A few years ago, Macy's (M 3.00%) began testing a new off-price concept in an effort to stem the tide of market share losses to the likes of TJX Companies (TJX 1.88%). During 2015, it opened a handful of Macy's Backstage stores in the New York City region. These stores were similar in terms of size and location to a typical T.J. Maxx or Marshalls store.
However, in 2016, Macy's pivoted toward opening Backstage stores within existing Macy's full-line locations, most of which are in shopping malls. It further refined and grew the Macy's Backstage store-within-a-store concept last year.
Macy's plans to double down on this strategy in 2018, dramatically expanding the number of Backstage outlets it operates. This move holds significant promise for improving the sales productivity and profitability of its store base.
Successful so far
During the past two years, Macy's has opened Backstage outlets in dozens of its full-line stores. The goal -- at least initially -- was to boost the sales productivity of lower-performing stores. The early results have been promising.
Macy's Backstage carries many of the same brands as Macy's full-line stores. However, it has a completely separate buying organization from the full-line business. In fact, the merchandise assortment at Macy's Backstage is very similar to that of TJX's T.J. Maxx and Marshalls chains. Furthermore, whereas Macy's full-line pricing strategy entails high starting prices combined with a variety of sales and coupons, everything at Backstage is marked down from day one -- but with no additional discounts allowed.
Thanks to these differences between its full-line and off-price businesses, cannibalization hasn't been a significant problem when Macy's has opened Backstage outlets within its full-line stores. Meanwhile, management believes that the Macy's Backstage pilot locations are stimulating extra customer visits and higher spending.
In total, adding Macy's Backstage in an existing store has provided a nearly 7-percentage-point sales lift on average.
Taking the next step
As of the end of 2017, there were about 45 Macy's Backstage locations within Macy's full-line stores. During 2018, the company plans to open another 100 Backstage stores, significantly expanding the off-price concept's footprint.
However, there's more to this expansion than pure numbers. First, Macy's will begin testing the Backstage concept in some of its best stores, to see if it can help those locations become even more successful. Second, Macy's will start actively marketing its Backstage brand. This should further boost sales by driving higher shopping frequency and pulling in new customers.
Some of the new Backstage outlets planned for 2018 have opened in the past couple of weeks. New Macy's Backstage stores will continue to open between now and the fall.
Macy's biggest sales driver -- at least for now
The ongoing rollout of Macy's Backstage is just one of many initiatives that Macy's is working on to improve its sales and earnings. The company is also investing in a new loyalty program, a redesigned marketing approach, mobile checkout, and a pilot program that uses virtual reality and augmented reality technology to help customers select furniture for their homes.
However, Macy's Backstage arguably holds more promise than any of these other initiatives for driving near-term sales growth.
Up until now, Macy's has gotten a roughly 7% sales lift in a small fraction of its store base. Thus, the impact on its companywide results has been marginal. But if the Backstage concept can be applied successfully in most (if not all) Macy's stores over the next few years, the impact on its financial results would be quite significant. Additionally, by continuing to refine its strategy for Macy's Backstage -- and by starting to market this new retail concept -- Macy's may be able to increase the sales lift from its Backstage stores to as much as 10%.
For 2018, Macy's expects to achieve modest comp sales growth of 0%-1%. If the next phase of its Macy's Backstage rollout succeeds, the company could surpass that forecast -- and achieve even stronger comp sales growth in 2019 and 2020.