How Macy’s Is Contending With Fewer Sears and J.C. Penney Stores in Malls

With Sears (SHLD) now in bankruptcy protection and J.C. Penney (JCP) struggling again, Macy’s (M) is being forced to rethink how it operates its stores in the malls it co-anchors with those rivals.

Sears filed for bankruptcy protection last month, announcing yet another round of store closings en masse, and Bon-Ton liquidated earlier this year, while Penney is struggling to tread water despite shuttering 140 weak stores in 2017. The malls that those chains left but where Macy’s still has a store have practically become ghost towns: while counterintuitive, the disappearance of rival retailers that anchor a mall hurts Macy’s since it means less overall shopper traffic.

To address that problem, Macy’s on Wednesday said it was creating a three-tier classification of its 600-plus stores that determines how much investment they will get. Stores in weak malls and centers where Macy’s is the last department store standing will typically be part of the subset designated as “neighborhood” stores by the company.

Concretely that means they will continue to get investments like better lighting, flooring and fixtures, but on a much more modest scale than other Macy’s locations. The idea is that those stores—while under-performing—are nonetheless profitable and worth keeping. But the state of the malls they inhabit mean Macy’s should’t warrant anything more extensive or lavish.

“We are experiencing [that trend] at our malls where we’re the only anchor left and that has really informed our neighborhood store strategy,” Macy’s CEO Jeff Gennette told Fortune. “Such stores are typically used for trips to replenish basics rather than explore and look for new fashion, which customers do by going to a better Macy’s,” Gennette said. The neighborhood stores will be shrunk in size by about 20% and have fewer staff.

Still, Gennette says that the stores still have to be up to a certain standard. Such neighborhood stores will include self-service checkout and self-serve shoe sections. Crucially these stores are key to supporting Macy’s red-hot e-commerce growth and will offer online order pickup and returns handling like all stores do,

“There might not be enough reason to come to the balance of the mall so you’ve got to give them enough reasons to come to your store,” Gennette said.

Stores in the next tier up, Macy’s so-called “magnet” stores, will get a lot more investment. Some 50 of those stores have been part of Macy’s “Growth50” project, where it has tested new merchandising and presentation ideas at specific stores to quickly see what works and is worth rolling out to more stores. Those stores will get more involved facelifts, more staffing, offer a wider variety of merchandise, including in many stores, more high-end merchandise. At some locations, Macy’s has tested things like lockers to retrieve online orders. Another 100 Macy’s will get that treatment in 2019.

The highest tier stores includes Macy’s Herald Square million-square-foot store in Manhattan and ten more locations like Union Square in San Francisco.

The idea of smaller stores is one that is growing in retail. Kohl’s, for one, is also reducing the inventory at many stores to de-clutter them and down the line, carve out space to sublet to other retailers like grocers that generate frequent store visits. Nordstrom and Target are among the others rolling out smaller locations.

Macy’s, often slammed for store clutter, is already showing signs of progress: In a research note on Wednesday, GlobalData Retail said that its research found that 67% of customers this rated shopping at Macy’s as “good or very good,” up from 59% a year ago.

That helps explain why Macy’s rebound seems to gaining steam. The department store chain reported that comparable sales rose 3.1% in the third quarter, the fourth quarter of growth in a row and well above Wall Street forecasts for 2.2% growth, according to Consensus Metrix. And it raised its full year forecast just as the crucial holiday is getting underway, one for which Gennette said Macy’s is ready.

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