The high-end chain is crucial to the department store's turnaround.

By Phil Wahba
October 4, 2017

If you want to understand Macy’s m ongoing sales slump, look past the market share lost to Amazon.com amzn , the explosion of off-price chains like T.J. Maxx, and slow mall traffic to see one of the most devastating culprits: Macy’s shrinking status as a leading purveyor of beauty products.

Beauty is one of the only categories in retail showing consistently strong growth. But Macy’s has been losing ground at the cosmetics counter to leaner, hipper competitors, including strip-mall stalwart Ulta Beauty ulta and Sephora.

Now, as it looks to end a streak of 10 quarters of comparable sales declines, Macy’s is more forcefully taking advantage of a weapon it acquired two years ago: the fast-growing, upscale Bluemercury chain of neighborhood beauty stores and spas. In addition to 155 stand-alone Bluemercury stores, there are now 20 full-size Macy’s (out of 670) that incorporate one of the brand’s shops, with more to come.

Macy’s CEO Jeff Gennette has made it clear since taking the helm in March that Macy’s recovery in beauty is a centerpiece of its turnaround effort. And Bluemercury, which Macy’s bought in 2015 for $210 million, is equipped to help Macy’s win over younger shoppers, drum up traffic with its spa services (which generate 20% of sales), and figure out how to better use tech and social media to connect with new customers. The beauty stores can also help Macy’s add more exclusive high-end products to its line-up alongside classics like LaMer and Chanel, at a time when Ulta is also adding to its upscale assortment with products like Estée Lauder Cos’ el MAC.

“We are gushers of innovation,” Barry Beck, Bluemercury co-founder, tells Fortune in an interview.

Beck acts as Bluemercury’s operations chief; his wife, Marla, serves as CEO. After giving us a tour of the Bluemercury store in Manhattan’s TriBeCa district, he lists some of the ways in which the chain is breaking new ground. Bluemercury has a pipeline of dozens of new products a year at any given time, developing showcase proprietary brands that include buzzy products like M-61 skincare and Lune+Aster cosmetics. He boasts about features such as Bluemercury’s WiFi-enabled artificial intelligence mirrors, which allow a customer to get real-time opinions from friends and family about potential purchases. The store is experimenting with new shipping methods that could see a bike messenger meet up with a customer on the street to ensure extremely quick delivery times.

Bluemercury was founded in 1999 by the Becks as a contrast and rebuttal to the growing obsolescence of department store chains’ antiquated way of selling beauty products. That model involved having merchandise separated by brand on sprawling store floors, while sales associates controlled the shopping experience, doling out samples to customers from behind high counters. The department stores’ outmoded approach helped create a huge market opening for Ulta and Sephora, which display merchandise by function rather than by brand and happily let customers play with items.

A Bluemercury shop within a Macy's department store.
Macy's

Bluemercury’s idea was to have smaller stores in city centers, closer to shoppers’ homes, and focus on spa services and product expertise, while offering in essence a high-end version of a drugstore’s beauty area, where customers have more freedom to browse. Bluemercury doesn’t disclose its financials, but Barry Beck told Fortune that comparable sales are rising by a high double digit percentage every quarter. Even as it thrived, change has come glacially to Macy’s and other department stores, while sales slumped. (Macy’s is finally testing some “open-selling”, or self-service in non-retailer language, for emerging brands or trying out letting associates sell multiple brands, like Bluemercury’s does, at 250 stores.)

Accelerating the pace of change

When Macy’s brought Bluemercury, it brought the smaller chain enormous distribution firepower, greater research and development infrastructure and a marketing apparatus to help it ramp up more quickly. But the acquisition was also intended to speed up the department store’s own metabolism. Beck sees parallels in Walmart‘s purchase of jet.com: Both deals were intended to accelerate the buyer’s pace of experimentation.

The Becks also bet, correctly, that giving more intensive training to store associates would make those staffers the go-to beauty experts for Bluemercury clients. And they intuited that salon services such as Brazilian waxing, facials and hair treatment would widen Bluemercury’s appeal as a physical destination. On top of bringing customers to stores, spa services are big businesses in their own right, accounting for as much as 20% of Bluemercury sales.

That is part of what Gennette has said he is looking to replicate at Macy’s. “The hope is that we’re going to have an actionable model to scale into a lot more Macy’s stores,” Gennette told Wall Street analysts in August. He also recently told Fortune that Bluemercury and its services would be a key part of the next phase in Macy’s roll-out of its new, higher-end focused loyalty program.

In the meantime, Bluemercury continues to expand apace. Bluemercury is quickly building up its fleet in markets it already operates in. Given the relatively small average size of its stores (2,600 square feet), the chain has found that locations in the same market feed each other. Bluemercury recently opened a massive flagship on Sixth Avenue in the heart of the Midtown Manhattan business district, a departure from the chain’s focus on residential areas within cities.

As Macy’s tries to stand out from its peers and shake off the “ocean of sameness” blahs that have hurt department stores, it’s clear that Bluemercury offers lessons to absorb. Beck says stores are viable if they are places where you can be educated and entertained. In the case of Bluemercury, the education and entertainment can come from learning about new products and beauty trends, whether through osmosis in conversation during a spa service or through direct advice from a favorite store associate. That kind of experience could help restore Macy’s aura as a “fashion authority,” in Gennette’s words, and dispel its image as simply another big box for retail price-cutting.

“The Bluemercury customer doesn’t want discounts, she wants to be first,” as Beck puts it.

The success of Bluemercury has been such that one Wall Street analyst recently surmised that as a standalone it could be worth $1 billion, or one-seventh of Macy’s current stock market value . That sounds fanciful, but it is clear that Bluemercury is an important piece of Macy’s strategy. The high end beauty boom is expected to last: Euromonitor International projects that the $27 billion U.S. market for high-end beauty products will grow 4% a year through 2020.

Beck says the company could “easily” double its store count within a few years even as it rolls out more shops within Macy’s, and looks to open more stores in New York, Washington, D.C., and Boston, while expanding into new U.S. markets. And Bluemercury is homing in on men, who are behind 20% of sales already, soon launching its first house brand for those customers.

“We’re going to fill out all these markets,” he says.

SPONSORED FINANCIAL CONTENT

You May Like