Macy’s and JC Penney earnings offer evidence of the stall at the mall
On the basis of early results (and specious or unreliable indicators), many industry observers predicted this would be the best holiday season in a long time. It turns out, eh, not so much. In fact, at least one guy was pretty skeptical all along.
But you don’t have to be some sort of retail savant (I’m not) or have the gift of prophecy (I don’t) to have seen this coming. While the idiotic U.S. government shutdown, along with every retailer’s favorite scapegoat (the weather), had a largely unexpected dampening effect, anyone who was paying attention could have predicted that retailers with highly customer-relevant and remarkable offerings would do comparatively well and that those stuck in the boring middle would continue to struggle. Which brings me to Macy’s and JC Penney, the two mall-based department stores that reported earnings this week.
Under the newish leadership of Jeff Gennette, Macy’s has embarked on a number of new initiatives, which my fellow Forbes contributor Walter Loeb recently outlined. While I applaud the company’s willingness to try new things, its results continue to be decidedly uninspiring. As sales continue to go nowhere, Macy’s has resorted to what just about every other retailer that can’t seem to get on a path to being truly customer relevant does — namely, cut costs and close stores. As the saying goes, when all you have is a hammer, everything starts to look like a nail. w
JC Penney recently reported fourth-quarter earnings and managed to top analysts’ estimates. And when we say “top,” we mean they were not quite as horribly sucky as anticipated. Same-store sales were down “only” 4%, and operating losses were only somewhat awful. And, you guessed it, the company also announced it was going to close a bunch of stores.
Amid the generally bad news — which comes, I might add, as Sears (its neighbor in hundreds of locations) hemorrhages market share — was one bright spot: The company did manage to reduce bloated inventory levels by some 13%.
New CEO Jill Soltau also said that the company “has the capacity to produce improved results.” You know, kind of like I have the capacity to complete a triathlon. So good luck and Godspeed to us both.
As Macy’s and JC Penney close the financial chapter on 2018 and try, yet again, to reset their overall cost base, there are five things that need to be kept front and center as we move forward.
1. The stall at the mall is real, and there is no going back. As I’ve written about many times, the moderate-department-store sector has been losing share for decades, first to discount mass merchants and category killers and then (mostly) to off-price retailers. The format is structurally disadvantaged. Accept the things you cannot change.
2. Stop blaming Amazon. To be sure, the growth of online, and Amazon in particular, has added extra challenges, but most of the share losses in the past decade have not been to online-only players, and as mentioned above, both these brands were struggling way before Jeff Bezos had impressive biceps. And by the way, I’m pretty sure there is no law against Macy’s and JC Penney having really good digital capabilities (see Neiman Marcus, Nordstrom et al.).
3. Get out of the boring middle. If you continue to swim in a sea of sameness, you are going to drown. If you continue to chase promiscuous shoppers, your margins will stay low. If you continue to try to be a slightly better version of offering average products for average people, your best-case outcome is average results. Better is not the same as good. You have to choose to be truly remarkable.
4. It’s a customer-relevance problem, not a cost problem. Given the structural issues facing mall-based retailers, as well as the broader shift to online shopping, we often jump to the conclusion that brands like Macy’s and JC Penney can shrink their way to prosperity. This is fundamentally wrong and, in most cases, ultimately destructive. It also belies the fact that plenty of “traditional” retailers have managed to thrive by opening stores and foregoing massive cost-cutting. Time and time again we see that brands that get into big trouble have a problem being customer relevant and memorable yet decide instead that they have a too-many-stores and too-much-staff problem. This is not to say that Macy’s and JC Penney can’t thrive with less square footage; they can and should optimize their store fleets. But there is plenty of business to be done directly in and, more importantly, by leveraging brick-and-mortar locations. As we move ahead, the overwhelming majority of Macy’s and JC Penney’s efforts must be about growing share with their target consumers through improved relevance.
5. Aggressive trade-area based goals. We need to get away from the hyper-focus on comparable-store sales and realize that online drives offline and vice versa — and that the store is the heart of most brands’ customer ecosystems. Accordingly, the metric we should pay most attention to is how retailers are gaining share (customer relevance) and profits on a trade-area by trade-area basis, regardless of channel. If Macy’s and JC Penney are going to be around for the long term, they likely need to be growing at least 3–5% in every trade area where they have stores and be growing faster than inflation overall. Closing many more locations risks impacting both customer relevance and necessary scale economies.
In the next year or two, things are likely to remain especially noisy as the long overdue correction in commercial real estate settles out and the weakest competitors make their way to the retail graveyard. And even if that were not true, both Macy’s and JC Penney face significant structural headwinds as well as daunting operating challenges making their way out of the boring middle — although, to be fair, Macy’s is definitely further along.
Despite the noise, from where I sit, one thing is clear: Neither brand will cost-cut or store-close their way to prosperity. If revenues don’t start to consistently grow faster than industry averages (and that’s likely to come with relatively flat physical-store sales and online growth of at least 15–20 %), then both chains will continue to lose relative customer relevance, and a downward spiral is likely inevitable.
A slightly better version of mediocre is rarely a winning strategy.
A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.
Originally published at stevenpdennis.com on March 6, 2019.