Inside Backstage, Macy's off-price Hail Mary
Macy's is late to the off-price party, but the company is betting it can boost sales, traffic and real estate productivity — and keep its shoppers out of T.J. Maxx and Ross — by expanding Backstage.
Welcome to Macy’s if-you-can’t-beat-them-join-them moment.
Walking around in one of the department store retailer’s newest off-price Backstage locations, the impression you get of the reconfigured top floor might seem alien if you are a devoted shopper of that specific Macy’s, the one that has served you all those years.
Clothes inside Backstage, at a mall in suburban Maryland, are tightly packed and ordered by size rather than brand. Women’s shoes fill up six tall rows of shoe racks, where they sit in open boxes that customers must work through themselves. You can buy ceramic Buddha statues and gourmet snacks, sequined pillows and body lotion, dog beds and plastic toy cars.
There are no discount markers, no clearance racks. No "40%-off sales" here. But you can buy a pair of jeans for $20 or a men’s Kenneth Cole suit jacket for $150 (and the price tag will tell it would have been $300 purchased somewhere else).
In other words, Macy's Backstage looks a lot like a T.J. Maxx.
For frequent off-price shoppers, there’s nothing alien at all about the Backstage concept. The prices, layouts and assortment doesn’t differ that much from existing players. And that’s likely no accident. Off-price sellers have been on a hot streak for years as department stores contend with weak mall traffic, the expansion of e-commerce, changes in consumer behavior and a surplus of inventory discounted heavily to get out the doors. And those are just a few of the challenges
To Macy’s, which is rapidly expanding its Backstage line inside existing full-line stores, off-price represents not just an entry into a hot sector but also a chance to make its stores more productive. While Nordstrom drew a distinct line between its traditional department stores and off-price "Rack" stores, Backstage holds the potential to turn Macy’s into a "one-stop shop."
Take the Maryland store, which opened over the weekend in the Mall at Prince Georges in Hyattsville, Maryland, as an example. In the same mall are T.J. Maxx, Ross, Target and Old Navy. All offer clothes for cheap and appeal to younger shoppers who came of age during the recession and hunt out value. Paul Onosakponome, vice president store manager, said he hopes that with Backstage in the fold now, customers "won’t have a reason" to shop at the other off-price and discount stores in the mall.
'A really big opportunity'
This year Macy’s has opened Backstage stores in Philadelphia, Atlanta, Rhode Island, New Jersey and Memphis, Tennessee. By August, the company had 37 stores open within existing stores. Michelle Israel, Macy’s senior vice president of off-price who recently took on management of the Backstage division, said in an emailed statement that the company expects to have more than 40 locations by the end of 2017, all of them in the store-within-a-store format at existing Macy’s locations.
Macy’s foray into off-price and its brisk plans to expand Backstage is one of a handful of strategies at the department store chain to adapt to a new retailing world. Off-price is one sector that is both expanding — hungrily — and is seemingly safe, for now, from e-commerce eating its market share. Moody’s recently listed off-price retailers among the "leaders" in the industry, with operating income across the sector projected to increase 4.8%.
"The three main incumbents" — TJX Cos., Ross Stores and Burlington — "offer quick product turnaround, lower prices and physical store presence that provides the customer a catalyst to shop its stores," Moody’s analysts wrote in an August report emailed to Retail Dive. "And this group has achieved its success almost entirely without an e-commerce platform."
"I think it will generate business for the traditional stores. They need an idea that will generate traffic. This is just one. They have to create this theater of shopping."
Co-Founder and Principal, BRP
"There’s a really big opportunity in off-price for those guys, if they were to go into it and take what’s good in the T.J. [Maxx] model and put their own spin on it, try to co-locate them [with existing Macy’s stores]," Ken Morris, co-founder and principal of retail consulting firm BRP, told Retail Dive in an interview. "Because I think it will generate business for the traditional stores. Traffic is down across the board in these department stores. They need an idea that will generate traffic. This is just one. They have to create this theater of shopping. ‘Treasure hunt’ is part of it."
But of course Macy’s is relatively new to the off-price game. Not only is it behind the sector stalwarts, Macy's is also behind fellow department store retailer Nordstrom, which has built a $4 billion off-price business with its Rack stores, which Nordstrom first launched in 1973.
In August, Nordstrom executives told analysts that the company opened six stores in the spring with plans to open another 11 this fall, making for a total of 232 Rack locations by the end of the year, according to a Seeking Alpha transcript. Sales for the company’s off-price business rose 9.8% in the second quarter, with comparable sales up 3.1% — a number that disappointed management but stands in stark contrast to many retail earnings releases.
As Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, put it in a previous interview with Retail Dive, "Unlike Macy’s, who was in bed on sleeping pills when this whole off-price retail took off, Nordstrom did it and is producing superb results."
Giving real estate a boost
Macy’s off-price venture isn’t just about net sales growth. It’s also a way to make its real estate more productive, said Shelley E. Kohan, vice president of retail consulting with RetailNext. "I think they’re very smart to take advantage of existing real estate."
To that effect, Macy’s Chief Financial Officer Karen Hoguet said in a May call with analysts that total sales rose at 26 stores that opened Backstage locations within them, as compared to a control group of stores. In an August call, Houget updated analysts on Backstage’s progress, saying that Backstage had added 6% in incremental sales to 38 full-line Macy’s stores that included the concept.
"We are testing a few variations of our strategy this year, but we believe from our tests so far that this will both add incremental spend from existing customers and also lead to the addition of new customers. Whichever model performs best this year, will be rolled out aggressively next year."
"We are testing a few variations of our strategy this year, but we believe from our tests so far that this will both add incremental spend from existing customers and also lead to the addition of new customers, and whichever model performs best this year, will be rolled out aggressively next year," Hoguet said on the May call, according to a Seeking Alpha transcript.
Explaining why Macy’s was determined to expand into off-price, CEO Jeff Gennette said on the May call that "when you look at our best customers, those customers that shop with us up to 20 times a year, two-thirds of those shop in off-price on a monthly basis, and 70% of Millennials are shopping off-price on a monthly basis." And while the company opened Backstage concepts "off-mall," it also tested them in underproductive stores by "kind of carving out a big cavity of real estate and putting Backstage in there." That experiment produced "some interesting results," Gennette said.
"[W]e had excess space where we could add the Backstage concept, and so then we started to play with what the offering would be," he added. "And we were very careful about cannibalization, making sure that what we put in the Backstage section of that store wasn't just cannibalizing what was on the full price side."
A ‘new model’
The off-price game is a complicated calculus for both Macy’s and Nordstrom, and for different reasons. And although the retailers make for an obvious comparison, Macy's and Nordstrom have reasons for doing things differently.
Nordstrom has, notably, built out its Rack store line outside of its existing stores. And for good reason, as Kohan points out. "If you try to have this iconic service brand and try to run an outlet division within their stores, I think it’s very hard to switch back and forth between a very high personalized service model and all of the sudden self-service. That’s not to say the employees at the Rack aren’t friendly, aren’t helpful, aren’t amazing — they are, it’s just a completely different model."
For that reason, it made sense for Nordstrom to divide the two store lines physically and geographically, in Kohan’s view. Macy’s, on the other hand, doesn’t have quite as much invested in its customer service reputation and has plenty of real estate that needs a boost from any extra sales and traffic the company can manage to recapture from the off-price machine.
Macy’s has also taken pains to separate the Backstage stores within their full-line department stores and create a separate, distinct environment. "They’ve done a pretty good job trying to contain it, with branding and signage, in a designated area on the lower level," Kohan said. "The size [of the Backstage section] is much more manageable. Signing, pricing, staffing are all very different operationally."
Indeed, the company uses different logos (a trio of primary-colored stars as opposed to the iconic red star) and even different fixtures at the Backstage locations. Products sometimes ship on different trucks and are stored in Backstage-specific stockrooms. The Backstage employees dress differently (in all black) and specialize in the off-price unit. For example, the Mall at Prince Georges store at the moment has about 20 employees dedicated specifically to Backstage.
But managing these operational details will likely be the easy part. More challenging could be meeting and managing customer expectations. "The outlet model has to meet the shopper trends, which is really this whole proposition of value," Kohan said. "Value equals time, money and convenience. In the outlet business you have to nail all three of those. And so we would have to ask, does Backstage meet that for their existing market? They’re new at this. This is a new model that their doing."
Kohan points to the particular need for Macy’s to differentiate its products from its full-line stores and Backstage locations. "If the consumer is confused about: ‘Well, you know, is $25 really a value at Macy’s if I can get a top for $25 at the full-line?’ You have to be really clear about differentiation. It could be in assortment, it could be in dollars, it could be in convenience. Keep in mind some of the discount stores, a la Target, have done a really great job on the fashion side, and they are also competitors."
Backstage’s operational structure within Macy’s should help to create differences in product assortment. "Backstage is separately sourced with different buying teams than Macy’s," Israel told Retail Dive. "We find our product from manufacturers and partners all over the world." The retailer has also added new categories to the Backstage stores — such as toys, kids shoes, pet accessories and various lines of home goods — further trying to differentiate them from the full-line stores.
Kohan also points out that Macy’s must have a different pricing model for Backstage to succeed. "One of the key pieces of the outlet model is very transparent pricing," she said. There has to be a "sense of urgency." "If I have my hands on a pair of pants and I don’t buy it, it’s going to be gone," she said. "The pricing strategy has to be crystal clear — they can’t guess if is this going to be cheaper tomorrow."
Hence the lack of percent-off signs at the Backstage locations and dearth of advertised sales. Onosakponome said the Prince Georges Macy’s will have just two clearance sales per year. "Hopefully we won’t have anything left."
If the Macy’s team can do it right, Kohan said she thinks the Backstage model has the potential to bring Macy’s customers back into stores more frequently, as they chase the latest deals on the best merchandise Backstage has to offer. "Part of model of the outlet business is to make sure people say, ‘Oooo, what’s coming in today?’"
The stores try to do that with a special section featuring new arrivals and trendy product lines. Along with traditional discount fare, Backstage also offers luxury brands priced lower than in typical luxury retail outlets. At the Prince Georges store under a locked glass case were handbags from Louis Vuitton and Prada, the latter selling at around $300.
Not everyone thinks the strategy suits Macy’s. GlobalData Retail managing director Neil Saunders warned in a note earlier this year that his firm’s research found having off-price assortments inside Macy's stores is cannibalizing full-line sales.
"As much as we can see the logic for this from the perspective of trying to make space more productive, we believe the strategy will ultimately fall short."
Managing Director, GlobalData
"As much as we can see the logic for this from the perspective of trying to make space more productive, we believe the strategy will ultimately fall short," Saunders said in the note. "It also sends confusing messages to the customer about the Macy's brand. … [W]e believe it is better suited to stand-alone locations in units where rents are cheaper."
For now, it’s unclear who, exactly, is shopping at Backstage. Asked if the unit had managed to attract entirely new customers into Macy’s stores, Israel said in a statement: "We haven’t activated the marketing plans for Backstage yet, so it’s too soon to tell. What we do know is that the Macy’s Backstage shopper is fashion savvy and cost conscious. She enjoys the thrill of the hunt and is always excited to return — at least on a weekly basis — to find new and exciting items to shop."
Observers aren’t sure either whether Macy’s full-line and Backstage shoppers overlap and to what extent. "If you sat down 10 CEOs and asked them that very question, half the room will say there’s absolutely no crossover shopping whatsoever, and the other half will say there is absolutely crossover shopping," Kohan said.
"I believe today’s shopper is very willing to shop at a variety of formats," she added. "And I do believe there’s a lot of crossover shopping between the two."
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