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What Macy's Is After With Its Flashy New Loyalty Program

By Motley Fool Staff - Oct 1, 2017 at 5:30PM

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The perks for those who spend a lot at the department store will be upgraded, but will it really help the chain compete?

In this Market Foolery podcast segment, host Chris Hill and Motley Fool Asset Management's Bill Barker assess the potential of Macy's ( M 3.85% ) soon-to-debut new rewards program. The top-spending 10% of its customers -- who contribute about half of its sales -- will get 5% back, plus free shipping, among other things. As they note, cultivating customer loyalty is a cost-efficient move, but in this case, it's a sign of a company playing defense.

A full transcript follows the video.

This video was recorded on Sept. 27, 2017.

Chris Hill: Macy's has had 10 straight quarters of declining same-store sales. Next week, Macy's is unveiling a new loyalty reward program aimed at its biggest shoppers. This is people spending at least $1,200 a year. They'll get perks like free shipping and 5% back, although as I understand it, that's as a store credit. And the company says that more perks to this loyalty program are going to be revealed in 2018, and this is just the start of this. But I don't know. I'm not rooting against Macy's, and I'm not a shareholder, but partly because of my age, I'm rooting for Macy's to succeed. This struck me as not a great -- I don't know what specifically I was hoping for when I heard that Macy's was going to be announcing a loyalty program. But I was pretty underwhelmed by this.

Bill Barker: The most interesting part of the Fortune article, which you sent to me that covered what they're doing here, and I'll read this and give them the credit for doing the reporting on this, "The stakes for the loyalty program couldn't be higher. Macy's gets about 50% of its $25 billion in annual sales from the top 10% of its customers, those who spend over $1,200 a year at the chain." They go on to say it's about 10 times more expensive to win a new customer than to entice a current one to say, according to experts. So, combining that, this is a company which is trying to stabilize the floor, it's trying to stabilize the number of loyal customers and keep them coming in. From a cost perspective, it sounds like that's much more efficient than going out and looking for new customers. And that makes sense to me, but it doesn't make you particularly hopeful about the future. If they can't bring in new customers, or if bringing in new customers is as expensive as it is, I don't know that what we'll see from Macy's if anything better than playing defense. Because that's what this is.

Hill: Do you think this is enough to get them through this holiday season? I think, whether you're a shareholder or even a prospective shareholder, I think you have to be looking at Macy's, and 2018 is great, but you kind of need a really great holiday in 2017.

Barker: I mean, are they going to get through? Yeah, they're going to be around.

Hill: I should have been more specific.

Barker: Are we going to be more enthusiastic about Macy's after a white Christmas? 

Hill: Yes.

Barker: Or a green Christmas, as opposed to a blue Christmas? I don't know. I think it's just going to be more of the same. This is going to help, I suppose, if they are able to roll this out fast enough to get those loyal customers to come into the store and shop. But Amazon is out there all the time and is a constant threat, and Macy's is about half the market cap today that it was 10 years ago. And that's not good.

Hill: It's surprising, given how well they've done for so long in terms of managing their footprint, managing their store growth. They've always been pretty conservative about that. So the fact that they're particularly good at that one part, or, historically, they've been very good at that one part of the operations, but still suffer the same inventory woes from time to time that most every retailer seems to, is unfortunate.

Barker: When I say that Macy's is about half the market cap that it was 10 years ago, that doesn't mean that the stock is half the value. You've basically seen flat returns on your investment because they've been buying back shares. So they haven't aggressively gone out and used the money, the cash flow that they do have to expand operations. They've done a more intelligent job of managing what they do have. They've gone out and acquired Bluemercury, which is probably a pretty useful acquisition compared to some of the other choices out there. I think that's been largely successful. But people just aren't going to department stores in the same way that they used to, and if Macy's has some slightly more elevated brand in that space, and believes that it can protect Macy's as a unique shopping experience, that's a high hurdle to have. And that's, I think, what they see themselves as, as unique in some way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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