Controversial

Macy’s Looks To China As Sales Slump In US

Macy’s second quarter earnings revealed the trend that many major retailers have been facing with a modern day, digitally driven customer base that’s going online more, and visiting stores less.

A preference for online, however, means more consumers are flocking to marketplaces and fewer consumers tend to stick to one favorite retailer. And the results from Macy’s earnings showed that the retailer is not immune from the trend.

Its chief executives were transparent about their feelings toward Macy’s sales dip and worse-than-expected earnings performance. They also gave some insight into plans ahead to boost digital initiatives, grow its loyalty program and get Macy’s back on the retail map.

"We are disappointed in our second quarter results, which were impacted by a variety of factors, both internal to the company and in the macroeconomic environment. We expect an improvement in trend beginning in the second half of 2015 based on a range of promising new strategic initiatives, including those initially announced in January, which we believe will transform our company in the years ahead,” said Macy’s CEO Terry Lundgren.

One initiative that seemed to cut into Macy’s overall performance for the quarter was the removal of its Family & Friends promotional event. The port slowdown that delayed shipments of merchandise was also a factor that was cited as contributing to the lackluster quarter.

“Moreover, throughout the first half of the year, overall consumer demand has been restrained in many of the categories of merchandise we sell, and the strong U.S. dollar has led to significantly lower international tourist spending,” Lundgren added.

Revenue for the quarter dipped to $6.1 billion, which was down from last year’s Q2 figures of $6.27 billion. Same-store sales for the quarter also fell 1.5 percent. Year to date, sales are also down 1.7 percent to $12.3 billion.

“We’re going to face the music when we have good quarters [or] bad quarters. And this was a tough one,” Lundgren told CNBC, later citing a dip in tourism as a reason for slow sales.

“The consumer didn’t shop in our categories to the degree that we thought the consumer would,” Lundgren said in the interview, noting that European, Chinese and Brazilian tourists “are not coming to America, and the strength of the dollar is impacting that.”

During the earnings call with analysts today (Aug. 12), Macy’s CFO Karen Hoguet shared some reasons she believes the company is seeing a sales dip, specifically citing the sluggish consumer economy.

“The overall growth in the economy is modest at best, and we are seeing customers gravitate toward restaurants, recreational services, health care and electronics — rather than to traditional general merchandise apparel and furnishing category,” Hoguet said.

She also spoke briefly about Macy’s omnichannel efforts and its impact on its earnings.

“We also had mentioned last quarter that there was a steeper than expected learning curve as our new ominchannel merchandising planning and marketing team learned how to maximize business in their new role. This is still a factor, but doesn’t rise to the same level it did when the new organization launched in the first quarter,” she said, providing a bit of optimism for the strategy.

“Our omnichannel strategies are working well, as customers increasingly shop and buy across multiple channels. We believe that our new organization structure is helping to accelerate digital growth which continued to be very strong in the quarter,” Hoguet said.

Speaking of retail strategies, the Plenti loyalty program was also mentioned as a potential bright spot for Macy’s, but Hoguet emphasized that it’s too early to forecast the success Macy’s will see from the program since it does take time for those loyalty points to accrue. She did, however, provide a few metrics about its growth at the retailer. 

“Plenti has launched very successfully. Macy’s has now over 7 million customers enrolled and we expected to generate incremental sales from these customers, as well as new customers who enroll in this program through other companies as points begin to accumulate and customers understand the value inherent in this loyalty program,” she said.

Outside of the earnings call, some initiatives to help boost sales growth — both short and long-term — provided by Macy’s include:

  • Accelerating Macy’s online business through integrated omnichannel buying and planning of merchandise, as well as more strategic placement of inventories in stores and online fulfillment centers.
  • Expanding same-day delivery markets, including a nationwide buy online, pick up in-store program.
  • Piloting the first six Macy’s Backstage off-price stores in metro New York City before the holiday season.

While Macy’s earnings didn’t perform as expected, the company did announced a joint venture with Fung Retailing to help Macy’s test its eCommerce abilities in China. This will also include a plan to allow Macy’s to sell its merchandise on Alibaba’s Tmall marketplace in late 2015. Net sales fell 2.6 percent to $6.1 billion in Q2 and net income fell 26 percent to $217 million.

Macy’s will own a majority of the joint venture, with a 65 percent stake, and Fung Retailing will own the remaining 35 percent. This plan entails rolling out an eCommerce pilot that will put Macy’s merchandise on Tmall Global by curating a Macy’s online merchandise assortment tailored for Chinese consumers — which will be fulfilled via Tmall’s logistics channels.

"By making Macy’s accessible in China, we have an opportunity to deepen our relationship with domestic and international customers and to grow sales. We have been closely following the development of the Chinese marketplace for many years and have learned that success requires that we have the right partners to help us navigate the unique needs and characteristics of consumers in China,” Lundgren said.

Because Macy’s already accepts Alipay on Macys.com and has partnered with Alibaba in the past, this concept of working cross-border for both companies is nothing new. Peter Sachse, Macy’s Chief Innovation and Business Development officer, commented: “We believe that, through the joint venture, Macy’s online presence on Tmall Global will give us insight that will serve us well in evaluating future international initiatives.”

From Fung Retailing’s perspective, there is also an advantage to entering the joint venture.

“The potential for growth is significant. While the Chinese online consumer is already one of the savviest in the world, there are untapped ‘white spaces’ to fill,” said Fung Retailing’s Executive Director Sabrina Fung. “There is demand for the quality and variety of power brands and authentic products associated with the world-famous name of Macy’s. Many Chinese are attracted to the American lifestyle, of which shopping at Macy’s is the ultimate symbol.”

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