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.

References

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