Harnessing the Might of Macy's

Chief executive officer Terry J. Lundgren is out to prove that bigger really does mean better.

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Special Issue
Beauty Inc issue 04/22/2011

During the last decade, department stores have often been the target of criticism for a seemingly anemic approach to innovation and an inability to attract new customers in the face of competitive new retail formats.

Now Macy’s is attempting to change the market’s tune and show that bigger is better by adding a dimension. As the solid number one in terms of U.S. prestige sales, the retailer is out to prove it’s got the brains as well as the brawn to become unbeatable in beauty.

If Terry J. Lundgren—chairman, president and chief executive officer of Macy’s Inc.—has his way, Macy’s, with 665 full-line beauty stores, will soon outstrip its competitors in terms of buzz and volume. With the recently introduced Impulse Beauty storewithin-a-store units, Macy’s is formulating a retail one-two punch that theoretically offers consumers—under one roof—the power of big brands on the traditional cosmetics selling floor and the playfulness of the niche dwellers on gondolas in the free-wheeling, more casual Impulse format. The staff, divided into merchants and operations chiefs, has been reorganized to give top executives the dexterity to drill down into local branches and discover what’s selling and what’s not. Likewise, the chain has launched a widespread training program aimed at honing selling skills and sharpening finesse.

All this adds up to a giant in the process of developing its own sense of cachet.

During a wide-ranging interview, Lundgren reflected on the strategic potency of beauty at Macy’s and the Impulse Beauty concept, as the chain battles for market share against the likes of Sephora and Ulta, onetime retail upstarts that are now vying for more turf.

“Beauty is such an important business,” says Lundgren. “Once you capture this customer, you’ve got a customer who will not only shop for beauty products consistently, but will shop the store.…We call it a signature business. It’s one of the most important businesses in the store.”


The importance of the category is underscored by its location. As Lundgren points out, the cosmetics department stands “at the front door of every one of our stores.

“I have always viewed it as the first impression of Macy’s, so the beauty business needs to be a great first impression,” he says. “We have to continue to work very hard to not ever take that for granted, but also work closely with our vendors and with our stores to make sure we understand that what is important to the customer in downtown Chicago may be different from the customer in Miami.”

Macy’s intensifying preoccupation with local preferences—a program known as My Macy’s—prompted a reorganization of its entire staff structure to ensure that information fl ows freely from the store level to the executive suite. The retailer also initiated a broad-scale training program called Magic Selling. Lastly, it unveiled the ambitious Impulse Beauty—an assisted, open-sell concept in select doors that serves as Macy’s answer to Sephora and like-minded competitors that cater to consumers’ interest in service only when they want it.

The Impulse Beauty concept expands Macy’s beauty business and the breadth of brands it carries by mixing open sell with traditional beauty counters—inside one store.

Asked how much beauty commands of total store sales and how high he would like to see it grow, Lundgren slyly replies, “Whatever it is, it always needs to be more in my opinion.”

Macy’s executives steadfastly declined to cite financial figures of any sort, but industry sources estimate the chain generated $3.25 billion in prestige fragrance, skin care and color cosmetics sales for 2010. That’s roughly 40 percent of the prestige market in America. In fragrances, the chain dominates with an estimated 50 percent share of the U.S. prestige market. These same sources calculate that beauty generates nearly 15 percent of total store sales, putting the category at the high end of the department store average.

By comparison, sources estimate Sephora accounts for roughly 15 percent of the prestige market, with a sales volume calculated at $1.1 billion to $1.2 billion a year— generated by 253 freestanding stores (not counting Canada), 235 units within J.C. Penney doors and what some manufacturers consider the most potent Web site in the industry. A Sephora spokeswoman had no comment on the sales estimate. In addition, Nordstrom is considered the third heavyweight by market executives with cosmetics department sales of $972 million last year in only 115 full-line doors, as of February.

As for Macy’s, “we don’t break out the categories, nor do we break out the stores,” says Lundgren. “But we are very pleased with our performance in beauty. We are very excited about 2010, and we are more excited about 2011.”

For the quarter ended Jan. 29, total store sales gained 4.3 percent on a comparable-store basis and the company projects 3 percent gains on a comp basis. Beauty division sales, according to industry sources, have been running ahead of those of the overall store.

Wall Street is equally as bullish. “Macy’s had the best comps in 15 years,” says Citi analyst Deborah Weinswig, noting that Macy’s same-store sales increased 4.6 percent in 2010. “This is a company that is very much evolving.” She notes that the apparel category, on the whole, is in decline, due to an aging customer. “But, skin care is particularly important to this customer,” says Weinswig. She’s also encouraged by Impulse Beauty and its ability to draw younger shoppers to the category. “It makes Macy’s feel more edgy.…It’s much less intimidating to shop Impulse Beauty. You can explore, it’s whimsical and it’s fun.”

Weinswig, who estimates beauty accounts for 10 to 15 percent of Macy’s sales, says, “It’s definitely a growing business for Macy’s.” The retailer’s My Macy’s efforts also lend themselves particularly well to the category. “I’ve always thought of beauty as a very localized business,” she says. Analysts’ optimism is reflected in the company’s stock price: Last July, shares on the New York Stock Exchange were at $17.16, a figure that had climbed to $23.93 at press time.

As an example, Muriel Gonzalez—Macy’s executive vice president and general merchandise manager of cosmetics, fragrances and shoes—cites the retailer’s success in foundation sales. “Our foundation business is very strong and that makes for a very loyal customer,” says Gonzalez. “Getting it right by location is something that we are able to do with a much greater degree than we ever did in the past.”

A lot of effort has gone into making such seemingly logical tasks possible. More than five years after swallowing up its competitors, Macy’s seems to have finally cracked the code on how to capitalize on its scale. In 2005, Lundgren orchestrated the acquisition of its long-time competitor May Department Stores Co. and its various retail nameplates—including Lord & Taylor (which was later divested), Marshall Field’s, Hecht’s and Foley’s—for approximately $17.3 billion. After combining the companies, Lundgren boldly created the first prestige category national department store chain called Macy’s. That controversial act has allowed Macy’s to implement national, blockbuster launches on key products in all stores on the same date.

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