The Future of Department Stores

APRIL 11, 2017by Michael Dart and Robin Lewis

A Conversation with Jeff Gennette, CEO of Macy’s

Jeff Gennette was named CEO of Macy’s Inc. in 2017. He began his retail career in 1983, as an executive trainee at Macy’s West. During our recent conversation with Jeff, intriguing insights surfaced as to the future of department stores.

RR: Do you believe in the future of the retail department store, maybe without the “departments?”

JG: Absolutely. But there will be a lot of changes strategically and structurally. We’re in a transitional time. Department stores will be re-imagined, services and experiences will be ramped up. Square footage will be condensed. A lot of our competitors have too many store units and that will have to be rationalized over time. The amount of retail square footage per capita in the U.S. remains three times more than any other developed nation. With most growth coming in the digital channel, retailers will continue to close or re-purpose underproductive store units.

RR: So what is the path forward?

JG: I think omnichannel retailing will continue to evolve. In the short-term, developing differentiated, well-valued assortments, and reducing shopper friction, are two of the most critical elements of success for an omnichannel department store brand. However, the focus is shifting to the individual customer and how we can develop a deeper relationship with her by anticipating her needs, solving her problems, and using our data to personalize our messaging and offers to address her specific interests. We have to commit to winning before the store as much as in the store. Browsing is now online vs. in-store, so our digital experience must be curated and inspirational to her. Store visits are now mission-based, so we need to make store experiences easier, fun and educational. “End-to-end” customer experience journey mapping is the new frontier for all of us and the answers are not monolithic. Boomers still shop by brand, love the thrill of a sale, respond to direct mail, and put up with coupon exclusions. Millennials want to shop by lifestyle, reject complicated sales math, and invest more in experiences and data plans than they do in apparel and accessory purchases. So, a balanced strategy is required for a department store moving forward: address the needs of your core customer while adapting your goods, services, and touch points for your future ones.

RR: So, you will be effectively catering to each shopper’s unique choices?

JG: Yes, while understanding that too many choices can paralyze. Sociologist Barry Schwartz wrote “The Paradox of Choice” and psycho-economist Sheena Iyengar gave a TED talk on how, when people are faced with too much choice, they make no choices at all. So, let’s say a Macy’s shopper is looking at 46 different polo shirt choices. Especially if you don’t have a strong brand preference, you have to expend a lot of energy to navigate to a decision. Our challenge is to gather and understand data that tells us how many choices are optimum, in the sense of pleasing, but not overwhelming the customer. The store of the future must be able to do that.

RR: What are some other features you see defining the future of department stores?

JG: The department store will be the new mall. Everyone eats, so how do you take advantage of that level of frequency? Where you shop is also where you’ll be entertained. We need a much better and healthier mix of what a store offers besides clothes. We need to integrate high frequency activities into the store, be it eateries, entertainment or services, etc.

Another key is using technology to eliminate major friction points for the customer, as well as the retailer. The number of returns in our industry is staggering: 18 percent in-store and over 40 percent online. How much of that is related to not having standardized sizing among brands? We can solve that. For example, we could apply technology to let shoppers virtually ID their body, and then show them exactly what product is right for them. Think of the difference that could make in terms of customer experience and monetization for the retailer.

RR: How, as the leader of Macy’s, do you shape that kind of future?

JG: By taming complexity. We are too hierarchical, with too many spans and layers that add unnecessary management oversight and slow us down. Streamlining structure, committing to the right talent in select arenas, and rigorously using data to better understand and service our customer will help us win in the future.

RR: How will department stores fit in with, and stand up to, all the new competing retail formats?

JG: Old paradigms are being busted all over the place, and I think the department store can be viewed as “Malcolm in the Middle.” We’re used to owning wide and discrete lanes, but those are getting picked off one by one. Here’s what some of those forces look like:

• You have Amazon and online pure-plays selling similar products (directly or in a marketplace) that are fast, convenient and well-valued.
• Off-price has gained a very strong place in the mix. Value is growing like a weed. It’s easy and discernible, and the price-off experience is consistent.
• Fast-fashion, the Zaras of the world. This is for customers who don’t care about brands as much as they do about trends. They can get the red carpet celebrity looks at one-twentieth the price.
• Then you have strong, unbelievably integrated category killers, like Sephora.
• Finally, department stores and the vendor brands they showcase need to find their equilibrium. Brands have their own retail stores, outlets, and websites, and have a relationship directly with the consumer. So what is the role of the department stores with brand distribution and long-term brand equity? Our new roles are being developed.

All these forces point to the need for differentiation. It all comes down to how you define the central statement of Why Us? Why The Children’s Place? Why Macy’s? Why Amazon? What distinct strengths or tenets bring us customer trust or loyalty? How can we build long-term customer value versus stoking transactional behavior? The relationship that our customer has with our brand is the single most important asset of our company. Moving customers who like our brand to those who are committed to our brand is a key measurement to best drive shareholder value.

About Michael Dart

Michael is an accomplished strategy and private equity consultant and advisor with more than 20 years of experience leading major strategic transformations and due diligence studies for many of the largest private equity funds and global retailers. Michael co-authored “The New Rules of Retail” with Robin Lewis.