Macy’s Exploring Outlet Stores
By Tom Ryan
Seeking to reach many
of its customers flocking to factory outlet centers in the current climate,
Macy’s is exploring opening its own outlet stores. Said Terry Lundgren,
chief executive, "There is an outlet customer who shops those outlets.
It’s an opportunity for us."
Mr. Lundgren made his
comments late last week following the firm’s annual meeting. Most of his
17-minute presentation at the meeting focused on the early successes of
the My Macy’s local-merchandising program, as well as other merchandising,
online, advertising and expense-control initiatives.
But according to Bloomberg
News, Mr. Lundgren said after the meeting that the company is looking
into opening outlets to sell leftover inventory from Macy’s and Bloomingdale’s
stores as well as to possibly have merchandise developed specifically
for the locations. He didn’t specify a time frame.
"The idea is on
paper but we have nothing to announce,’ said Mr. Lundgren.
The department store
operator’s exploration comes as price-conscious shoppers are reported to
be increasingly venturing to outlets over regional malls. Also, the top upscale
department stores – Neiman Marcus, Nordstrom and Saks – have all developed
sizeable outlet concepts, and many of are fairing better
than their full-line locations in the current climate.
At Nordstrom, comps slid
only 1.5 percent at its Rack outlet stores in the fourth quarter versus
a 16 percent drop at its full-line stores. Nordstrom ended the year with 56
Rack locations and plans to add 10 this year. It closed the year with 109
full-line sores and expects to add four more in 2009.
In the early nineties,
however, Macy’s had rolled out a few dozen Macy’s Close-Out (MCO) stores
to unload unsold merchandise. The business generated $83 million in sales
in 1994, the year it was acquired out of bankruptcy proceedings by Federated
Department Stores, Inc. By May 1995, Federated announced it was discontinuing
MCO operations by the end of that year. At the time, the company said, "The
separate clearance format initiated by Macy’s is inconsistent with Federated’s approach
to clearing merchandise within the department store format."
Discussion Questions:
Should Macy’s Inc. open outlet locations for either its Macy’s or Bloomingdale’s
formats? What challenges does it face in opening outlet locations?
I have mixed feelings about this idea. On the one hand, Nordstrom Rack points to a business model that could work for Macy’s and/or Bloomingdale’s. It allows for a location strategy with much more flexibility and cost-efficiency than the traditional mall anchor. It also provides a way to clear inventory outside of the mainline stores, which have tended to look very cluttered and poorly converted lately during “clearance season.” This would be a particular benefit in clearing private brands like INC that are a liability once commitments have been made.
On the other hand…this idea requires a lot of planning and good infrastructure. There needs to be a cost-effective way to manage the “reverse logistics” of moving goods from stores to outlets. And, most importantly, Macy’s has its hands full today trying to wring efficiencies from the May Company acquisition and its own buying-office consolidation. Investors would probably like to see Macy’s turn a profit before it turns its attention to another distraction.
Apparel inventory needs to move. Whether they operate their own outlets or sell to liquidators, all fashion industry retailers needs a solid clearance program. Macy’s has several things going for a move into the outlet business, including: a solid brand/banner for the stores, weakness in the commercial real estate market, a broad level of acceptance by consumers. The real question is, can they expect to eek out a few more basis points versus their current method?
Living in Detroit, I thought Macy’s was an outlet store already.
Macy’s had been treating their main stores as outlet mall locations for years with the constant markdowns, and that didn’t really drive the traffic or business results they wanted. So now, they announced that shoppers should not expect the stores to have those kind of bargain promotions any longer. But they are considering outlet stores?
I must say that in my shopper marketing humble opinion (IMSMHO) they will likely have a lot of extra merchandise to put in those outlet stores, plus the expenses of new real estate, store build-out and operations, and transportation to move unsold merch from the main stores to the outlets. Hmmm?
I might go so far as to say that Macy’s MUST open outlet stores. Macy’s ongoing focus on private label and exclusive brand deals (ala Tommy Hilfiger) means that left-over goods don’t have a home outside of the main store. Instead, they are sold at deep discounts within the store, sullying Macy’s image and compromising customer experience and perception in the process. Outlet stores would pump up margins, clean up Macy’s in-store image and help brands maintain equity. I hope Macy’s goes from exploration to action, pronto!
Like my fellow Midwesterner from Detroit, I too thought Macy’s was an outlet store. Chicagoans think of Macy’s more like Sears or Kohl’s. Bloomingdale’s might make more sense.
People shop Nordstrom’s Rack or other brand name outlets because of the cachet of the name, lower prices, and quality products. If Macy’s plans to attract new consumers they need to have a cachet about their name, really low prices, and high-quality clothes. They have none of these. Outlet stores are not a good idea for them.
Bloomingdale’s maybe, Macy’s no way. Macy’s already has EDLP, and plenty of discounting. I can’t remember the last time I bought something there full price. They would be smarter to spend the money on customer service enhancements in their stores. And I don’t mean more self-service customer service either. Finding an associate that isn’t stuck behind a cash register with a line is nearly impossible on most days. And fitting room service, where the buying decision is being made; non-existent.
Again I say; the non-discount retailer needs to differentiate on something other than price! That leaves product and service. Macy’s is addressing the product category with their My Macy’s initiative. Service is where they really need to step it up.
Customers generally have lower expectations about service, merchandise displays and nice dressing rooms at outlets, so this may work well for Macy’s. I wonder if they are thinking of converting some of their existing stores to outlets rather than acquiring even more real estate. However, the article said that Macy’s has lost men as customers and needs to regain them. From eyeballing shoppers in outlets (especially at outlet malls) isn’t outlet buying more a female, girls-day-out type activity?
It seems to me that this comes back to the department stores, and Macy’s ability to execute and manage inventory. Granted, many retailers have found themselves having to chase sales down in order to bring inventories into line, but this has been an on-going issue at Macy’s.
The challenge for vertical brands is managing the pipeline. They require an outlet for their goods, and their brand lends itself to outlet stores. Macy’s isn’t a brand, in that sense, it’s a department store. To the degree that they have built their PL, it’s still under the Macy’s banner.
Macy’s can open outlets, and they’ll sell goods. But it seems to me that the more cost effective, and profitable, approach to take is to get a better handle on their inventory management.
Outlet stores generally work when there are substantial numbers of wannabe shoppers. Nordstrom has them, so do Neiman and Saks. I am completely unconvinced that Macy’s has them. Are these supposed to be JCP or Kohl’s customers who would really rather shop Macy’s left overs? Comments about systems and processes made by others are also dead on. It took Nordstrom’s a lot of time and a lot of effort to get The Rack right (which it still isn’t completely) from an operational performance perspective. Setting up outlets as dumping grounds for unsaleable merchandise is NOT a viable strategic initiative. One of the reasons The Rack worked AT ALL initially is that Nordstrom at the time took markdowns exactly twice a year. So there wasn’t the option to be a clearance shopper at Nordstrom. That was the origin of the Rack customer.
Macy’s HAS a clearance shopper. They have a well-educated, well-trained, and dedicated clearance shopper. I don’t know the numbers, but I’d guess that upwards of one third of all unit sales in apparel come after the initial markdown. May even be closer to 40%. This, as they say, is a problem.
Macy’s needs no distractions, and outlet stores would certainly fit that description. Macy’s and Bloomingdale’s are heavily promotional, every day of the year. Clearance merchandise is a great traffic driver. Moving merchandise from regular department store locations to outlet locations won’t be profitable. Why bother?
Why add extra real estate expense if the merchandise can be liquidated in current locations? If excess inventory is that much of a problem, perhaps purchases should be made with more realistic stock-to-sales ratios.
I agree with Mr. Lilien and Mr. Seesel; Macy’s is not an aspirational entity and doing away with markdowns inside of their stores will likely drive customers on to JCPenney and Kohl’s, who are both better managers of inventory, and better at logistics, it seems, as well. Perhaps a portion of some of the locations in less affluent zip codes could be turned into “in-store centers of clearance”–at an increased markdown of material that is already usually incredibly marked down upon actual sale. This should not be seen anywhere near more affluent zip codes as Macy’s will lose any possible credibility it may have.
Actually obtaining further real estate for more stores–which Macy’s definitely does NOT need–and then attempting to deal with the logistics and expense of moving and managing that merchandise, is a complete distraction that they can not afford now or in the near future. Bloomingdale’s would not have such great potential either because of the cross over of the private brands that exists between the two divisions. For example, finding a great reduced Armani shirt at Last Call by NM at a great price–a win; finding reduced John W Nordstrom dress shirts moved on to the Rack and reduced–a win; finding an INC dress from Bloomindale’s at the (Bloomindale’s) outlet–but more expensive than a new, current season INC dress offering at Macy’s–or potentially even Bloomingdale’s if they continue to have sales–not such a win. Focus would be very important and Macy’s seems to have problems in this regard and they need NO further distractions.
The definition of insanity is constantly doing things the same way, but seeking different results. I worked for MCO in the ’90s. MCO stands for Macy’s Close Out, it was a DISASTER. I opened a couple of stores for them and then was the General Manager for one in Niagara Falls, NY. The pricing strategy was a mess, no matter how many times you tried to explain it, the customers did not get it. The merchandise mix was constantly in a state of flux. One month you had more infants and lingerie than you could handle, the next month you had none. We were trying to sell shorts and tanks in Niagara Falls during the dead of winter, with very few coats, sweaters, hats, gloves, etc.
Their buyers have no discipline, are arrogant, and just not wise business people. They really need old guys like myself who know how to merchandise, but they prefer the young punks. Their choice; I would never work for them again anyway.