Reinventing Retail as a New Ecosystem with Macy’s CEO

In this episode of TD Cowen’s Retail Visionaries Podcast Series, Jeff Gennette, CEO and Chairman of Macy’s speaks with Oliver Chen, Retail & Luxury Analyst on Macy’s investments in next-generation omni capabilities, the transformation of it’s digital platform, and how they engage new and younger customers. They also discuss how Macy’s is working to develop a complete personalized shopping ecosystem fit for every customer, diversity and inclusion imperatives, and how the retail landscape is changing to fit modern demands.

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Transcript

Speaker 1:

Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Oliver Chen:

This is a retail visionary podcast series about visionary ideas and people. My name is Oliver Chen. I’m Cowen’s new platforms, retail and luxury analyst. I’m thrilled today to be joined by Jeff Gennette, the chairman and CEO of Macy’s and the NRF Foundation chairman. Jeff, thanks for being here. What are the key ways the team has reinvented Macy’s for the modern shopper?

Jeff Gennette:

Hey Oliver, it’s great to be with you. So really four ways. So the first one is really being a omnichannel retailer in all its fullness and with Macy’s and Bloomingdale’s doing that from off price to luxury. So making sure that all customer touch points are covered and it’s a frictionless journey for them. Second way is really through expanded categories. And that really is to really serve a much more diverse, younger customer and their lifestyle needs and all of that. And we do that through our kind of the nexus of style and fashion as well as through special occasion.

Jeff Gennette:

The third way is really just by continuing to accelerate our digital chops. And as you know, we’re moving to about 40% of our business starting on or really on the digital platforms, we’re moving towards a $10 billion digital business. And we’re doing that through really a hyper focus on our function, as well as the experience of all of our digital touch points. Growth for us in the future will be, we just made the announcement that we’re going to be expanding into a marketplace. So we’re ready for that. And that’ll be on top of the $10 billion marker that we’ve already set. And then the fourth way is really this Omni ecosystem that we’ve been talking about, and really starting to expand this small door format that’s off mall that we’ve been experimenting with very successfully on both the Bloomingdale’s and the Macy’s brands.

Oliver Chen:

Jeff, the business has seen a sizeable increase in new customer signups, particularly with younger and more diverse shoppers. How is Macy’s driving the growth within this customer group and how is the customer invested in the brand relevance?

Jeff Gennette:

Yeah, so Oliver we’re definitely focused on this under 40 customer. And I think when you look at our customers, our under 40 customer is much more diverse than the national average. We’re about 60% more diverse than the national being at 50% that are heavily influenced by digital. We’ve been very focused on product relevancy and curation. New brands that we’ve added, private brands that we’ve added really focused on the discovery and experience across all channels, really propping up our off price business. And through that, we’ve been able to, as you heard from us in the third quarter, we were able to get about four and a half million new customers into the brand, which was almost a 30% pickup from where we were in 2019. A chunk of those came in through digital, about 40%. And we did that through our app update.

Jeff Gennette:

We added live stream shopping. We added a contemporary site. We added a sustainability site lit, about half of those new customers joined our loyalty program. One of the things that we’re really focused on is this millennial parent, and that’s a good way for them to come into our brand. And so you see that through our Toys “R” Us initiative, and really recognizing that we believe that the toy experience at Macy’s on a national level can be the best experience in the future. And you’ll see that as we roll out all the Toys “R” Us shops in the holiday of 22. The other thing that we’ve done with like fanatics and just new content that we put in. And the last thing I’d say on this younger customer has been really payment options. As you know, we joined, we collaborated with Klarna for almost a year now and we just added PayPal and Venmo, just new payment options for these younger customers. So we have a lot in play to make sure that we continue to attract a younger customer.

Oliver Chen:

Thanks, Jeff, the scale, and the size, and the agility of Macy’s digital business is also exciting. What are the key opportunities here? What does next generation Omni mean to you?

Jeff Gennette:

Yeah, just to back up, just to look at the Omni facts at Macy’s Inc, today about six different touch points go into a purchase between digital, in store and so customers, they shop both, they don’t think of us by channel. They think of us as a brand and they shop both channels. That’s our competitive advantage versus digitally native brands. And what you see on digital is that wherever we have stores or digital business is three times higher in penetration in those markets. The omnichannel customer, they shop frequently, three times more than another customer. They shop more categories, they spend more, they’re more profitable. And about 85% of these omnichannel customers participate in our loyalty program. So all good there. When you look at digital and the thing that we’re hyper focused on, on digital is as mentioned kind of what’s the functional experience for the customer, just take all the friction out. Make sure that there’s enough of an experience there for them to come back.

Jeff Gennette:

And then the metric that we most look at is really what our conversion is. So as you heard from us in the third quarter, our conversion in digital was up about 27% for two years ago. And we did that by just this foundational work we’re doing with Google Cloud, with Klarna, with the Omni experience that we’re pushing through curbside and same day delivery. And then on the experience side, we just did a total refresh of our app. We’re really focusing on curated digital experiences and just go to like our contemporary site, go to our gift finder. We’re just starting with Macy’s Live and live shopping. So all that is in play. I think as I look forward, the two biggest digital growth factors are going to be number one is going to be marketplace. And we’re adding that. That’ll be launched in the back half of 22 and it really is just going to enable Macy’s and Bloomingdale’s customers to connect with curated sellers and it’s scalable.

Jeff Gennette:

There’s almost zero incremental cost. We’re partnering with Miracle to do that and something that’s very near and dear to your heart on this Oliver, is really what we’re doing with personalization. Personalization is what connects all of it. And we’re in the early innings of that. So when you think about our assortment online, be it owned, vendor direct or through marketplace personalization is going to give us the opportunity to have the most relevant offers for each of our customers. And we’ll leverage analytics and insights to do that. And that by targeting our personalization and pricing science, we’re able to do so many things. And one of them is just to reduce the number of promotions that we do broadly and really have much more relevant content for an individual customer. So that’s on the horizon for us.

Oliver Chen:

That’s an interesting topic, Jeff, with personalization. How can Macy’s achieve that? What’s on the roadmap ahead and what do you think consumers will really want or value here with respect to personalization?

Jeff Gennette:

I think the big thing that they are going to value is that dude, does this message, it’s coming across my email or as I go into the site or I go into the app, do they specifically know me? And is the content relevant for me? And making sure that we use all the millions of bits of data that we have to kind of personalize those offerings, be it content, or be it price, or be it service, or be it value. Those are all the things that are at our disposal with a customer in mind. And we now have about 70% of Macy’s and Bloomingdale’s business is with of known customers as part of our loyalty program. And it just gives us huge opportunities to accelerate everything that we’re doing with art and science, to make sure that those offerings are relevant to those customers.

Oliver Chen:

Jeff, what about that? What about this magic and logic theme and maintaining the magic of Macy’s and merchandising that’s fashion forward as well at the same time of managing inventories very smartly?

Jeff Gennette:

Yeah. That’s one of the biggest things that we learned during the pandemic was just reducing the amount of inventory that we’re carrying, bringing it in, put supply chain aside for a moment, but bringing inventory much closer into need. Making sure that your supply chain is ready to handle what those customer indications are. We use the full country landscape to identify what trends are happening. What’s going to be popular, what price points are happening. And we do that in certain parts of the country to inform next seasons needs and content. And bringing that in closer to using lag as a real discipline with our merchant population, making sure that our book stock is lower than it’s been in many, many years and bringing in content that is just right for that customer at those moments is a way that we’re going to be driving more relevancy, more curated assortment, less clutter, and obviously better profitability. So using pricing science and keeping our inventories down and much fresher to customer need is a key component that we learn through the pandemic that will carry with us.

Oliver Chen:

Supply chain’s been an interesting challenge for everybody. You really proactively faced it. What are some major changes and permanent changes that you’ve made to supply chain as we look forward and also dealing with this tougher environment?

Jeff Gennette:

Yeah. So it’s just kind of going through the kind of steps of supply chain, certainly from a sourcing perspective. Having less reliance on certain countries, spreading the opportunities across duty free countries, really working on all of our brands, looking at common fabrics, looking at making sure that the factories that we use that were important and the ones that are the most important to us. The second thing is really making sure that our overseas freight that we’re working with. I mean, obviously we work with a brand like Merskin’s making sure that we’re as important to them as they are to us, getting so that you’re not in the spot market trying to negotiate containers, keeping your cost down that way. Using different ports. I mean, I think that’s one of the biggest ones, is that can you reduce your reliance on the LA port and use smaller ports and use smaller freight coming in, getting your supply chain into those smaller ports.

Jeff Gennette:

We’ve had big advantages with that. Then just obviously moving up your ship dates, ensuring that you’re working with all of your national partners, and if you have the opportunity to negotiate room with Merskin and you have the opportunity to help them with their freight on those same container ships, do that. So, and then when you get into kind of the, what you’re doing with upstream downstream, if you’re in your own supply chain, that’s going to be, when you think about speed and convenience for the customer, that’s the new table stakes like free shipping was five years ago.

Jeff Gennette:

And so, making sure that we are testing everything that we need to, to be able to forward deploy inventory much closer to the customer versus our customer fulfillment centers. And so giving customers option with that and doing that all as a millions of SKUs that we carry as a fashion retailer. And so there is a lot of art and science on that and we’re very focused on that. And then the last mile and making sure that you’ve got inventory that’s ready to go for same day pickup, curbside pickup, that you’re using third party freight in addition to your national carriers. So look, there isn’t a plank in our supply chain that we’re not looking at that’s not under review and that we’re not getting better at.

Oliver Chen:

Jeff, Macy’s has also been a leader in diversity and inclusion through embedding transparent D&I initiatives and goals across the business. What should investors know about what you’re doing here?

Jeff Gennette:

Yeah. So couple things. We definitely want to be a beacon for diversity and inclusion for our colleagues, for our customers, for communities. We want to embed diversity and inclusion in how we think, act, and operate. And so we have five planks to our strategy. First one is really colleague, and this is one that makes sure that your ethnicity, your representation is across the entire funnel all the way from your frontline to your boardroom. And where we have a drop off and the kind of we call it the hourglass and that kind of mid-management where you have some thinning there where people might leave, how you going to solve that? So we do that through many programs. The mosaic program is the one that we’re getting some great traction with. The second bit would be customers and making sure they feel represented in our stores with our products and our services.

Jeff Gennette:

So we’ve done that through icons of style. We were one of the first retailers to take the 15% pledge. The third bucket would be suppliers. And what are we doing to provide economic opportunity for minority and women owned businesses? And so Oliver, what we’ve been doing with workshop it’s now in its 11th year, really focusing on a diverse supplier program, working with organizations like the NRF to be a repository for contacts for all companies against companies that are minority and women owned. The fourth bucket would be community. And we take great pride in our culture for volunteerism and really using local and national grants to support community social groups. And we’re also doing that through CEO Action for Racial Equity, which we’ve taken a leadership position with. And then the last bucket is where do you stand with marketing? And we’re just committed to reflecting the full spectrum of our customers, and our imagery, and our messages, and our experience. And those are the tracks that we’re taking. We’re never going to be done with this subject, but it’s part of the DNA of Macy’s, Inc. And it’s something we take great pride in.

Oliver Chen:

Jeff, another important topic with respect to ESG is this topic of sustainability. What do you thinks on the roadmap for this in terms of how you think about it? What’s important for the retail industry more broadly as the industry focuses on many aspects of this as well?

Jeff Gennette:

Yeah, so I think, obviously we just posted in October our sustainability program on our website. And when you look at everything that we are doing to reduce waste, be that carbon waste, what we’re doing in our supply chain, what we’re doing in our stores, what we’re doing with energy, what we’re doing with our parking lots, all of those are opportunities that you’ll continue to see us expand. But it also is a hallmark when you think about ESG expectations from investors or new colleagues. We’re on point to make sure that we continue to get better at this. And when you look at sustainable brands, or you look at just best practices that we’re learning from some of our competitors, this is a journey that we are putting increased focus on and it’s a gigantic expectation from everybody. It’s the right thing to do and it’s just going to get more important.

Oliver Chen:

Jeff, earlier you mentioned ecosystem. What do you mean by ecosystem? We host an ecosystem conference at Cowen and related to that question, Jeff is how will your marketplace be special? I mean, there are a lot of marketplaces out there, but it sounds like a really special opportunity for Macy’s as well.

Jeff Gennette:

Yeah. So we took our time on this one, Oliver. I’ll take it in two parts. The first one is the ecosystem, which from my perspective ecosystem is really about how do you make sure that you’re satisfying all your customer touch points. And for us, having a national website, clearly we were able to do that. Having stores only in malls when 60% of American shoppers who shop brick and mortar are shopping off mall was a big opportunity for us to say, okay, how do we scalably put brick and mortar off mall in ways that are touching customers that don’t find malls convenient as a place to shop. So that ecosystem, and you make every one of those touch points omnichannel capable for returns, for pickup, for all forms of payment. And so that’s something that we have experimented with in three different markets and successfully. And so we’re now ready to scale that into more markets in 2022. So that is one of the biggest opportunities that we have.

Oliver Chen:

Jeff, our final question is what do you thinks most underappreciated about the Macy’s store and any key messages for investors as well?

Jeff Gennette:

Yeah, I think the key messages are that or just three, I would say is that we’re deeply committed to the customer journey across all the appropriate omnichannel touch points. And we’ve got the cash flow to basically make all those investments. And so we’re just, we’re very committed to making sure that the customer in all of their fullness is addressed in our strategy. The second is that we have momentum for sustainable and profitable growth with an eye on market share gains in the future and doing that through digital first and foremost marketplace, personalization being two of the big growth factors. And the second would be for new and expanded categories, brands and ideas like toys, new categories for us that are going to bring in lots of new customers.

Jeff Gennette:

And the third point was just, would be how healthy our balance sheet is. I mean, we really have focused on that. Obviously making sure that the first order of business is having capital to invest in the business, but then making sure that the debt retirement is handled. In our case we’ve been doing that ahead of schedule. We’ve reintroduced the dividend with signaling that will have increases to that in the future, as well as we’ve also been doing stock buybacks when we believe that our stock is at a price that it makes sense for us to buy it back. So our financial health is in, we’re in better shape out of the pandemic than we were going into it. So those are the three things that I would want the investors to know about Macy’s right now and going into the future.

Oliver Chen:

Well, Jeff, it was great to hear about all the innovation happening and the customer centricity that you’re driving, speed and logic, and also your commitment to diversity, inclusion, and equity as well. Thanks for joining us.

Jeff Gennette:

Thanks, Oliver.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.

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