In an effort to refocus resources on high-performing stores and improve its online shopping experience, Macy’s announced recently that it will close 100 stores, thus reducing the retailer’s total brick-and-mortar footprint by about 15 percent. The company will shutter these stores—whose specific locations they have yet to identify—by early 2017.
While the Macy’s announcement comes at a time when many other retailers are closing shop, this is big. For perspective, the department store will close more stores in 2017 than it has in the last six years, a period in which 90 doors closed. Also, Macy’s, despite its recent struggles, has been considered one of the better performing companies in the retail sector. This announcement sent shockwaves through the industry and will likely have other retailers reconsidering their long-term real estate strategies.
The company’s dramatic change in channel strategy is indicative of two key retail themes.
The first is that e-commerce continues to change the game faster than players heavily vested in brick-and-mortar can keep up. Foot traffic at physical stores—particularly at mall stores—continues to drop as consumers increasingly shop online. And even though Macy’s e-commerce channel has grown at a compounded double-digit rate over the past 15 years, this growth hasn’t been enough to take the pressure off declining same-store sales, which are expected to fall between 3.0 and 4.0 percent this year. Investments in improving the online shopping experience are a must, but so is retooling the physical store experience to capitalize on opportunities within the company’s real estate holdings.
A second key theme relates to vacancy. When a retailer with a behemoth footprint pulls out of a center, it leaves the mall operator with a gaping hole to fill. Operators and developers will need to rethink these former anchor spaces in new and existing centers. While the loss of a Macy’s is painful enough on its own, the cascading effect it might have on the overall viability of a center is highly significant, particularly as other anchors, like Sears and J.C. Penney, are also closing units.
Macy’s press release made mention of talks with various potential partners in rolling out joint ventures and strategic alliances to better utilize locations where real estate value exceeds the value of its existing use. We’ve seen other retailers economize through this approach. Sears has sold off stores to the fast-fashion retailer Primark at select locations in the Northeast. Sephora, Hallmark and Disney operate mini-stores with their own staff inside hundreds of J.C. Penney locations. Staples is partnering with an office-sharing start-up to open communal workspaces at a number of locations. If Macy’s wants to avoid closing more stores, it might need to take on a roommate or two.
Branded retailers are also feeling the heat. Michael Kors is pumping the brakes on its department store sales—more bad news for Macy’s—in an effort to decrease promotional sales and ramp up full-ticket purchases. Coach has also announced a significant pullback from the department store channel. Ralph Lauren, whose North American sales have seen a steep decline compared to last year, plans to lay off 8 percent of its team and close more than 50 stores.
No matter how you spin it, closing stores is tough. As CEO Terry Lundgren put it, operating in a fast-changing world “involves doing things differently and making tough decisions.” This is likely the beginning of a major shift in the world of retail as we know it. Macy’s is deserving of credit for making a move of this gravitas to right the ship. But in the choppy seas of physical retail, retailers must move faster in order to stay afloat.
Neil Stern is a senior partner and Brian Dondanville is a consulting associate with Chicago-based retail consulting firm McMillan Doolittle.