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Macy's Is Copying J.C. Penney as It Looks for Growth

By Adam Levine-Weinberg - Updated Apr 17, 2017 at 6:20PM

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J.C. Penney has experienced huge success from adding Sephora shops within most of its stores. Now Macy's is trying to get a similar lift with its fast-growing Bluemercury beauty concept.

Over the past decade, revenue has plunged by more than 35% at J.C. Penney (JCPN.Q), largely due to strategic missteps made during Ron Johnson's brief tenure as CEO. By contrast, Macy's (M -1.91%) has been relatively successful at retaining sales, despite the severe impact of the Great Recession and the recent slowdown in mall traffic.

Nevertheless, with sales sliding for two years and counting, Macy's is leaving no stone unturned in the search for growth drivers. As a result, it's taking a page out of J.C. Penney's playbook by rolling out beauty mini-shops in some of its stores. This move could help reinvigorate store traffic while getting millennials more excited about the Macy's brand.

Sephora is a home run for J.C. Penney

Back in 2006, J.C. Penney began a partnership with cosmetics retailer Sephora, opening Sephora shops inside a number of J.C. Penney stores. J.C. Penney's then-CEO Mike Ullman has admitted that he initially wasn't sure whether these shops would be successful. After all, Sephora is a much more upscale, fashion-forward brand than J.C. Penney.

A Sephora shop inside a J.C. Penney store

J.C. Penney has partnered with Sephora since 2006. Image source: J.C. Penney.

As a result, J.C. Penney was cautious about rolling out the Sephora concept in its stores. In mid-2011, nearly five years into the partnership, J.C. Penney still had only 254 Sephora shops, or less than a quarter of its 1,100-plus stores.

However, Sephora has been an unqualified success for J.C. Penney, performing well even when the company was stumbling. Sales per square foot in the Sephora shops are between $500 and $600, more than three times higher than the average for J.C. Penney stores. Furthermore, Sephora shops have been surprisingly successful in smaller, rural markets.

J.C. Penney has been working to capitalize on this success by steadily adding more Sephora shops within its stores. In 2016, it added 61 new Sephora shops, ending the year with 577 of them. In 2017, J.C. Penney plans to open 70 more, while enlarging dozens of existing Sephora shops.

In short, Sephora has gone from being a niche concept tested in a portion of the J.C. Penney store base to becoming one of its most reliable traffic generators and sales growth drivers. Without Sephora, J.C. Penney would be in much worse shape than it is today.

Macy's has its own weapon in the beauty business

Macy's began its beauty reinvention in 2015, when it spent roughly $210 million to buy luxury beauty retailer Bluemercury. At that time, Bluemercury was quite small -- it had about 60 boutiques spread across 18 states -- but growing very quickly.

The exterior of the Macy's Herald Square flagship store

Macy's bought fast-growing beauty retailer Bluemercury in early 2015. Image source: Macy's.

Bluemercury is similar to Sephora in that it carries a variety of brands and has a self-service setup along with knowledgeable sales associates. It aims to provide a less intimidating shopping experience than a traditional department store beauty counter.

Macy's has rapidly expanded the Bluemercury chain over the past two years while starting to add Bluemercury shops inside some Macy's stores. By the end of January, it had 101 freestanding locations as well as 19 shops within Macy's stores. The company plans to open roughly 30 more Bluemercury stores this year, including a mix of freestanding locations and shops within Macy's.

Can Macy's strike gold?

Thus far, Macy's seems to be moving at an even more deliberate pace than J.C. Penney in terms of adding new beauty shops within its stores. To some extent, this may be because Bluemercury doesn't have the name recognition of Sephora. Additionally, Macy's is trying to reinvigorate its traditional beauty business at the same time.

Nevertheless, Bluemercury has the potential to become a powerful brand as it gains more name recognition around the country. This could potentially lay the foundation for more aggressive moves by Macy's to incorporate Bluemercury shops within its stores.

Macy's is about a decade behind J.C. Penney in terms of rebooting its beauty business. But it arguably has even more upside, given that it owns the Bluemercury brand outright. It's still early, but the incredible success of J.C. Penney's Sephora shops suggests that Macy's is on the right track.

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Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
M
$17.97 (-1.91%) $0.35
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q

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