The iconic department store chain Macy's (M -0.66%) will forever be enshrined in pop culture thanks to the film Miracle on 34th Street, but while millions of Americans might rewatch that holiday classic at some point this season, they may never set foot in an actual Macy's or browse its website. If the retailer doesn't get its act together, it may wind up better remembered on-screen than in reality.

One of the strategies it's exploring is downsizing, not just the number of stores it operates but the size of the ones it keeps open. While in New York City, some behemoths among department stores have closed their doors of late -- think Lord and Taylor or Barneys -- Macy's block-sized store in Herald Square, which features 10 floors and 15 restaurants, has managed to stay afloat. But the times, they are a-changin', and icon or not, the company needs to undergo a serious shift.

Macy's Herald Square

Image Source: Macy's.

How is Macy's doing?

Though it was once the largest American department store operator, Macy's revenue has been sagging over the past few years due to consumers' changing shopping habits. The market has noticed: Its share price is less than a quarter of what it was at its 2015 peak, and the stock has lost half of its value in 2019 alone. The company has resolutely followed the retail trends, so it offers digital shopping options, but sales in its stores -- many of them mall anchors -- have declined.

Management has had an admitted problem with failing to spot fashion trends, which left it with excess inventory in the second quarter that it had to sell at a discount. The third quarter was the worst in a long time, with a 3.9% decline in comparable sales on an owned basis.

Omnichannel and more

Macy's is working hard to get things right. It has a strong focus on a combined digital and physical strategy, and that omnichannel approach has led to great results for rival Nordstrom, as well as large retailers such as Target and Home Depot. Macy's has cited the popularity of its "buy online, pickup in store" option with shoppers, and like key competitors, the company now offers one-day delivery. Though this latest report saw a slowdown across the business, management boasted of the company's 40th straight quarter of double-digit growth in digital sales in the second quarter, when mobile also happened to be its fastest-growing channel.

Another promising venture is Macy's vendor direct program, which allows independent sellers to use the retailer's platform as a selling space. The company is seeing growth in this area with vendor direct making up 13% of digital revenue. Year to date, the company has added about one thousand vendors and one million SKUs through the program.

The company has even rolled out virtual reality technology to its furniture departments to help customers get a better idea of how various pieces would look in their homes. Macy's also offers a tiered rewards program, and its platinum-level members contributed 30% of the company's total sales in 2018.

Yet so far, things have not been looking up.

Better things can come in smaller packages

In another attempt to increase its relevance and profitability within the shifting consumer discretionary space, Macy's has been testing stores with smaller footprints. Here are four ways it's expanding these efforts:

  • In 2016, Macy's outlined a new strategic plan that involved closing 100 stores; reducing the size, inventory, and staff of other locations; and investing in its most profitable "magnet" locations. It began with a trial in 50 of the most profitable stores. The company has remodeled those locations, given them extra staff and lounge areas, and opened Starbucks within the stores. CEO Jeff Gennette has said that they "outperformed and delivered higher comparable sales, customer retention rates, and satisfaction scores" than other Macy's locations.
  • It's creating smaller, experience-based concepts within its huge department stores. One of these is STORY, a chain Macy's took control of 2017. "Our stores need to go from a place of transaction, to a place of experience," Gennette said. There are now 36 STORY spaces at Macy's in 15 states, each one 1,500 square feet, and they highlight different themes at different times. Another in-store concept is Market@Macy's, where the store brings in new brands for customers to sample in a pop-up style on a rotating basis.
  • In 2015, Macy's purchased skincare seller and spa Bluemercury, which has seen tremendous growth. It currently operates 190 locations. In the dismal third-quarter report, Bluemercury was a bright spot, with double-digitsales growth and a new rewards program that enrolled 30% of customers.
  • The company recently introduced SoGifted, a pop-up shop featuring products from women-founded companies that will run through Jan. 2020 in some locations.

These are the right sorts of moves for Macy's to make -- keeping its well-known name for its larger stores while trimming some of them down, and correspondingly looking at new formats that are attractive to shoppers who might otherwise veer away from the brand. If Macy's does have a future, this is the way to reach it.