Macy's Makes a Risky Move to Pander to Wealthy Customers

By Markets Fool.com

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Macy's wants to bail on the middle-income consumer by appealing to those with greater disposable incomes.

They say the only thing found in the middle of the road is a dead squirrel, which may be whyMacy's is ceding more of the mid-tier market to its rivals as it explores new opportunities at either extreme of the retail spectrum.

Recently, Macy's said it will open four new off-price concept stores that would operate more like a T.J. Maxx or Marshall's discount store than a Nordstrom Rack or the ones its own Bloomingdale's runs. Now it says it wants to test the other end of the market and convert some of its stores to an upscale experience, moves indicative that Macy's may be giving up the middle ground to rivals J.C. Penney and Kohl's .

It's a dichotomy reminiscent of what's happening in the market at large.

Stuck in the middle
Consumers haven't evenly benefited from the economy's recovery. The upper and lower income levels have fared better, but fewer job opportunities, lower real-wage levels, and a higher cost of living are eviscerating the middle-income group. Money available for discretionary spending -- like on merchandise sold at Macy's -- is greatly reduced.

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Macy's revenues in the first quarter fell 0.7% to $6.2 billion, while comparable-store sales, an important retail metric that measures revenues achieved by organic means rather than just opening new stores, fell 0.1% from last year. When you remove the comps made by licensed third parties, however, sales were down by almost 1%. Profits also fell to $193 million from $224 million a year ago.

In contrast, J.C. Penney saw a 3.4% gain in comps while significantly narrowing its losses year over year, and same-store saleswere 1.4% higher at Kohl's, with net income growing 2%.

Data: Compant quarterly SEC filings.

A platinum parachute
To shake off the lethargy, Macy's said it's transitioning 150 of its 855 stores to a luxe experience with the top 20% of stores, or what it calls its "platinum doors," having most of or even all clearance merchandise removed from the racks. The stores will also be lavished with new layout redesigns and upgrades, the most popular merchandise, and more employees to help customers.

Macy's CFO Karen Hoguet said the retailer believes there is a chance to accelerate growth by going upmarket: "If you think about it, the top malls in the country are doing extraordinarily well, as are we, but we think we can actually push that growth farther." She said investors could expect results from the change in strategy as early as the fall, but more likely across the fourth quarter.

It was a move signaled by its acquisition earlier this year ofluxury beauty-product retailer Bluemercury.

Threadbare results
Yet that could be a tall order. Handbag maker Coach , for instance, also wanted to leave behind its reputation as a purse for Everywoman (albeit an already more upscale Everywoman) and concentrate on being a modern luxury retailer, but instead saw its customers abandon it in droves.

While handbags priced at $400 and up accounted for about 30% of all handbag sales in its latest quarter, up from the mid-teens just two years ago, sales in the all-important North America region tumbled 24% and comps plunged 23% from the year-ago period as its primary customers stopped shopping its stores.

And the high end of the market isn't necessarily without problems. Hermes may have done well in recent periods, but LVMH Moet Hennessy Louis Vuitton, Gucci parent Kering, and Prada have all struggled to increases sales lately. It's not a slam-dunk proposition for Macy's by any stretch.

Keeping ties to its roots
In reality, Macy's can't completely abandon the mid-tier market. As CFO Hoguet acknowledged, going upscale doesn't work everywhere, so they'll be focusing the strategy on just those regions of the country where they can push it further. It still needs to be mindful of where many, or perhaps most even, of its stores are located.

Yet this move to luxury is coming even as it suffered from a lack of tourist spending in its biggest markets that have flagship Macy's and Bloomingdale's stores, including New York City, Chicago, Las Vegas, and San Francisco. Since those should also be the markets that are best positioned for the reimaging, the transition may not go as smoothly as Macy's projects.

Which is why it's a big opportunity for both J.C. Penney and Kohl's. Both retailers have struggled to regain customers after stumbling badly, but J.C. Penney could be the biggest beneficiary, if only because it fell more steeply. For every market that Macy's goes upscale in, it represents an opportunity for its rivals to capture even more share.

There are risks involved in catering to the middle market, but it's not clear Macy's won't get knocked down by traffic anyway just because it's taking the high road.


The article Macy's Makes a Risky Move to Pander to Wealthy Customers originally appeared on Fool.com.

Rich Duprey owns shares of J.C. Penney Company,. The Motley Fool recommends Apple, Coach, and Nordstrom. The Motley Fool owns shares of Apple and Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.