Another iconic Macy's (M 1.99%) store is set to close. Last Saturday, The Seattle Times reported that the department store giant plans to shutter its store in downtown Seattle in February 2020 and sell the building. It will be the third Seattle-area Macy's store to close in the span of a year.
Some pundits have painted the impending closure as another sign of the death of brick-and-mortar retail at the hands of e-commerce. There's some truth to that viewpoint: Macy's continues to face severe margin compression, due in part to the tough competitive environment. That said, issues specific to city-center retail -- and this particular location -- were far more relevant to this store closure decision than any broader threat to Macy's business model.
Macy's has been pulling back from downtown retail
At the beginning of 2014, there were 712 full-line Macy's stores operating in the U.S. and its territories. As of two months ago, that total had shrunk to 579. While all kinds of Macy's stores have been subject to closure during this downsizing, the company's massive city-center stores have been disproportionately affected.
This shouldn't be very surprising. Macy's downtown stores tend to be in great locations and are well suited to being repurposed as office space, housing, or hotels -- perhaps with a modest street-level retail component. Meanwhile, these older, generally ornate buildings tend to be expensive to maintain.
In 2013, Macy's closed its downtown store in St. Louis. Its downtown Pittsburgh store followed in late 2015. Downtown stores in Minneapolis and Portland closed in early 2017. The city-center stores in Cincinnati and Miami were next, closing in early 2018. Some of these stores had been downsized from their original footprint prior to being closed for good.
During this period, Macy's also began to shrink many of the downtown stores that it didn't put on the chopping block. The company sold portions of its Brooklyn, Chicago, and San Francisco stores for redevelopment, while maintaining large flagship stores at each of those sites. Another downtown store that has been downsized over the past few years -- with a large part sold for redevelopment -- was the Seattle location.
The retailer is successful in Seattle -- just not downtown
Macy's sold the top four floors of the downtown Seattle store to Starwood Capital for $65 million in 2015. Two years later, it sold another two floors -- plus some basement space -- to Starwood for $50 million. At the time, management said that shrinking the location to just three floors would allow Macy's to create a better shopping experience for customers.
However, sky-high property prices have driven a surge in homelessness in downtown Seattle. Crime and drug abuse are growing problems as well. This has made the area less attractive for retailers -- particularly a giant department store like Macy's. At the same time, the opportunity cost of staying put is rising, as evidenced by the high prices paid for the upper floors of Macy's Seattle store. Starwood (the presumed buyer) may be willing to pay $50 million or more to acquire the rest of the building.
But while Macy's didn't find it worthwhile to maintain a store in downtown Seattle -- and also recently closed its other store in Seattle to make way for a redevelopment of Northgate Mall -- that doesn't mean the retailer is struggling in the region. Indeed, it recently renovated three stores ringing Seattle (plus another store in nearby Tacoma) as part of its Growth150 program. These locations are all highly productive.
With Seattle real estate prices being what they are, stores that aren't in the upper echelon in terms of profitability don't earn enough to justify keeping them when the underlying real estate could be sold instead.
Macy's isn't abandoning all city-center stores
Despite the overall trend toward Macy's closing downtown stores, some of its best stores are located in city centers. While some of these high-performing downtown stores have been downsized, none of them have been closed entirely.
Macy's flagship stores in Manhattan, Chicago, and San Francisco remain massive retail destinations for locals and tourists alike. The company has also renovated high-traffic downtown stores in Boston, Brooklyn, Los Angeles, Sacramento, and Washington, D.C., since 2018 as part of its Growth150 program. Macy's store in Center City Philadelphia is another example of a high-performing downtown location.
By selling stores that sit on valuable real estate but aren't high performers, Macy's is freeing up lots of cash that it has used to pay down debt. These store closures won't impact the retailer's long-term earnings potential very much, while Macy's improved balance sheet will help the company weather the current period of retail disruption.