to analysts following the company’s announcement of its First Quarter 2020 results, CEO Gennette saw several bright spots. A portion of the company’s loss in Q1 2020 was a result of a $300 million charge on inventory that would have been marked down as sale items if stores had been open. Also, CEO Gennette believed that the company would be able to right-size its inventory during the second quarter of 2020 to reduce overhead. Macy’s management was particularly encouraged by the company’s 80 percent increase in online sales

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during the month of May 2020 as consumers were forced to shop online during stay-at-home orders. Gennette had commented to analysts that while sales might not stabilize until 2021 or 2022, the company would be able to retire $1 billion in debt by 2022. With so much unpredictability, coupled with changing consumer wants and needs, the retail arena was surely one that will continue to be a challenge moving forward.

MACY

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