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Is Macy's new CEO Jeff Gennette the right man for the job?

Longtime Macy's chief Terry Lundgren is stepping down, and handpicked successor Jeff Gennette is stepping in. Only time will tell if he can reinvent the retailer for today's omnichannel world.

The curtain is falling on the Terry Lundgren era. The longtime Macy’s CEO, who transformed the company into America’s largest department store chain during his 13 years at the helm, announced earlier this month that he will resign at the end of March 2017. He will pass the reins to handpicked successor Jeff Gennette as part of a transition plan that included Gennette’s election as Macy’s president in 2014.

Lundgren’s accomplishments are undeniable. In 2005, he spearheaded the blockbuster merger of Macy’s parent Federated Department Stores and May Department Stores, forging a retail giant that last year reported revenue of $27 billion. Lundgren also pioneered the much-copied concept of curating store merchandise to local tastes, and supervised the renovation of Macy’s flagship Manhattan location, bringing aboard upmarket brands like Louis Vuitton in the process.

But Macy’s recent difficulties are equally impossible to ignore. Under Lundgren the company has struggled to keep pace with changing consumer tastes and shopping behaviors, losing significant ground to fast fashion upstarts as well as online merchants like Amazon, which is projected to surpass Macy’s as the nation’s largest apparel retailer sometime next year. Shares of Macy’s have lost roughly half of their value over the past 12 months, dozens of stores have closed, and activist investor Starboard Value is lobbying the company to explore options for its vast real estate holdings.

“I have been honored to lead this enterprise through a period of unprecedented reinvention," Lundgren said in a statement announcing his resignation. "While our company is larger, stronger and more resourceful than we were 13 years ago, now is the time to reset our business model.”  

Macy’s is just the latest in a series of high-profile department store chains and major retailers to swap out CEOs in the past few years. Since the start of 2014 alone, Doug McMillon replaced Mike Duke at Wal-Mart’s helm; Target traded Gregg Steinhafel for Brian Cornell; J.C. Penney exchanged Mike Ullman for Marvin Ellison; and Art Peck took over for Gap Inc.’s Glenn Murphy, to cite just some of the most notable examples.

“There’s no surprise that there’s so much turnover in the retail space, given the struggles the industry is having,” Natalie Kotlyar, partner in consulting firm BDO USA’s Consumer Business practice, told Retail Dive. “Management is only as good as its most recent earnings report.”

These myriad shakeups present decision makers a range of real-world examples of retail leadership strategies to study, helping determine which approaches to emulate—and which to eschew. Instead of looking outside of the Macy’s organization for new blood, the company selected Gennette, a move suggesting its focus is on evolution, not necessarily revolution.

“[The CEO selection process] depends on the direction that the retailer is going to take,” Kotlyar said. “For example, if it’s a department store retailer that’s going to continue to focus on brick and mortar, it’s easier to promote from within. If they’re looking to completely change direction and go more into the e-com space and focus on omnichannel, and there is no [viable successor] internally, it may make sense to get a fresh set of eyes coming in from the outside, with fresh ideas. Every situation is different.”

Hire learning

While the timing of Lundgren’s resignation announcement surprised some onlookers, Gennette’s promotion was by no means unexpected. Gennette started his career in retail in 1983 as a Macy's West executive trainee and steadily climbed the ranks, ultimately rising to president and de facto heir apparent following a five-year stint as chief merchandising officer.

Macy’s board directors accelerated the transition to give Gennette the latitude to begin overhauling the company now, a source familiar with the company told the Wall Street Journal. “He is going to make the radical changes” before he officially takes over from Lundgren next year, the source said.

Macy's new CEO Jeff Gennette
 

The question is how radical. "They’ve been grooming Gennette since 1983—they must have decided he’s a superstar,” Lee Peterson, executive vice president of brand, strategy and design at customer experience consultancy WD Partners, told Retail Dive. “What I wonder about Gennette is whether he’s going to be more of the same [as Lundgren]. Does he have the guts and the permission [from investors and board members] to implement real change? I would guess that’s not his mission.”

Historical data suggests Peterson's assumption is probably correct. A six-decade University of Missouri study published in 2015 states that while 78% of all new CEOs are selected from within the organization, CEOs brought in from outside of the organization are more likely to innovate. Chief executives hired from outside tend to spend more money on research and development, the researchers noted, while CEOs hired from inside the ranks are more likely to make large, strategic acquisitions.

“If a company currently is either mired in mediocrity or performing poorly and it announces the hiring of an external CEO, it could be a signal that the board is serious about fixing problems,” Stephen Ferris, professor and director of the Financial Research Institute at the university’s Trulaske College of Business, said in a press release. “The hiring of an internal candidate, on the other hand, may indicate that a company is stable and likely to continue an already successful business approach.”

Macy’s is far from stable, of course. Its sales have been slumping for five consecutive quarters. So regardless of Genette’s experience and qualifications, why did Macy’s promote from within instead of jumpstarting its business through outside leadership? Macy’s did not respond to Retail Dive’s requests for comment on its decision. But the recent history of retail suggests that taking risks in executive hiring doesn't always translate to rewards.  

External forces

Some retailers have righted the ship by bringing in external leadership. Consider Target, which in 2014 hired Brian Cornell, its first-ever chief executive recruited from outside the company. Cornell was brought in to clean up the mess created by former CEO Gregg Steinhafel, who was fired following a massive data breach that exposed the credit card and personal data of some 110 million Target customers. Steinhafel also guided the company’s disastrous expansion into Canada and failed to fend off threats from rivals emulating (and in some cases eclipsing) Target’s signature cheap-chic ethos.

Cornell came to Target after serving as CEO of PepsiCo Americas Foods, where he led its global food business. Before joining PepsiCo, Cornell served as president and CEO of Wal-Mart's Sam’s Club wholesale unit, a job he landed after a two-year stint as CEO of craft store chain Michaels.

Initial reaction to the hire was mixed. “Target’s transformation will take some time,” retail management consultant Walter Loeb wrote in the immediate wake of the move. “None of [Cornell’s] background at other companies assures us that he has the mettle to innovate.”

But Cornell quickly quieted critics by taking dramatic, decisive steps. Most notably, he pulled the plug on Target Canada, closing all 133 stores north of the border at a cost of $5.4 billion in pre-tax losses. Soon after, Target announced a restructuring effort calling for significant investments in its grocery departments, omnichannel operations, and a variety of merchandise categories, also cutting "several thousand" jobs as part of a $2 billion cost savings plan. All told, Target shares increased more than 40% within eight months of Cornell’s arrival, trading at an all-time high.

Cornell has continued remaking Target over the last 12 months. Target’s highly anticipated Lilly Pulitzer line of clothing and home goods debuted online and in stores last August to such overwhelming demand that its website crashed and sold-out merchandise quickly surfaced on eBay, reaffirming the retailer's reputation as a middlebrow tastemaker. Cornell’s investments into in-store merchandise presentation have helped drive brick-and-mortar traffic, and Target has also invested in its store associates, raising its minimum starting wage to $10 per hour. And contrary to expectations that Cornell would struggle to innovate, Target has partnered with startup accelerator Techstars to create a new retail tech incubator based in Minneapolis, teamed with the Massachusetts Institute of Technology and design firm IDEO on urban farming and other food-related research, and launched Goldfish, a mysterious initiative captained by West Stringfellow, the retailer’s tech disruptor-in-chief.

But Target is not immune to the malaise afflicting much of American retail. The company missed expectations and delivered a disappointing forecast in the first quarter of this year. On a more positive note, same-store web sales rose 23% in Q1 2016, and Target also hit paydirt with its style, baby, kids, and wellness categories, which experienced sales growth more than three times greater than the company average.

While Cornell's relative success at the Target helm underlines the value of new leadership dynamics and perspectives, discussion of retailers looking outside the ranks inevitably turns to Ron Johnson, whose 2011 to 2013 tenure as CEO of J.C. Penney is a cautionary tale for the ages.

Johnson, an instrumental force in the development of the Apple Store’s future-forward retail aesthetic and Target’s trendy-not-spendy design sensibilities, arrived at J.C. Penney hellbent on transforming virtually every facet of the venerable merchant’s declining business. He outlined a “fair and square” pricing strategy that dumped inflated manufacturer-suggested prices in favor of lower everyday prices, but instead of studying the approach in a handful of test markets, he rolled it out nationwide in one fell swoop.

Johnson also proposed radical innovations like “mini-malls,” making over about 700 of J.C. Penney’s 1,100 stores into new shopping structures that cleared out the retailer's private label brands in favor of rows, or “streets,” of boutiques or shops. Each mini-mall included a “town square,” a centralized area where customers could gather to grab a bite to eat, attend a free fashion show or cooking class, or chat with friends over coffee—in short, experiencing retail in a different, more entertaining and more interactive way, in turn staying in stores longer and spending more money in the process. 

It proved to be an unmitigated disaster. J.C. Penney failed to properly articulate Johnson’s new pricing strategy to its coupon-clipping, deals-driven customer base, who abandoned its stores in droves. At the same time, Johnson’s all-inclusive department store experience failed to attract new shopper segments, resulting in slow traffic. In all, same-store sales tanked 25% in 2012, resulting in a net loss of $985 million. Just 17 months after Johnson joined J.C. Penney, he was ousted by its board.

Johnson now leads Enjoy, an online-only consumer electronics marketplace and concierge service. But his vision for brick and mortar’s future may finally be taking root… at Macy’s. Days after Lundgren formally announced his resignation, Macy’s unveiled a new prototype store concept in Columbus, OH’s Easton Town Center, integrating features like store-within-store concessions, a Bluemercury spa, revamped wedding and stylist services (including a Men's Wearhouse tuxedo shop), and an athletic wear section with fitness “ambassadors.”

The Macy’s prototype brings to life many of Johnson’s innovations, Peterson notes. “Everyone looks at [Johnson’s tenure] like ‘Oh, this was a tragic mistake.’ I don’t think so. The things he was talking about are things that [Macy’s is doing],” Peterson said. “We have to start to measure the success of physical stores in a much different way. It can’t be as quantitative as it was in the past. It must be more qualitative. Did customers have a good time? Did they engage with the brand? Did they receive great customer service? People are buying goods in stores less and less often, especially stores like this. Stores have to become something.”

In an interview with Fortune, Gennette hinted Macy’s will lease additional space across its 800-plus department stores to other specialty retailers moving forward, and also expand its array of in-store experiences. But it remains to be seen whether Gennette will be given more time and leeway than Johnson to execute on this new approach. While Gennette is a Macy’s insider and Johnson was a J.C. Penney outsider, investors and board members will only allow Gennette so much rope to hang himself.

“If Gennette starts to implement more stores or more features like [the Easton store], there’s no way they’re going to do revenue at the same volume. They’re gonna get dinged for that, and he may get dinged for that,” Peterson said. “[Macy’s] investors and the board are going to look at this like ‘Jeez, you just cut your profits in half in that store. Stop that shit.’ At the end of the day, we have to wait to see if they have the guts—and if he has the permission—to take that kind of a hit.”

Out with the old?

Although Gennette’s plans for Macy’s future may evoke Johnson’s past at J.C. Penney, Gennette’s upward trajectory through the Macy’s ranks most closely recalls Wal-Mart lifer Doug McMillon’s rise to CEO. McMillon first joined Wal-Mart as a summer associate in high school, unloading trucks in the retailer’s Bentonville, AR distribution center. While studying at the University of Tulsa, he rejoined Wal-Mart as an assistant store manager, earning a series of promotions in the years to follow: From 2005 to 2009, McMillon served as president and CEO of Sam’s Club, and from there spent four years as head of the company’s international division.

McMillon was named Wal-Mart’s fifth-ever CEO in late 2013. “Doug is uniquely positioned to lead our growing global company and to serve the changing customer, while remaining true to our culture and values,” Wal-Mart chairman Rob Walton said in a statement issued at the time of McMillon’s hire. “He has broad experience—with successful senior leadership roles in all of Wal-Mart’s business segments—and a deep understanding of the economic, social and technological trends shaping our world. A merchant at heart, Doug has both a long history with our company and a keen sense of where our customers globally are heading next.”

But Wal-Mart has never quite found its footing under McMillon’s leadership. Its revenue dropped 0.7% last year, with total sales falling for the first time, and in the early weeks of 2016, Wal-Mart announced that it would shutter 154 U.S, locations, including its 102 smallest format stores, Walmart Express, which had been in pilot since 2011. The company said it would “focus on strengthening Supercenters, optimizing Neighborhood Markets, growing the e-commerce business and expanding pickup services for customers.”

Wal-Mart is finding e-commerce a particularly tough nut to crack. The company spent some $3.8 billion in its fiscal 2016 year to boost sales online and in stores, but during the 2015 holiday quarter reported just 8% growth in online sales, far behind Amazon (which experienced Q4 growth of 22%) and Target (which boosted its online sales by 34% in the same period).

None of this bodes favorably for Macy’s. Peterson questions whether it’s time for retailers to move on from veteran leadership altogether, and bring in more youthful voices nurtured in the digital world.

“All hell is breaking loose in retail,” Peterson said. “These guys are running these huge companies based on a retail model of measurement that is 30 or 40 years old. I think you’re going to see turnover at a lot of big companies. We’re gonna go through this transition phase where digital natives are going to start taking over these companies and figuring out what’s next.”

BDO USA’s Kotlyar disagrees. “You want someone with innovative ideas being able to execute on omnichannel and create a seamless experience, but at the same time, you want someone with proper retail experience, because at the end of the day you need to know your consumer,” she said. “If you don’t know your consumer, all the technology in the world won’t increase your revenue.”

Gennette has that proper retail experience, but only time will tell if he has the insights and skills necessary to reinvent Macy's for the omnichannel age. He doesn’t officially take over until the second quarter of 2017, giving him nine months to figure out what kind of retailer Macy’s will become on his watch—and what kind of CEO he will be.  

“The real question about Gennette is whether he’s going to be more of the same. I think he’s going to be a lot more transitional—a little like Lundgren was, only maybe more so,” Peterson said. “The interesting thing to me is this Easton [store prototype] test. If it’s not just a test, but the direction Gennette wants to take stores in, then you’re going to see Macy’s become a much more forward-thinking company.”

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