Times are tough for department stores. Despite a strong holiday season that drove comparable-store sales up across the sector, the changing retail landscape will continue to undermine the model. Now that consumers can order nearly everything from the convenience of their own homes and phones, the need for cavernous department stores that sell everything from furniture and clothes to cosmetics and jewelry is much less than it was even a generation ago.
Macy's (NYSE:M) knows this, which is why the company is focused on revamping and modernizing its stores so it can continue to attract customers. It's shuttered underperforming stores and sold off excess real estate. It also is opening 100 of its off-price Backstage stores inside existing Macy's locations this year, emulating a model that has worked well for TJX Companies and Nordstrom.
Macy's acquired the BlueMercury beauty brand in 2015, gaining a foothold in the growing prestige beauty sector, as well as a competitor to fast-growing concepts like Ulta Beauty and Sephora, which have been rare bright spots in retail. The company plans to open 40 BlueMercury locations this year.
At the recent ShopTalk conference, the retailer said it was taking steps to improve its stores, making checkout easier with a mobile option, using virtual reality in its furniture showroom, and adding more private-label brands to differentiate itself from other retailers who also sell labels like Calvin Klein and Michael Kors.
Macy's recently took yet another important step in its attempt to modernize itself, announcing that it would acquire the New York-based concept store STORY -- which focuses on "experience, engagement and collaboration/brand partnerships" -- and that its founder and CEO Rachel Shechtman will become its Brand Experience Officer.
The move seems reminiscent of other acqui-hires in retail, such as when Walmart acquired Jet.com, in part to putits founder, Marc Lore, in charge of its e-commerce operations. Similarly, Macy's hopes Shechtman can reinvent its store experience.
What is STORY?
STORY is a unique concept in retail. It's a 2,000-square-foot space in Manhattan's Chelsea neighborhood that "reinvents" itself every four to eight weeks, setting up a new design and bringing in new merchandise. The company says, "STORY is a retail concept that takes the point of view of a magazine, changes like a gallery and sells things like a store."
Past themes have included Color, Making Things, Love, and Made in America, and it has had corporate partners including American Express, Intel, and Target. It describes itself as taking "a view of retail that goes beyond the transaction and a permanent space where the experience is everything and collaboration tells a STORY."
It's unclear how Shechtman and her brand will affect Macy's, but CEO Jeff Gennette dropped a hint, saying, "Bringing Rachel's perspective to the table will help create more enriched and engaging in-store experiences and brand activations." Shechtman will have a much broader canvas to work with, as Macy's has more than 690 locations under the Macy's and Bloomingdale's banners and about 160 more including outlet stores and BlueMercury. Having someone like Schechtman likely will help Macy's attract younger or more exciting brands and lead to more experimental spaces inside its stores.
Brick and mortar isn't dying
The shorthand story for today's retail shift is that e-commerce is taking over the brick-and-mortar channel. However, while it's crucial for retailers like Macy's to invest in the online channel, they also need to remember that their brick-and-mortar stores remain the bigger driver of their financial performance. Macy's doesn't break out its online sales, but based on its store base and $25 billion in annual revenue, it's fair to say that the substantial majority of its revenue comes from its stores. Overall, only 9% of all retail sales in the U.S. come online, so there's still plenty of opportunity at physical stores.
For a company like Macy's, which is best known for operating gigantic, multi-level stores in downtown areas like New York's Herald Square and the Chicago Loop, stores will continue to be the heart of its business. Macy's move to acquire STORY and bring on Shechtman shows the company understands this.
The stock rose modestly on the news, but investors may be underestimating the impact that Shechtman could have. Macy's central, high-traffic locations should be huge assets for the brand, and it has plenty of space to devote to experiential and experimental retail. Shechtman can help those stores -- and therefore, the company -- unlock that value.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool recommends American Express, Intel, Nordstrom, The TJX Companies, and Ulta Beauty. The Motley Fool has a disclosure policy.