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A subscriber recently asked us about Macy’s Backstage initiative. It is a fascinating question, as other off-price competitors like TJX, Burlington Stores and Ross Stores have seen much better profit growth, and of course stronger share prices, compared to Macy’s. We thought you would enjoy the Q&A session:
Q: What is Macy’s Backstage?
A: Backstage is Macy’s initiative to develop an off-price merchandising business. Launched in 2015 as a series of six free-standing pilot stores in New York City, Backstage is now being developed as an in-store department to attract new and existing customers and increase sales. Currently there are 45 Backstage locations, 38 within existing Macy’s stores and seven free-standing stores. Macy’s plans to open several additional Backstage stores this year.
Q: Does Macy's have a competitive edge over more established retailers like TJX and Burlington? Why or why not?
A: Currently Macy’s Backstage does not have a competitive advantage relative to other off-price retailers. Backstage certainly benefits from being located inside Macy’s stores (and in malls), which provides traffic flow. Also, Macy’s does have tremendous merchandise-buying and pricing capabilities since this is their core business. However, the company is very new to the dedicated off-price concept and has a lot to learn about how to find, buy, display, price and manage this new business line. Established competitors like TJX, Burlington and Ross Stores have been exclusively focused on off-price for decades and have a vast advantage in all aspects of the business.
Macy’s will need to make a cultural shift to successfully incorporate this concept, as they have previously gone to great lengths to avoid operating and being perceived as a discounter. This cross-over strategy generally has had mixed success. An example can be found in the airline business—the majors like American and United started discount flight services to compete against Southwest and others, but stumbled badly for a long time before they figured out how to integrate the concept effectively.
It is too early to determine how successful Macy’s initiative will be. They will admit to the evolutionary nature of their process. The company is well-managed so they will likely evolve fairly quickly as they apply their learnings to existing and new Backstage locations. From a top-down perspective, the concept seems to be working as Macy’s is expanding it to more stores in the fourth quarter and in 2018. So far, Backstage has added 7% to the sales of existing Macy’s stores—a good start for sure.
Q: How are these businesses (TJX, Burlington, Ross Stores) faring?
A: TJX (NYSE: TJX), which includes Marshalls, as well as Burlington Stores (NYSE: BURL) and Ross Stores (NYSE: ROST), are doing well. Recent quarterly results show good comps, expanding merchandising margins, growing traffic and good inventory management. Their stock prices over the past few years have been much stronger than Macy’s and other mall-based retailers, reflecting their better results and a more Amazon-resistant business model.
Q: Is this is a smart space for Macy's to get into?
A: Macy’s is smart to experiment with the off-price space. It will make them a better overall competitor and operator almost regardless of how it turns out. If they execute well, it could provide them with more traffic and profit growth. However, a major risk is poor execution, which could convey the impression that Macy’s sells low-quality merchandise, perhaps becoming viewed as a retailer that has an in-store dumping ground for unwanted goods.
Q: What does this mean for Macy's core customers?
A: Macy’s core customer will probably look through the Backstage merchandise to see what is there. It could become a regular stop on their rounds, or, if not developed properly, a place they can easily avoid. Macy’s is carving out somewhere around 20,000 square feet for Backstage space per store, reducing the space for other merchandise. While this might reduce selection, it might allow for an overall better array of goods for core customers.
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