Macy’s to Close 100 Stores as Discounting and E-Rivals Hit Legacy Retailers

http://www.nytimes.com/2016/08/12/business/macys-q2-earnings-store-closings.html

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The great American consumer is very much alive. It’s just that people aren’t shopping like they used to, reluctant to pay full price or even leave the couch — cutting deep into the business of many top retailers.

For legacy stores, the fallout from this shift has been profound, perhaps never more apparent than this week. Macy’s, the country’s largest department store, said on Thursday that it would close 100 stores, saying they were more valuable as real estate properties. Walmart, the world’s largest retailer, announced on Monday that it would buy a small online rival for more than $3 billion. The hope is that the deal will reverse its sputtering online growth.

Other retailers have taken aggressive action, too, trying to turn their fortunes around. Billions of dollars have been poured into e-commerce efforts. Stores have turned to sharp discounting, temporarily lifting sales but hurting profits and upsetting partners.

But almost always, these efforts have led to mediocre results. And the decisions by Walmart and Macy’s, two towering figures in the industry, have sent a clear message: The pressure to keep up with customers is at a boiling point.

“These legacy players are having a terrible time navigating through that shift successfully,” said Mark A. Cohen, the director of retail studies at Columbia Business School.

For decades, Americans have relied on the country’s dense footprint of shopping centers and department stores for their prom dresses, paper towels and everything in between. Often, they were willing to drive to the mall, pay full price or wait for annual sales to get a deal.

But that has been transformed in the last decade, with the meteoric rise of the online giant Amazon, discount and low-cost stores like T. J. Maxx gaining popularity, and a long recession that reset the value of a dollar.

People continue to spend. In the spring, household spending rose at an annualized rate of 4.2 percent, driving overall economic growth. But more and more, they now want bargains and convenience — in stores and online — and know how to find them.

“Given the convenience of e-commerce, the consumer needs a really good reason to go to a store and park their car,” said Edward Yruma, a managing director at KeyBanc Capital Markets. “It has to be exciting and have something new, because if not, why wouldn’t I sit on my couch in my pajamas and shop on my iPad?”

For retailers, that new reality is playing out in a variety of ways. Some, like Sports Authority, have thrown up their hands and closed. Others, like Express, have started opening outlet stores in regular malls.

T. J. Maxx, Marshalls and outlet stores have boomed by loudly advertising big savings over their full-priced department store rivals, spurring some to create their own versions. Nordstrom long ago created Nordstrom Rack, for example, while Macy’s recently introduced Macy’s Backstage. But in many cases, heavy discounts and lower-priced offshoots have eroded the power of traditional stars to lure in shoppers.

The situations at Macy’s and Walmart, and their reactions this week, capture the large forces at play, and the sense that major changes need to be made to thrive.

Walmart is already a discount behemoth, with 4,627 stores in the United States, but it has not been able to duplicate its dominance online. It isn’t for lack of trying. The company has dedicated its deep pockets to the effort, building a large engineering outpost in Silicon Valley, the heart of the tech industry.

But like other discount retailers, it has been unable to convert its vast network of warehouses and stores into a seamless and highly profitable online enterprise. In some ways, the ease of its online shopping site also lags those of some tech competitors. While Walmart is the second largest online retailer, it is far behind Amazon, which has an efficient network of distribution centers and a robust, standard-setting site.

“Something drastic had to be done,” said Bernard Sosnick, a retail analyst at Madison Global Partners.

That something was buying Jet.com, an unprofitable, year-old start-up, for about $3 billion, the biggest e-commerce acquisition ever in the United States. Jet offers Walmart an edge in the online bulk-buying space. It also gives it Marc Lore, a founder of Jet who is widely considered a top e-commerce executive. Another company he helped start, Quidsi.com, was sold to Amazon for more than $500 million.

“None of these traditional brick-and-mortar retailers feel like they can move fast enough to stave off the competition,” said Liz Dunn, chief executive of Talmage Advisors, a retail consulting firm.

As companies like Sears and J. C. Penney experienced long and fast declines, Macy’s had often been held up as one of the few retailers that had managed to withstand the new environment. But it, too, now feels pressure on multiple fronts.

It faces major competition from online sites like Amazon, which is beginning to make inroads in apparel. The biggest threat, though, comes from discount chains like T. J. Maxx, some of which have little online presence.

The challenges have put heavy shareholder pressure on the company. Shares in the stock have fallen more than 40 percent in the last 12 months. In June, the company announced that Jeffrey Gennette, its president and a longtime Macy’s executive, would replace Terry J. Lundgren as chief executive next year.

As the share price has fallen, investors have pressured Macy’s to sell some of its real estate. Macy’s closed 41 stores in its last fiscal year, and said on Thursday that it was in talks to sell its men’s store on San Francisco’s Union Square.

The company said that the 100 stores it planned to sell generate about $1 billion in annual sales, but that some of the stores’ real estate was more valuable than their retail sales. Macy’s said it would spend savings on its digital businesses and to revamp other locations.

The store closings were announced along with quarterly earnings, in which Macy’s reported that profits fell to $11 million last quarter, down from $217 million in the same period last year. Sales fell 3.9 percent, to $5.87 billion.

Investors were clearly upbeat about the overall message, though. The stock rose more than 17 percent on Thursday.

Macy’s currently operates 728 stores, including 675 full-line locations. It did not specify which stores would close. And it said it did not know how many employees would be laid off, but said that it would offer severance to full- and part-time workers.

For much of Macy’s history, large department stores were used as “anchors” at the mall, and benefited from cheap rent in exchange for drawing people in. But as their luster faded, a divide has emerged between the best- and worst-performing shopping centers, leaving a trail of “dead malls” behind.

“For Macy’s, they still believe in stores. They’re just acknowledging that a lot of the business has shifted online and away from some lower-quality malls,” Ms. Dunn said.