Why This Christmas Is Make-or-Break for Macy’s

If you want to know why Macy’s (M) needs to reinvent itself—why the department store ­giant wants to change, and why doing so will be so challenging—you could start by comparing two of the most recent circulars that the chain sent to shoppers.

One brochure is a snappy mini-catalog for the all-important holiday season, a centerpiece of a new marketing campaign. Called “Gifts We Love,” it features 125 items—a tiny, strategically chosen slice of the tens of thousands of products Macy’s sells. It uses lush, high-quality photography and elegant fonts to showcase offerings like a cozy Ugg robe and a $180 Star Wars drone. And there’s not a single mention of a discount, not one “Extra 40% Off” or “30%–75% Off Storewide” bubble to be found. If anything, the brochure looks like something a higher-end retailer, a Nordstrom or a Saks, might produce.

It also looks almost nothing like Macy’s previous circular, which came out just days earlier. That one touts canyon-deep discounts pegged to the end of daylight saving time—a flimsy excuse for a shopping event if ever there was one. (One such deal: 65% off Tommy Hilfiger sport coats.) The brochure looks cluttered, almost like a supermarket coupon mailer. It gives off a whiff of desperation.

“Gifts We Love” represents the future to which Macy’s aspires. It’s part of a far-reaching effort by the nation’s largest department store chain to regain its former mantle as a tastemaker among better brands at its 664 stores nationwide. The daylight saving discount-orama, meanwhile, represents the reality Macy’s is struggling to transcend—a circular firing squad where big retailers that offer very similar products can lure shoppers only by slashing their prices.

Macy’s flagship store in New York City.John Taggart—Bloomberg via Getty Images
John Taggart—Bloomberg via Getty Images

The Tale of Two Brochures epitomizes Macy’s long-standing identity crisis, and it’s one that the company needs to resolve soon. In November, the company, which also owns the 38-store Bloomingdale’s chain, posted its 11th consecutive quarter of declines in comparable or “same-store” sales, a metric that strips out results from recently opened or closed stores. Its stock is down more than 70% from its 2015 peak. The task of reversing this slide falls to Jeff Gennette, Macy’s CEO since March and a 34-year veteran of the company. This holiday season—during the gift-buying rush that generates about 30% of annual sales, and is the one and only time all year that some shoppers will visit a Macy’s store—the initiatives Gennette and his team are rolling out will face their first major test.

Gennette’s plan, dubbed “North Star” in a nod to Macy’s logo, leans heavily on the “Gifts We Love” approach, stressing the idea of Macy’s as not just a store but a retail “authority”—a favorite word of the imposing 56-year-old CEO. “Our customers really look to us for fashion curation and guidance, more so than to other retail brands,” Gennette tells Fortune. He wants to capitalize more fully on that clout with customers, in fashion, beauty, home goods, and even tech. That means de-emphasizing discounts and cutting clutter in stores, so that Macy’s can build a selective aura around hotter brand names that can draw more customers and sell at bigger profits.

There’s a catch, though: If Macy’s eliminates too many discounts, it risks chasing away the deal-hunting shoppers who account for much of its $25 billion in annual sales. In short, Gennette wants to burnish Macy’s tasteful patina while remaining what retailers call a “promotional store.” And threading that needle may prove to be as difficult as shimmying down a chimney flue with a sack full of toys.

It would be pollyannaish to believe that Macy’s will easily win its way back into shoppers’ good graces. The chain has been bleeding market share, losing ground to established retailers, including the almighty Amazon, and to ascendant digital-first companies like Stitch Fix and Revolve. Younger customers are staying away in droves. And in an ominous turn of events, big brands like Coach, Michael Kors, and Ralph Lauren have reduced the amount they sell through department stores, complaining that the industry’s culture of discounting has contaminated their brands. Even Nike, without naming names, recently said it had had enough of “mediocre” retailers and would rely more on its own stores and e-commerce site.

These are the fires that Gennette is racing to douse. Since taking the reins from longtime CEO and current executive chairman Terry Lundgren, he has won kudos from investors for his frankness about store clutter and shopper defections. “It’s been nice to hear Macy’s talk about reality rather than tell the Street what it wants to hear,” says Stacey Widlitz, president of consulting firm SW Retail Advisors. Gennette has led a reorganization of top management (the third in three years) that included poaching a top eBay executive, Hal Lawton, to be his second-in-command, and consolidated the retailer’s sprawling merchandising bureaucracy.

This holiday season, customers will start seeing North Star’s influence on the sales floor. Macy’s will set up displays at key spots in stores to highlight the “Gifts We Love”—supported and promoted by Macy’s small but increasingly important army of “My Stylist” personal shoppers. (After the holidays, Macy’s will continue to “curate” must-have items under a new “It List” rubric.) The chain is wooing higher-­spending customers, meanwhile, with a revamped loyalty program that lavishes the top 10% of its customers, people who spend an average of $1,200 a year, with more goodies like exclusive sales and beauty-salon pampering.

Holiday shoppers at the New York flagship store on “Black Friday” in 2016. New CEO Jeff Gennette faces a tough balancing act: He hopes to reduce Macy’s dependence on deep discounts, without chasing away the customers who love them.Alexander Scheuber—Getty Images
Alexander Scheuber—Getty Images

Close observers will spot other changes, too, as moves initiated years ago bear fruit. More Macy’s are selling beauty products in ways that borrow ideas from nimbler, fast-growing competitors like Ulta Beauty and Sephora. There are now 20 stores with a kiosk from ­Bluemercury, the luxury beauty chain the company bought in 2015. And in more locations, clearance merchandise now dwells in segregated areas, called “Last Act,” intended to keep their deep discounts from sharing space with, or dimming the luster of, trendy brands that sell at full price.

Conventional wisdom holds that department stores can’t survive in the 21st century—and the woes of retailers from J.C. Penney to Sears to Dillard’s to the upscale Neiman Marcus reinforce that argument. But of its cohort, Macy’s arguably is the best equipped to pull through the current slump. It’s one of the few chains offering a mix of higher-end and mass-market merchandise, and it wields a formidable marketing and supply-chain apparatus. The company is also an e-commerce powerhouse, with $4.3 billion in annual sales, ranking it sixth nationwide. These strengths have helped Macy’s buy more time from investors and analysts, even as it struggles to figure out what comes next.

“It takes a long time to turn around a battleship, but they’re incredibly dangerous,” says Mortimer Singer, CEO of retail consultancy Marvin Traub Associates. Now the pressure is on Gennette to retrofit the U.S.S. Macy’s before changing consumer tastes capsize it.

Few retailers enjoy as prized a place in U.S. history as Macy’s. The retailer, opened in 1858 by Rowland H. Macy in New York City as a dry-goods store, became a cornerstone in many major American cities by the early 20th century, and its primacy in popular culture was cemented by the 1947 holiday movie classic, Miracle on 34th Street. The million-square-foot Macy’s flagship is among the five most visited tourist spots in New York, and its annual Fourth of July fireworks and Thanksgiving Day parade attract millions of TV viewers. Today, 41 million Americans shop at Macy’s at least once a year.

The company reached true retail-behemoth status under Terry Lundgren. Sales roughly doubled in the decade after Lundgren became CEO, hitting a peak of about $28 billion in 2014. Macy’s fueled that growth by getting ahead of its rivals in e-commerce, and by undertaking several major acquisitions, most notably its 2005 purchase of May Department Stores.

But the deals that made Macy’s the industry leader also sowed the seeds of its current problems. Macy’s management swelled to become a lumbering bureaucracy, slow to react to change. And as more buying decisions flowed from national headquarters rather than local management, its product offerings, particularly in clothing, converged with those of other department stores. That drew the company deeper into the lethal spiral of discounting: Macy’s and its rivals created a “sea of sameness” that left shoppers bored and forced the retailers to resort to discounts to lure them back. “They really took their eye off the ball in terms of how to be special for the customer,” says Steve Dennis, president of SageBerry Consulting and a former Sears and Neiman Marcus executive.

Today clothing is one of the categories where Macy’s is hurting most. Discounters like T.J. Maxx have been juggernauts, and the threat from Amazon.com, which is launching its own fashion brands as well as a subscription service called Amazon Prime Wardrobe, is only growing. Already, 47% of Macy’s clothes customers also shop for clothes on Amazon, according to Magid Retail Pulse. And Cowen & Co. is forecasting a new indignity: The Wall Street firm says Amazon will eclipse Macy’s as the top seller of apparel in the country this year, and that Amazon’s market share will be three times as big as Macy’s by 2021.

Gennette’s star rose just as Macy’s momentum began to run out. After five years as chief merchant—the executive in charge of deciding what Macy’s sells—he became president, and Lundgren’s heir apparent, in 2014. Gennette has been involved with multiple efforts to get the retailer back on track, efforts that underscore how much spaghetti Macy’s has thrown at the wall, and how little has stuck.

A case in point: Beauty products, which generate about 15% of department store visits, became a chronically weak spot for Macy’s about five years ago, as it ceded market share to the likes of Ulta and Sephora. One edge those boutiques brought to the battle was “open sell,” where customers can try out products without intervention from clerks. But Macy’s stayed wedded to the 1940s, products-behind-the-counter method of selling; only now, after years of sales erosion, is Macy’s testing “open sell” at 200 or so stores.

Macy’s also waffled in handling Backstage—its separate brand for selling discounted fashion. Originally conceived as a chain of outlet stores, its development was slow; as Lundgren admitted in 2015, “I didn’t really want this business.” Only after it became clear that shoppers were choosing discounters like T.J. Maxx and Marshalls over Macy’s did the company relent. It has now decided to bring the concept into its main stores, giving Backstage 25,000 square feet, or about 20% of the space of a typical store, at 45 locations, with hundreds more stores potentially getting one.

Stores with a Backstage section are seeing a seven-percentage-point improvement in sales year over year, according to Gennette. But valuable time and opportunities have been lost. “In the past they’ve talked about a lot of good initiatives,” says Neil Saunders, a managing director at GlobalData Retail. “Do they have the stamina and confidence to see them through?”

Tall and immaculately dressed, Gennette doesn’t seem to lack for confidence. And in conversations with Fortune this summer and fall, he reiterated that he was directing his energy toward smart, strategic cutting.

Some of the cuts focus on the supply chain. Gennette wants to use far fewer suppliers for Macy’s exclusive products. Those house brands, including INC apparel, now generate 29% of the company’s sales. As part of an effort to boost that to 40%, Gennette is cutting out two-fifths of those suppliers and requiring the remaining ones to set aside much of their capacity exclusively for Macy’s so it can speed up the time it takes to bring merchandise to market—essential to competing with “fast fashion” brands like Zara and H&M. For some items, Macy’s has shrunk the time from order to shelves from several months to eight weeks.

But the more important cutting is happening on sales floors, where Gennette is chipping away at Macy’s image as a bazaar that overflows with stuff people can find anywhere. “We know that we have too much clutter in our stores,” the CEO says. To fix that prestige-destroying problem, Macy’s is testing what Gennette calls “extreme editing” at a store in Woodbridge Township, N.J. Shoppers in that area skew “fashion forward” compared with Macy’s national average. So the store cut about 40% of the selection, rapidly eliminating items that were too similar, or that didn’t catch on, and replacing them with trendier fare. The average revenue generated by some key items is up 10% at the store, and Gennette tells Fortune he thinks he can replicate those results throughout the chain.

The Woodbridge test exemplifies the benefits Gennette wants to reap from a leaner inventory. In theory, it’ll lead to fewer items being sold on clearance, while creating a more visually pleasing store that looks more upscale. A smaller, easier-to-track inventory will enable faster, smoother e-commerce deliveries, transactions in which stores now play key roles.

Above all, Gennette sees smaller selections paying off in improved customer service. Rather than continually running between store floor and stockroom, clerks could build expertise in products like those on the “It List” and develop more of a rapport with customers. Right now Macy’s employs just 250 personal shoppers across 150 of its stores; in a leaner future, more of the rank-and-file could play a comparable role. Macy’s gets just under half its revenue from the top 10% of its customers, who have been visiting less often. Creating a sense of exclusivity and service could swell the ranks of those bigger spenders—and make them less likely to hold out for discounts.

Gennette knows he has to tread carefully. Unless you have products that other retailers don’t carry and that shoppers genuinely want, pulling back on discounts can be suicidal. (A similar move by J.C. Penney in 2012 led to plummeting sales and an enduring crisis.) “We’re going to remain a promotional department store” has become a mantra for Gennette in talks with investors. But he’s striving to draw a clear boundary between the sharply discounted deals and the products from the big, distinctive vendors he hopes to emphasize.

Early signs suggest that Macy’s has convinced some big names in fashion that its discounts no longer taint them. Stalwart brands like Tommy Hilfiger and Calvin Klein, both owned by apparel giant PVH, are enjoying a sales rebound at Macy’s, thanks in part to better presentation. Gennette says Macy’s could deliver similar results for Michael Kors and Ralph Lauren. More such wins could soothe vendors’ anxiety and even help Macy’s line up hot new brands. As consultant Singer puts it, “Macy’s needs to remember that they can be kingmakers.”

For one day this fall, Macy’s investors felt like kings. The stock jumped more than 10% on Nov. 9 on news that net income was up 54% year over year through the first three quarters of 2017. Macy’s reported that it was selling fewer items at clearance and seeing booming sales of fragrances, women’s footwear, and jewelry.

Still, the bump in profit coincided with continuing declines in revenues. And that isn’t the only metric that’s shrinking: Macy’s is also inexorably trimming its physical footprint. By the end of 2018, the chain will have closed 20% of the stores that it operated in 2014. The chain has shrunk space at some stores and sold others back to mall developers like General Growth. In a near-perfect metaphor for retail’s upheaval, Macy’s sold the top floors of its downtown Seattle location in October—and Amazon is moving in.

Nicolas Rapp
Nicolas Rapp

Macy’s will likely face pressure to close even more stores. According to a January tally by Green Street Advisors, only 40% of Macy’s stores are in “strong” malls as measured by sales per square foot; the other 60% are in the sorts of uninviting shopping centers where foot traffic is dwindling and department stores can feel especially vacant and gloomy. And as the company’s latest results underscore, shutting underperforming locations can boost profits.

Still, Gennette tells Fortune Macy’s is now at “about the right number of doors.” It’s easy to see why he’d resist culling the fleet further. Closing stores can create a vicious cycle in which reduced brand visibility hurts sales in nearby stores, and vendors stop giving that retailer priority. And while Macy’s e-commerce is strong, it doesn’t generally pick up the slack: The company says that in areas where it has closed a physical store, it holds on to an average of only 12% of its sales, either online or at another store. “That [percentage] says, ‘We don’t need Macy’s,’ ” says Widlitz, the retail consultant.

The store conundrum is a metaphor for the challenges Gennette faces. “Less is more” may be a leitmotif in his efforts to restore luster to the products on Macy’s sales floor. But too much “less” is just, well, less—shrinking too drastically risks driving away customers, brands, and investors alike.

Gennette himself avoids language that suggests that Macy’s would be better off as a smaller, more focused retailer. Instead, he’s betting that with fewer products in stores, a combination of higher prices and continued growth in e-commerce will create a revenue rebound.

The way Gennette sees it, the big retail shakeout underway will have winners and losers. “We intend for Macy’s to be one of the winners,” he says. But trying to be all things to all people is a hard battle to win—and a tough holiday season in 2017 could force Macy’s to fight on fewer fronts.

A version of this article appears in the Dec. 1, 2017 issue of Fortune with the headline “Macy’s Make-or-Break Christmas.”

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