Before we get to Macy’s knocking Q1 out of the park, or blowing past many of the street’s estimates, let’s contemplate the real win, the longer-term vision that results in the numbers.
One of my wiser business school professors made a point that has stuck with me all these years (too many to expose), and it’s more prescient today than ever (which also tells you he was way ahead of his time). He said that perhaps the most serious impediment to sustainable growth, particularly for giant publicly owned corporations is “short-termism.” This disease creeps into the mindsets of most of the CEO’s running these companies as they frantically race to achieve compounded growth and profits every quarter. This pressure, largely driven by Wall Street and shareholders, results in CEOs making short-term decisions in order to generate the so-called quarterly numbers. And these short-term decisions are typically tactical. Over a period of enough quarters focused on veering away from the positive long-term strategies, the business will ultimately fail to make the numbers. It will hit a wall and collapse.
On the other hand, for a business that focuses on a long-term vision with the strategy and implementation to get there, the numbers and success will naturally follow.
Having stated the pitfall of short-termism, don’t confuse financial short-termism with the need to achieve the operational long-term vision with great speed or, in the very short-term. Of course, Robin Report readers understand this major point and realize that “short-termism” is a vortex that sucks a lot of businesses down. Heaven knows I’ve been pounding this message in for years. But it’s worth repeating, particularly in this dog-eat-dog, hyper-competitive environment, now incredibly exacerbated by the technology revolution and ecommerce.
Macy’s Is No “Short-Termer,” Yet
In my opinion, at least for now, I don’t believe that Macy’s CEO Jeff Gennette, President Hal Lawton and their teams have become victims of “short-termism.” Sticking to their longer-term strategies and successfully implementing them has resulted in “out of the park” numbers for Macy’s 2018 first quarter.
With a little help from an improving economy, increased tourist traffic, moving their Friends and Family promotion from Q2 to Q1 and comparing the numbers to a miserable Q1 in 2017, Macy’s reported Q1 net sales of $5.54 billion, an increase over Q1 of last year of 3.6 percent, with comp store sales increasing 4.2 percent (on an owned plus licensed basis). And even estimating the effect of moving Friends and Family from Q2 to Q1, the comp sales would still have risen by 1.7 percent, well above the FactSet consensus of 0.7 percent, estimated by MarketWatch. Operating income increased nearly 8.7 percent over last year to $238 million, which was about 4.3 percent of sales. And net income nearly doubled to $139 million, up from $78 million during Q1 of 2017. The FactSet consensus for top-line sales was $5.43 billion, which Macy’s surpassed by more than $10 million. And the company’s earnings per share was 48 cents, 12 cents higher than the FactSet consensus of 36 cents.
According to the Q1 results, Gennette projected annual comp store sales in the 1 to 2 percent range, a one-point lift from the prior guidance, and he anticipates annual earnings per share will be in the $3.75 to $3.95 range, up $0.20 from the prior guidance.
The First and Most Important Perfect World Strategy
One, rather obvious and vanilla comment made by Gennette on the analysts call struck me like a nuke. He said, “We are maintaining a healthy inventory position, which helped us deliver improved gross margin.” And so it did. However, In a perfect textbook world, there would be zero inventory, right? Macy’s would flow the desired product, personalized for a specific consumer, where, how and when they want to pick it up or receive it, and how often, as well as what kind of frictionless experience they expect. This flow of goods is demand-driven, not by the antiquated forecast-driven model, but by a seamlessly integrated, de-siloed, shortened, fluid and agile value chain from creation to consumption.
This is the “perfect world” strategy I believe Gennette’s vision rests on.
Given the power of AI and machine learning, this “perfect world” strategy is achievable. And if one understands Gennette’s initial priority moves, along with what he has been communicating, then, in my opinion, one would realize that this is indeed his perfect world strategy. Simply, getting into the hearts and minds of each customer via AI and machine learning to mine their desires and expectations, Macy’s then builds or reshapes their entire value chain to implement this perfect world strategy.
At the end of the day, this strategy turns everything else into tactics.
The Initial Priority Moves
One of the major internal moves Gennette made was to de-silo merchandising across all categories formerly headed by many chiefs, now to be consolidated and run by one Chief Merchandising Officer, Jeff Kantor. The other major move was in hiring Hal Lawton as the President of Macy’s. Lawton comes with heavy digital and technology experience, having been an SVP at eBay, NA where he oversaw marketing, merchandising and consumer selling. And prior to that, he developed Home Depot’s ecommerce business and built it to nearly $2 billion.
These two major moves sent a loud and clear message to me. In my opinion, Gennette, having spent many years in Macy’s merchandising fiefdoms, understood that the antiquated, sluggish processes would not hack it in the new world. Agile, rapid and more fluid decision-making is required to provide the today’s young, tech-armed consumers with more newness, and more often. I know Gennette gets it.
And I believe Hal Lawton is another piece in Gennette’s plan to turn the proverbial battleship into a speedboat. I have often outlined the demand-driven value chain model vs. the old forecast-driven model as the winning model. However, it only works if shopping behavior and demand can be tracked and responded to in real time, as well as projected into the future based on the science of machine learning. Lawton’s technology and digital background brings this capability to the table. These skills matched with a streamlined, more agile merchandising organization begins to deliver the localization and personalization of products, services and experience across Macy’s fleet and online business.
In my view, the perfection of this strategy is the real game changer. The first tier of customers that Macy’s is focusing on is the most loyal 10 percent who account for over 50 percent of Macy’s revenues. Obviously not only are they the low hanging fruit, if Macy’s can drive personalized products and experiences to this group, they will visit more often, spend more time shopping as well as spending more.
Gennette answered a question from an analyst on the call regarding curation, “…hyper curation at a brick-and-mortar level is datable in format. It’s really going to be the crossbreed of art and science and great merchants to understand what’s ahead. But then, also look at past history. And to look at the particular community of that store and make sure that we are sorting appropriately.” So, in addition to driving localized store assortments, he underscored online potential, which by the way, is much more data-rich and can be mined more quickly. He also emphasized their new vendor-direct program, saying, “… on macys.com they (customers), will have access to an endless aisle curated through personalization. In the first quarter, we started the vendor-direct expansion and expect to have it fully underway by the fall season.” This sounds to me like a Macy’s branded marketplace. Genette continued, “Endless aisle is a long line. And where vendor-direct is taking us is the opportunity to massively expand our SKU counts online and then use data to hyper-personalize that at a customer level. So, we are in the beginning stages of that both in expanding of the (SKU’s) – right now we are at about 6:1 of online SKUs to an average store. You’re going to see us take that ratio much higher and you’re going to see us use data to then personalize that messaging to a customer in the future so that it’s also curated like the brick and mortar experience would be.” So, these are the beginnings of the perfect world long-term strategy.
In the meantime, there are five sub-strategies that I believe are working as enabling concepts to get to the ultimate vision.
- Macy’s Star Rewards loyalty program includes a “platinum level” for the most valuable customers, who in fact have been spending more since its launch in October 2017. They have a gold and silver level as well, which they are starting to see improvements in. And they just launched the second phase of their loyalty program, allowing customers to participate without having a Macy’s credit card. It’s called the bronze tier. There are no spending qualifications and this program is open to all customers no matter how they pay.
- Macy’s Backstage off-price model, which is built within Macy’s full-line stores, has been successful enough that they will open about 100 additional locations in 2018. In the first quarter, they opened 18 Backstage locations, and expect to open about 40 more in the second quarter. They will be expanding Backstage to some of their premium malls and to the West Coast for the first time. Macy’s also announced that they are opening a new distribution center in Columbus, Ohio dedicated to Backstage, which will allow them to move merchandise to our Backstage locations faster and with more flexibility.
Backstage is a unique model as a store within Macy’s store. Other outlet models are stand-alone stores, like the Rack, Nordstrom’s offspring. Some would say there is a danger in customers either making it a destination and not wandering into Macy’s for impulse purchases, or for loyal Macy’s customers finding like products in Backstage, thus leaving behind their loyalty to the Macy’s brand. I’m sure the leadership is monitoring those issues.
- The third initiative, and emphasized above, as looking much like the building of a Macy’s branded marketplace, they are expanding their vendor-direct initiative. They expect to have it fully underway by the fall season.
- Macy’s is focusing on store pick-up, offering more options for pick-up and delivery including the expansion of Buy Online Pickup in Store and the implementation of Buy Online Ship to Store, or what Macy’s calls BOSS. They are also rolling out extra service counters, to provide more efficient, convenient and easy pickup. By August, these will be in almost every single store.
- Macy’s “Growth 50.” Macy’s selected 50 stores in 2017, to innovate and re-imagine an elevated shopping experience. Macy’s is now implementing the best of what they tested in 2017 from merchandising strengths and strategies, more staffing in key areas, facility upgrades as well as local marketing plans.
As a part of this initiative, they have broadened their vision to include ideas about how to improve the customer experience. Accordingly, they recently acquired STORY, a concept store in New York City. The space reinvents itself every six to eight weeks, highlighting new themes that bring new customers in and keep existing customers coming back to see what’s next. Gennette said, “We are not in the commodity business. We are in the experience business and Rachel Shechtman, who is STORY’s Founder and CEO, is now Macy’s first Brand Experience Officer. Rachel has a clear vision of how merchandising and marketing strategies come to life in the store and we are very excited to have her and the STORY team join us at Macy’s.”
Along with these initiatives, Macy’s is introducing new technologies to eliminate friction and to improve the shopping experience on their mobile app and in stores. One pain point for customers is the checkout process. Now in test mode, by year-end, customers will be able to scan a product with the Macy’s app, pay with a store credit card and then go to a dedicated counter to remove security tags. They call it Scan. Pay. Go.
They are also using virtual and augmented reality in the furniture space. It uses a 3-D imaging feature on Macy’s mobile app that allows customers to see furniture in their actual living spaces. They’ve piloted VR in three of their furniture stores and found it significantly increased transaction size and also reduced returns. Using VR allows for a full range of furniture in roughly half the space. So, they are scaling this technology to 60+ doors this year.
Strategy Is One Thing, Execution Another
We’ve all heard this before. While Macy’s new leadership gets kudos for rapidly developing its strategies, and while it appears that their early implementation is getting positive results, the real payoff of a fundamentally transformed Macy’s is still down the road. Yes, they need to continue to move forward like a speedboat, but they must not fall victim to short-termism just to make the numbers. That would signal the beginning of the end.
My final and most important comment is that the most impactful opening moves made by Gennette, was in reorganizing to get the required leadership skills in place to make it into the new world. And above all else, his vision of “personalization/localization” — first, getting into the minds and hearts of Macy’s consumers to find their individual desires and expectations, and then building the entire value chain to satisfy those desires, is the toughest, yet most necessary to achieve. If achieved, it turns all five strategic initiatives into tactics. If the leadership perfects and implements this process, then Macy’s will speed its way into the new world.