Liz Dunn was on vacation in East Hampton when she was invited to an impromptu business meeting. Away from her work wardrobe, she stopped at a Macy’s in Commack, Long Island, to buy a basic pair of black heels.
“The shoe department was pretty uninspiring,” said Dunn, a financial analyst. She searched the aisles for more than 30 minutes, she said. No black heels. She settled on a pair of gold Michael Kors pumps. They were 70 percent off, but Dunn didn’t care. “I would have paid full-price for a more acceptable option,” she said.
“The world’s largest store” is dying. Macy’s triumphed in pre-Internet days, when people drove to malls, dedicated time to the dressing room, and had fewer options. Today people browse though the Internet’s infinite selection and check out with a lift of the index finger.
Macy’s always boasted items that were affordable and stylish. In a 1902 advertisement, it wrote, “We sell goods cheaper than any other store,” and “Our prices will always be the lowest.” But to keep that promise today, with e-commerce behemoths like Amazon in the picture, is proving impossible. Nevertheless, Macy’s is still trying to portray itself as the place to score a deal.
And there’s no doubt consumers are attracted to the sales.
But these deep discounts are eviscerating the company’s profit margin, trying its vendors, and leaving some customers desensitized to the promotions or flat-out turned off by them. “Most everything at Macy’s is on sale, all the time,” said Michael Cohen, director of retail at Columbia Business School. “They are sawing their own legs off.”
The company’s stock is down 40 percent this year, from $41 to $24. Last summer, it shuttered 100 locations. Other department stores, like Sears and JC Penney, have also seen their stocks tank in the last few years. They’ve also relied heavily on discounts to fight their waning appeal.
Profit margin erased
In 2015, Macy’s launched an off-price store called Backstage. The initiative is supposed to be a stop between a department store and an outlet, and attract bargain-seekers by offering a 50 percent discount on almost all merchandise. “We believe that this strategy, which offers simplified pricing, a treasure hunt environment, and lower price points is resonating with many of our customers and adding to the Macy’s experience,” Macy’s CFO Karen Hoguet told investors during a recent call.
Today there are 45 Backstage locations. Macy’s reports that sales are up 6 percent at these sites. But Macy’s sales overall have declined for 11 consecutive quarters. Revenue is down almost 5 percent from 2013. So while Backstage is booming, the department store is not.
Cohen compared Backstage to Nordstrom Rack, an off-price version of the higher-end department store. Nordstrom had hoped that its younger customers would shop at the more affordable Rack, and then move up into Nordstrom as they grew older and wealthier. Many of those younger people never grew into Nordstrom. Instead, they stayed shopping at the Rack. And, many former Nordstrom customers transferred their shopping to the Rack. The same dynamic is at play at Macy’s, Cohen said.
“This Backstage idea is clearly siphoning off business from their underlying core,” Cohen said. “I don’t think a customer separates Backstage from Macy’s. So if Backstage has a really great value on this winter parka, what kind of legitimacy does that offer a customer who’s shopping at Macy’s and paying more?”
Macy’s has an even deeper discount line than Backstage, called Last Act. Bright red posters are pasted to the walls. In bold font, they read: “LAST ACT! SAVE 50%-75% OR MORE!”
On a Saturday afternoon in December, at the Herald Square Macy’s, the Last Act section was packed with people looking for a deal. They sorted through the cluttered collection of shoes, trying to find their size or simply a pair of the same shoes.
As a growing percentage of Macy’s sales come from its discounted lines, its profit margin has all but disappeared. Five years ago, it had a profit margin of 8 percent. Today it’s at less than 1 percent.
“A lot of that gross margin erosion has been paid for by the vendors,” Cohen said. “And the vendors are running out of margins with which to offer up to Macy’s.”
Higher-end suppliers back away
The shelves of china, the perfume counters, the vase displays, the Oriental rug departments. Macy’s reputation for low prices was appreciated by customers because they were getting quality items at the same time.
But as Macy’s aggressively slashes its prices to move its merchandise, many of its well-known vendors are put in a hard place. “If you’re running a great brand, you’re generally not interested in competing on the basis of price,” said Oliver Chen, retail analyst at Cowen.
Last year, Michael Kors pulled out of most Macy’s locations. “We think that this is critical to protect our brand image,” CEO John D. Idol told investors after the decision. “As you know, that channel has become very promotional.”
Coach, Ralph Lauren, and Kate Spade also signaled they’d be reducing their presence in department stores, including Macy’s. Tailored Brands, a rental suit company, ended its relationship with Macy’s this year, citing disappointing earnings.
On top of Backstage and Last Act, Macy’s bombards its customers with coupon options. And it recently launched a Stars Reward Program that offers additional discounts for loyal customers. Those efforts don’t just further narrow Macy’s profit margin and pressure vendors to lower their profits. They frustrate people.
“We have confused our customer with very complex pricing,” Macy’s CEO Jeffrey Gannett admitted to investors last summer.
All of these simultaneous discounts require customers to pull out their calculators just to figure out what they’ll be spending on a shirt or tie. Macy’s has had to install “price checkers” around its department stores, in which a computer will determine an item’s final price through its many layers of discount.
In addition, these discounts are so common that they’ve lost their purpose: to pressure people to buy an item at that moment. Consumers used to rush into Macy’s at the announcement of a sale. Now such an announcement is commonplace, and consumers think if they miss this sale they’ll catch the next one. “Macy’s is promoting all the time,” Cohen said. “And there’s no more calendar left.”
More survival than strategy
In many ways, Macy’s discounting strategy makes sense. A recent report found that 80 percent of millennials consider price when making a purchase.
When Macy’s competitor, J.C. Penney rolled back discounts in 2012, its sales plummeted. People just weren’t buying. Still, most retail stores across the country have discount advertisements in their windows and across their stores. That’s because less people are going into stores. When they do, retailers want to make sure they didn’t just come in for a stroll down memory lane.
But the reliance on discounts reveals that Macy’s, along with its competitors, is more focused on clearing its shelves than planning its life in the digital age.
“The department store genre itself is basically becoming an artifact,” Cohen said.