Macy's Turnaround Strategy: Real Estate and Omnichannel Retail

Executive Summary and Introduction

The retail industry is undergoing fundamental change in how businesses operate. Advances in technology, product offerings, logistics, and data have all created significant headwinds for incumbent retail players. From a technology perspective, the internet has provided consumers with far greater pricing power than in prior business cycles. Consumers now have many more options to satisfy their demands, and as a result retailers have lost significant pricing power over their product offerings. The advancement of technology has also largely eliminated the information asymmetry that allowed retailers to prosper for so long. In addition, as more competitors enter the market, they are no longer restricted by geographic or logistical boundaries (Agrawal, 2009).

Changing consumer shopping habits have also created large shifts in how products and services are delivered. Customers are increasingly willing to shop online, and advances in logistics have allowed companies such as Amazon to deliver products within a single day in certain markets. The added convenience of shopping from home creates a compelling value proposition for emerging online retailers. These trends were exacerbated during the COVID-19 pandemic, as consumers rapidly adopted online shopping to mitigate health risks. During the pandemic, online retail sales surged as consumers sought efficient and low-cost solutions to their needs.

Due to these pressures, many once-powerful retail operations have gone bankrupt. JCPenney, Sears, Neiman Marcus, Payless, GNC, and Brooks Brothers are but a few of the many casualties caused by traditional retailers' inability to adapt to a changing environment. Many of these companies did not possess a sustainable competitive advantage that could allow them to compete effectively. Retailers with strong competitive advantages, however, have not only been able to hold their ground against online competitors — in many instances they have flourished. Low-cost producers such as Costco and Walmart have gained market share and are expanding into overseas markets. Other retailers such as TJ Maxx, Ross, and Burlington Coat Factory occupy a unique niche that is difficult for online retailers to dislodge. Still others have acquired emerging online retailers to gain digital expertise. Each of these strategies has proven viable by leveraging the retailer's particular operational strengths. To survive, retailers will need to adopt many of these trends and apply them to their current business operations.

As it relates to Macy's, the company has strong business elements that will allow it to compete more effectively while remaining profitable. First, it has one of the most recognizable retail brands in the industry. Consumers often view the brand favorably relative to peers. Events such as the Macy's Thanksgiving Day Parade and the Macy's Fourth of July Fireworks Show are hallmarks of American tradition. The company's flagship store in Herald Square, New York has become a tourist attraction and represents many of the best elements of American retail shopping. Likewise, the company benefits from an extensive and highly competitive real estate portfolio that can be leveraged in various ways to add shareholder value. Currently, the real estate portfolio is valued higher than the company's own market capitalization, meaning the market is heavily discounting Macy's store operations. All of these assets can be used to derive a strategy beneficial to all stakeholders — one that allows Macy's to remain a smaller, nimbler, and more competitive retailer; keeps retail employees employed; and ensures shareholders see the company's assets fully appreciated by the market.

Macy's and Agency Theory

Part of the role of the executive leadership team at Macy's is to increase shareholder wealth. This responsibility is directly correlated to the agency theory of strategic management. Here, executives — including the CEO and CFO — act as stewards of shareholder capital. As Macy's is publicly traded, its investors demand an adequate rate of return given the risk of their investment. Specifically, investors expect returns in line with or above those of publicly traded peers. Unfortunately, over the last five years Macy's stock has significantly underperformed, declining over 50%. For comparison, the S&P 500 rose 43% over the same period, resulting in a 93% performance variance.

This variance in performance is not entirely attributable to management, as periods of mass optimism or pessimism can cause a stock to decline irrespective of its underlying merits. However, in this case the market appears to be heavily discounting Macy's current strategy relative to its overall business performance. The company's annual earnings per share trend since 2008 tells a similarly troubling story. Earnings declined from a high of $5.10 in 2018 to a loss of $12.68 in 2021. According to the company's most recent investor conference call, Macy's attributed this loss to the overall impact of COVID-19 — as a department store, consumers did not need or desire to purchase clothing and apparel during lockdowns, and instead traded down to necessity items. Competitors with stronger strategic plans flourished during this same period. Taken together, five years of stock price decline and three consecutive years of declining earnings per share signal a deteriorating business model. While this has occurred, competitors such as Walmart, Costco, and TJ Maxx have gained market share. As agents of shareholders, Macy's executives must refocus on the competitive strengths of the Macy's brand in order to reverse these declining trends.

External Factors: Economic, Political, and Cultural

As mentioned in the introduction, the growing proliferation of the internet has ushered in a new era of commerce. As more individuals gain access to the internet, transactions, goods, and services can be exchanged without regard to geographic restrictions. The retail sector is no different: online sales growth is heavily outpacing brick-and-mortar sales growth. The trend toward online retail has been dramatic and sustained over the past fifteen years in the United States, with an ever-larger portion of total sales being captured by online channels. Notably, however, a majority of retail sales still occur in physical stores (Reynolds, 2000). As of 2020, roughly 79% of all retail sales still took place in a physical location. This data suggests that a strategy built on an omnichannel presence will be critical to the future of retail. Accordingly, the strategic focus of management should be to leverage superior retail locations and combine them with an unrivaled online shopping experience, allowing customers to be served however and whenever they wish without physical limitations (Dawson, 2000).

From a political standpoint, Macy's faces moderate tailwinds with respect to government intervention. The retail industry employs millions of Americans and is therefore a critical generator of economic activity. During COVID-19, the government provided three rounds of stimulus payments aimed at infusing liquidity into the economy so consumers could purchase goods and services. The government also provided grants to help keep retail-sector employees on payrolls and prevent layoffs. These policies, though helpful, are only temporary solutions and cannot be relied upon by the retail sector in the future.

Additionally, government policy has recently aimed to increase the federal minimum wage to $15 an hour, with several state-level officials introducing similar legislation. Historically, Macy's has paid lower base wages to front-line employees, with compensation supplemented by sales bonuses and commissions related to credit card sign-ups. These incentives can allow certain associates to earn more than their managers if their sales figures are high; in other cases, some sales associates earn well below $15 an hour. A higher minimum wage will therefore create a significant headwind in selling, general, and administrative expenses — costs that cannot easily be passed on to consumers, given that competitors already operate with razor-thin margins. In many instances, shareholders will effectively pay for these labor cost increases through lower profitability and reduced potential for dividend growth (Groothedde, 2005).

From a cultural standpoint, Macy's and retailers in general employ a diverse array of individuals. Retail jobs are often lower-paying but provide an entry point through which employees can gain valuable knowledge, skills, and experience. Macy's currently employs over 100,000 people, with significant diversity across its operations. As a global brand, the company also operates with a high degree of cultural sensitivity to the customs of the countries in which it does business.

The table below summarizes the key economic, political, and cultural factors discussed above.

Table 1 — Economic, Political, and Cultural Factors

Economic Factors: (1) High online commerce adoption rates; (2) Strong retail competitors seeking to take market share at the expense of profitability; (3) American retail is oversaturated and requires a reduction in physical space; (4) Consumers are purchasing less apparel and clothing on a per capita basis.

Political Factors: (1) Strong government desire to maintain high retail employment; (2) High appetite for intervention to support the retail environment during economic contraction; (3) Heavy emphasis on increasing labor costs to $15 an hour federally; (4) Movement shutdowns have exacerbated adverse retail trends.

Cultural Factors: (1) Macy's benefits from a very diversified customer, vendor, and employee base; (2) International operations provide the company with unique global perspectives.

References

Agrawal, N., & Smith, S. A. (2009). Multi-location inventory models for retail supply chain management. In N. Agrawal & S. A. Smith (Eds.), Retail supply chain management: International series in operations research & management science. Springer.

Dawson, J. (2000). Retailing at century end: Some challenges for management and research. The International Review of Retail, Distribution and Consumer Research, 10(2), 119–148.

Groothedde, B., Ruijgrok, C., & Tavasszy, L. (2005). Towards collaborative, intermodal hub networks: A case study in the fast moving consumer goods market. Transportation Research Part E, 41(6), 567–583.

Reynolds, J. (2000). eCommerce: A critical review. International Journal of Retail & Distribution Management, 28(10), 417–444.

Varley, R. (2003). Principles of retail management. Palgrave Macmillan.