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How Macy’s New CEO Plans to Stop the Bleeding

March 22, 2017, 11:00 AM UTC

After working at Macy’s (M) for some 34 years, Jeff Gennette is about to step into his dream job: On Thursday, he becomes chief executive officer of the iconic but imperiled department store chain.

Gennette, president of Macy’s and heir apparent for the CEO job since 2014, takes the reins at one of the most difficult times in the retailer’s history. Comparable sales have fallen for eight straight quarters, with another year of drops forecast by the company. Macy’s is closing 100 stores, and there is a growing, nagging sense that the department store retailing the chain has led for decades is passé.

As detailed in a Fortune deep dive last month, Macy’s, like most of its peers, is stuck in a rut of discounting, undifferentiated product offerings and consumer boredom. Many of its customers have defected to off-price stores like TJX’s (TJX) T.J. Maxx, nimbler retailers like Ulta Beauty (ULTA) and of course, (AMZN). There is even a Wall Street report projecting that Amazon will eclipse Macy’s as the top clothing store in the U.S. this year.

Gennette, a well-regarded merchant but still a Macy’s lifer, may seem a surprising choice for a company in dire need of renewing itself with unconventional ideas. Yet the 55-year-old is lucid in recognizing that he will have to rethink Macy’s from top to bottom to give it a new lease on life.

“We need a new playbook if we’re going to win again,” Gennette told a Bank of America Merrill Lynch investor conference last week. “We don’t have our heads in the sand.”

The retailer still commands a huge, loyal following: Gennette said 43 million people shop at Macy’s each year, and that 10% of those customers generate half of its $26 billion in annual sales. The retailer was early in seeing the importance of integrating its stores with its e-commerce efforts. And Macy’s continues to be an essential source of distribution for major brands like Nike, Levi’s, Coach and Ralph Lauren.

At the conference last week, Gennette gave his most detailed hints yet about his strategy to restore the historic retailer to glory. It’s a strategy based less on discounting and more on being a fashion destination, with a bigger emphasis on its own brands but with enhanced presentation of the outside brands it does carry and a rethinking of the role of stores in Macy’s future.

Gennette also won some welcome breathing room earlier this month as he tries to right the USS Macy’s. Reuters reported that Starboard Value, the activist investor that had been pushing Macy’s to sell off its best real estate, had exited the stock. What’s more, media reports suggested that prospective suitor Hudson’s Bay had turned its attentions to a smaller target in Neiman Marcus.

Now Gennette can take on the task of renewing a 159-year-old retailer.

Here’s a closer look at his game plan.

1. Taming out-of-control couponing

Macy’s is famous, or rather, infamous, for the complexity of its promotions and coupons. Get 40% off right away, then another 10% if you mix it with another coupon, and get more if you use a store card. (You get the idea.) Executives admit shoppers are turned off by how hard it is sometimes to just figure out how much something will cost. What’s more, the endless couponing is hurting Macy’s “fashion authority” with shoppers and cheapening the brand, Gennette conceded at the BAML conference.

“They look to us to curate what’s out there,” he said.

That’s not to say Macy’s will ditch coupons altogether— remember the bloodbath when Penney tried that in 2012. But it will be more focused on items that emphasize Macy’s fashion cred, rather than simple market share grabs on big events like President’s Day that kill margins and cachet alike, not to mention upset vendors fearful that coupons are brand-destructive.

“Customers love coupons but hate the exclusions, and vendors hate being part of it,” Gennette said. (Coach, Michael Kors and Ralph Lauren are all brands that have complained in the last year about department stores’ overuse of coupons.)

Macy’s shoppers can look forward to more $10 off or $20 off offers applicable to the items of a shopper’s choice, rather than specific items. There is a parallel here with Kohl’s famous cash rewards, which allow that retailer to offer discounts on brands indirectly.

2. Being more of a landlord

On the heels of successful experiments in the last year with shop-in-shop boutiques at Macy’s stores for brands like Apple, Best Buy and Brookstone, on top of long time arrangements with brands like Finish Line and Sunglass Hut, the department store chain is planning to expand that idea. For instance, it is rolling out more LensCrafters shops. (Not all of these have been a success: its tuxedo partnership with Mens Warhorse has been a bust.)

And Macy’s is thinking of completely redoing part of its San Francisco store to turn into an area hosting luxury brands in much the same way European department stores do. It has echoes of the “concession model,” which reduces risk for department stores since they are not on the hook for merchandise that doesn’t sell.

3. Selling more of its own brands

While rivals like J.C. Penney and Kohl’s each get roughly half their sales from house brands, Macy’s only gets about 20%. Gennette told analysts to expect that to rise.

House brands offer chains higher profit margins, but more importantly more control over manufacturing and sourcing, while also offering shoppers something exclusive. I.N.C. apparel and Hotel Collection home goods are among Macy’s mammoth brands.

At a time Macy’s is struggling to compete with the Zaras and H&Ms of the world, controlling the speed of production on a greater percentage of its merchandise will make it nimbler. Still, Macy’s will need to be careful not to overreach: Kohl’s is dialing back the percentage of its sales from house brands after struggling to entice shoppers with some of those proprietary labels.

4. Making more T.J. Maxx-like moves

Gennette said that two-thirds of Macy’s shoppers also frequent off price stores like T.J. Maxx or Marshalls or Ross Dress for Less. And 70% of the coveted millennial cohort in fact prefers that avenue. So Macy’s has been expanding its off-price Backstage concept to more of its own stores.

What’s more, Macy’s is rolling out a dedicated space in its stores for clearing out goods, called “Last Act.” (Someone at Macy’s likes theatre.) In the Last Act section, where items on final markdown end up, there are no coupons, no further price cuts, just a final low price, the simplicity of which is something Gennette said shoppers like.

Last Act facilitates the faster removal of old merchandise so that the stores’ full-price racks can feature current goods. Gennette said this concept has been tested at 10 Macy’s stores and will be expanded to 30 more this year.

5. Offering more dazzling beauty

For all the talk of how Amazon and T.J. Maxx have stolen market share from Macy’s, beauty stores like Ulta Beauty and Sephora have arguably done the most damage. Beauty products are essential to getting shoppers into stores. Ulta’s success has stemmed in part from letting customers touch and try on products, offering them something akin to playtime. That contrasts with the department store approach which is very top down from store worker to customer.

So Macy’s will expand its private label Impulse brand, with its 2,000-square-foot shops, to more stores, open more stores in its higher-end Bluemercury chain, and expand exclusive items from American and European beauty suppliers.

“We are the big delivery system in the country,” he said.

6. Staffing stores with fewer workers

At a different investor conference earlier in March, Macy’s said it was testing “open-sell” environments in its shoe areas, a fancy retail biz term for self-service. This means more shoes on the floor and fewer in the back room. Macy’s found that it could not adequately staff many stores to meet customers needs. And of course, assuming shoppers go for it, this would lead to better profit margins thanks to lower payroll. Macy’s is also testing “open-sell” in some beauty departments too.

It’s clear Gennette has a full plate. But the retail transformation buffeting Macy’s is only accelerating- it’s not cyclical he conceded but “secular.” In other words permanent.

“Department stores have got to get better if we are going to get market share back,” Gennette said.