Please note: This article was published before the CEO changeover at Macy’s.
Thinking Out of the Box, Literally
Last November Macy’s announced a collaboration with Brookfield Asset Management and an “out of the box” strategy to address 50 owned and ground-leased stores and associated real estate and property in malls not owned by major mall owners. Former Macy’s CEO Terry Lundgren said in a WWD interview, “We’ll look at the land first and imagine what could be there. That’s very different from selling or just renovating. We have a much broader view of the longer term. These 50 locations that we’re looking at are just a goldmine for development.” Lundgren’s statement is analogous to Macy’s viewing the space of each of those locations as blank canvases waiting for the painter to imagine a complete picture. The new picture has one objective: to delight consumers (and not to delight the short-term, “value-depleting” owners of a REIT). Over several years, Brookfield will be imagining the new pictures for these locations. It’s what they do best. Macy’s will approve along the way until the final plan is set.
The creative process for the picture then begins. Demolish, renovate, add, delete, change. Build go-to entertainment and lifestyle community shopping villages, including residential and office space. Lundgren mentioned a variety of possibilities, including adding other stores and restaurants and replacing parking lots with office parks and hotels. Macy’s CFO Karen Hoguet offered one hypothetical idea: “We could, on an eight-acre property, demolish a stand-alone furniture store, create 100,000 square feet of retail, a parking garage and possibly a residential tower and move the furniture operation back to a Macy’s mall location.” I expect the real imagining will be even more creative.
Wow, I thought to myself. When is the last time I heard from any growth-obsessed, Wall Street-hounded retailer utter the words “long term,” much less “we have a much broader view.” And there’s more: “…we’ll…imagine.” Lundgren actually stated that, prodding Macy’s to use its imagination, not only to unlock value, but to add value through strategic long-term creative thinking and fundamental innovation. Wow, again!
Of course, new CEO Jeff Gennette will be taking the baton and moving aggressively forward.
Bravo for Not Succumbing to a REIT
More than a year ago, activist investors assessed Macy’s real estate assets to be higher in value than the retail business. They pushed for Macy’s to monetize those assets by separating their value into a REIT. In the short term, REITs add shareholder value. In the long term, the very reason the REIT was formed (real estate assets worth more than the operating business), the tendency is to protect and leverage the most valuable part of the whole, knowing that if the operating business falters or continues to stumble along, the REIT can always sell off the more valuable real estate assets. In the meantime, the REITs collect rental fees from the operating businesses, further depleting the operating funds of those businesses.
Brilliant financier Eddie Lampert, and brilliant real estate mogul Richard Baker have both unlocked the real estate value of Sears/Kmart and select HBC real estate by forming REITs. I have often suggested that as the operating businesses continued to decline (Sears/Kmart), or were merely growing (HBC), that they would both revert to their brilliant innate skills (certainly not in retail) in finance and real estate. You can check out my article from 2014, “Richard Baker Is Smarter than Eddie…or Is He?” on our website. The REIT process would become their primary focus. The Q2 earnings this year dropped at Saks Inc., reportedly because of the rent they are now paying for Mr. Baker’s (and others’) REIT. Many experts noted the demise of Mervyn’s retail stores due to the REIT that Cerberus formed, which eventually squeezed the final bit of cash out of the dying retail business. I, too, believe the same death management process is happening to Sears, and is just waiting in the wings for the HBC businesses.
The Strategic Message for the Industry
Terry Lundgren and his successor, Jeff Gennette, believe in the long-term sustainability and growth of the Macy’s brand, not as it is today, but as it can be imagined into the future. They don’t believe in unlocking value for short-term gains. They believe in unleashing the long-term greater value of the Macy’s brand by creating new value that is being imagined. This new value will delight more consumers who will come to their brand to buy more and to buy more often.
The timing could not be more important to develop and perfect this strategy. Macro headwinds abound for the retail sector, even more so for department stores. There is seemingly no end to sluggish sales. Consumers’ hunger for stuff is giving way to experiences. Store traffic continues to drop, while also shifting to online. Stores are more challenged than ever to find ways to lure consumers. Outlet stores and off-price models are accelerating as another form of discounting, which also threatens brand integrity. The importance of brands in the purchase decision is losing to individual and exclusive selectivity by more knowledgeable consumers. All retailers are in the painful, and very complex process, of integrating their online and brick-and-mortar models. These are just a few of the major obstacles.
The message to the industry: shareholders will follow the consumers. Current shareholders will imagine with the brand, and they will retain their equity as that brand increases in value. New shareholders will invest in the brand and they too, “will buy more and will buy more often.”
Imagine unlocking the true potential of your space to successfully transform your business in the 21st century.