Summary
Macy's top management continues to show no clear signs of understanding the breadth and depth of the problems they face. Centralizing merchandising, marketing and planning may be appropriate moves when supported by the right technology. However, announcing a simultaneous "regionalization" program which ads 35-40 executives to allow for localized marketing, merchandising and planning makes virtually no sense. Rather than come to grips with the real issues, Macy's continues to grasp at slim straws. Already with a Price - Book ratio around 0.37, Macy's is valued less than any other comparative retailer except Dillards and The Bon Ton. Even Saks has a higher ratio. In comparison, WM and Nordstrom are above 3, TGT above 2, and even struggling JCP is above 1. With a virtually captive Board, there's no sign that Macy's shareholders can expect to see any improvement in their status.
Analysis
Centralizing functions such as marketing, merchandise planning, and buying is inherently NOT a bad decision. When supported by the right technology, it is realistically possible to manage a national chain effectively, and even, to produce assortments and marketing variations which address localized differences. I do not believe that Macy's has this technology, as it is relatively new, and I have seen no press releases indicating such an upgrade. If Macy's does NOT have the appropriate technology, then the centralization of these activities will soon have an impact on volume...negatively. There are a finite number of SKU's that a merchant can manage....and localized assortments across a national chain such as Macy's exceeds that manageable limit. Substantially. While the overhead reductions are unavoidable, there is very little reason to believe that mission-critical decision making and processes will be enhanced....rather there is reason to believe they will be degraded. This is bad news for improving results.
Localizing marketing, merchandising and planning at a regional level is contradictory to the centralized decision made above. Beyond that, this sort of matrix structure has NEVER worked for any sustainable period on a scale equal to Macy's. Name the national retailer, and they've tried this. None have succeeded. There are a myriad of reasons, amongst which are issues of performance evaluation, executive compensation, inventory control, merchandise presentation, marketing economies of scale, budgetary oversight and many more. Inherently, this structure requires highly efficient processes and business oversight in order to avoid becoming enormously detrimental. Past efforts such as this have led to rapid drops in marketing ROI, bloating of local inventories, degrading of gross and initial margins,, lack of coherent floor presence, and expensive retrenchment as management reverts to the previous ways of doing things.
The harsh reality for Macy's shareholders is that the chain has only a marginal value proposition in a deep recessionary environment. Without solid brands to drive foot traffic, trends difficult to find elsewhere, or merchandise assortments unique to Macys, there are relatively few compelling reasons to shop more, or to alter existing shopping loyalties. The high-low promotional reality of department store retailing sits poorly with the alterations in consumer shopping behavior brought on by the recession. The strength of Macy's merchandise has always been it's exclusive brands, yet the secret to THAT success was the existence of external national brands to drive traffic, create interest and more importantly, establish with higher price points the inherent value of the exclusive brands. None of that exists right now.
Beyond the almost unalterable merchandise mix issues is the fact that Macy's is over-stored. The paltry number of stores to be closed is simply insufficient. It's not news to say that the May acquisition was a bad choice. What is news is to point out that most of the post-merger decisions have added to the downside, not mitigated against it. One of the key issues was what to do with the May location in common malls. The dominant answer was to simply double the Macy's square footage, often separating into a Mens Store or other segmentation. The bottom line for this approach was to vastly increase the amount of inventory held at that overall mall....it's not like adding May added merchandise categories.
The BOD is virtually captive, dominated by insiders or longtimers without objectivity. There is no current voice for significant change, and no "loyal opposition" to force current management to consider anything other than it's current point of view. In short, while a Price to Book ratio of .37 is horrible, it very well may be over valued!
