Macy’s Is Overhauling Its Rewards Program to Win Back Straying Shoppers

Facing one of the toughest slumps in its history, Macy’s (M) is turning to a tried and true way of stanching shopper defections—but it’s giving it a new spin. The department store chain this week unveiled a revamped loyalty program that specifically targets its very best customers, at a time when many of them are drifting to other chains.

The company, seeking to end 10 quarters of comparable sales declines, is introducing a tiered rewards system next Monday that (among other things) gives its top shoppers, those who spend $1,200 or more a year, 5% back on whatever they spend as a store credit, along with free shipping. (The company has not yet said the speed of that shipping though two-days is becoming the standard in the industry.)

Macy’s says it will introduce far more features in 2018, including perks that could include exclusive early access to a hot new fragrance or personalized trunk shows. But it wanted to start with a pitch to its most frequent spenders, whom CEO Jeff Gennette told Fortune have not abandoned Macy’s, but are not quite the regular shoppers they were before.

“We were seeing customer spending shifts that we needed to stop,” Gennette said in an exclusive interview at Macy’s headquarters in Manhattan’s Herald Square, above its iconic flagship store. Gennette concedes that the previous version of its Star Rewards loyalty program fell short of what its shoppers wanted.

The goal of the new program, which borrows considerably from tactics at upscale chains, is to have a simpler scheme that focuses on loyalty rather than rewards by going well beyond the deals, deals, deals ethos that has severely damaged Macy’s image in the eyes of many shoppers. It is also a major test for rookie CEO Gennette. The update of Star Rewards is his first major initiative since moving in to the corner office in March. What’s more, he has told an anxious Wall Street that the program is a cornerstone of his turnaround plan, which aims to restore Macy’s reputation as a special place to shop rather than yet another retail bazaar.

The stakes for the loyalty program couldn’t be higher. Macy’s gets about 50% of its $25 billion in annual sales from the top 10% of its customers, those who spend at least $1,200 a year at the chain. (That level, previously called “premier elite,” is now called “platinum.”) It’s about ten times more expensive to win a new customer than to entice a current one to stay, according to experts.

E-commerce and store remodeling are of course essential to any retailer’s prosperity, but loyalty programs are just as important: Ulta Beauty (ULTA), one of the biggest poachers of Macy’s business in recent years, gets more than 80% of its sales from members of its “Ultamate” rewards set-up. (AMZN) offers free two-day shipping with its Prime loyalty program, to which 50% of American households will subscribe by next year, according to Wall Street firm Cowen & Co. Meanwhile, Kohl’s (KSS) and J.C. Penney (JCP), two major Macy’s competitors, have each radically transformed their rewards programs in the recent past; Kohl’s has more than 30 million members.

Macy’s is adopting a tiered system with rewards, monetary and otherwise based on spending levels, a strategy that borrows from the airlines and higher-end department stores. For instance, those platinum members can use the 5% Star Rewards credit on any item in the store, including brands like Under Armour (UAA) and Nike (NKE) that don’t typically allow coupons issued by retailers to apply to their merchandise. The 5% back works as a gift card of sorts. It’s similar to Kohl’s Cash, but in Macy’s case, only the big spenders can earn that credit.

The platinum members will get a fancy new store credit card, too. Macy’s customers one tier down, those who spend between $500 and $1,200 a year, will also get free shipping. And all the program members, at any spending level, can use the store’s 25%-off coupons whenever they want. (Regular shoppers are subject to some blackouts.)

Upgrading a confusing system

The simplicity of the program is by design: Macy’s has long driven customers crazy with the complexity of its promotions, with deals layered on top of each other, leading to confusion. That puts any chain at a disadvantage relative to other retailers. “If everyone is special, then no one is special,” says Jonathan Klezel, U.S. Travel and Transportation Leader and loyalty program expert at consulting firm PwC. “Retail loyalty programs have traditionally basically been punch cards,” he added.

Two years ago, Macy’s was a founding brand, along with the likes of Rite Aid and Exxon, in the first U.S.-based multi-chain loyalty program—called Plenti, and operated by American Express. But Gennette hinted to Fortune that the program hadn’t yielded the hoped for results, and said Macy’s participation is “under review.”

When Gennette, a Macy’s executive since 1983, became CEO, he made overhauling the rewards program a top priority, aware that absent big improvements to Star Rewards, Macy’s turnaround could be dead on arrival. Yet what Macy’s has announced this week is fairly basic for a loyalty program—free shipping has become a standard expectation from shoppers, for example. Gennette says the really big incentives are coming in 2018, but Macy’s wanted to get the program’s reboot rolling ahead of the all-important upcoming holiday season.

For one thing, the updated Star Rewards program is initially limited to Macy’s store cardholders, a large but limited subset of its shoppers. Two years ago, when Kohl’s radically updated its own program and renamed it Yes2You, it broke with its own long practice of restricting it to card members, long a way to try to drive sign-up rates for the store cards, and opened it up to people who can’t get a store card or don’t want one.

Macy’s plans to expand Star Rewards to non-cardholders at some point in the near future. “We have some great customers who don’t want to put [purchases] on the Macy’s card, and we need to have options for her,” Gennette says.

To get more mileage out of the new program, Macy’s plans to leverage its heft with vendors to put on platinum-member-only events as it expands the program next year. Gennette likes to point out that Macy’s is the top seller of high-end perfumes in the country, and future events could include incentives like members-only product previews and first crack at special items (tactics commonly used by Ulta).

Indeed, beauty will be a cornerstone of the new loyalty strategy, given how crucial the category is to generating shopper visits. It’s all the more essential given that Penney’s recently redesigned loyalty program has been rejiggered to integrate spending at the highly popular Sephora boutiques within its stores. Though Macy’s is playing it close to the vest for now, Gennette suggested that the retailer would soon make better use of the Bluemercury chain of upscale beauty stores and spas it bought two years ago.

Macy’s is also looking at using its army of personal shoppers to offer high-level clientele services, like having a stylist look at their closets and make suggestions, or having a trunk show with products specifically chosen for them.

These ideas show how Macy’s is designing its program to be aspirational, rather than simply another way to score deals. And Star Rewards clearly borrows from the world of luxury; it’s no surprise that Bloomingdale’s executives played an active role in helping sister chain Macy’s refine the program in recent months.

“It gives me an opportunity to give my best customers something that they value,” Gennette says. And more importantly, a reason to remain a Macy’s shopper at a time the chain cannot to afford lose one more shopper.

Macy’s updated Star Rewards program in a nutshell:

  • Platinum (previously “Premier Elite”): Customers who spend more than $1,200 a year get 5% back in rewards redeemable on any merchandise; free shipping with no order minimum; and 25% percent off with Star Pass coupons, with no restrictions on what days they use them.
  • Gold (previously ‘Elite’): For those who spend $500 to $1,200 a year, rewards are the free shipping and 25% off with Star Pass coupons, with no blackouts.
  • Silver (Preferred): Customers who spend less than $500 in a year get the 25% Star Pass coupons.
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