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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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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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Appeared In
Special Issue
Beauty Inc issue 04/22/2011

The beauty category’s performance has been driven by several stalwart introductions, in which Macy’s linked promotional efforts with key brands.

Case in point: The Estée Lauder Cos. Inc.’s Clinique brand was a powerful sales locomotive last year, as Macy’s got behind the spring launch of Even Better Clinical Dark Spot Corrector in a big way, including participating in the TV campaign.

“Even Better Clinical was a clear example of what we were able to accomplish as one Macy’s because we were able to make a decision and get behind it in a faster, more nimble time period than all the operating divisions could have done,” says Gonzalez. “We were able to decide the week [of the launch], we were able to decide the visual and the marketing support, and we were able to get our stores all behind it. The results were that we got more than our fair share of that business and that really showed us how we can make big things bigger.”

Lynne Greene, global brand president of Lauder’s Clinique, Origins and Ojon brands, nodded to the effort and to Lundgren’s vision and “unbelievable patience” in laying the building blocks over five years to build the merchandising machine by opting for one retail nameplate; creating the My Macy’s program, which she describes as a “brilliant” exercise in tapping localization to build relevance, and following with the “I Believe” holiday campaign to get the heart pumping. Greene says Lundgren is a retailer who is unafraid to make hard decisions, like slapping the Macy’s name over longtime local favorites—“not always to applause”—and knows when and how to put initiatives together into a coherent train of thoughts. “He is the master of timing and knows how to pulse a strategy,” she says, adding Lundgren is “terribly inspirational. He encourages people to step out of the box.” Greene goes on to say that he then supports those who take a chance and get it right.

Gonzalez says Macy’s has always carried “blockbuster” skin care products—Origins Plantscription and Lancôme Génifi que included—but adds, “We now have the machine to really maximize them.”

Fragrance is another area where Macy’s is flexing its national marketing muscle.

“We have the strongest fragrance business in the country, and an enormous share of the market,” says Gonzalez. She allows that the life cycle of celebrity scents continues to shorten, saying, “They might be good for three or six months and then that customer is onto the next thing.” But, she says when the celebrity does something as simple as send a tweet to her fans about an upcoming public appearance at the store—as Rihanna did for the launch of her women’s fragrance Reb’l Fleur—“it’s unbelievable what can happen.”

Lundgren sees Macy’s prowess at trumpeting blockbuster products as a powerful marketing tool, one that in certain instances serves as an alternative to department stores’ long-held practice of gift-withpurchase. Referring to Clinique’s Even Better, he says, “We’re all trying to find something more creative than gift-with-purchase. And 2010 was a clear example of that.…[There’s] much more to come.”

That’s not to suggest that Macy’s is abandoning gwp, rather, it’s simply augmenting it with a new approach. “I see it as a way the customers get involved in a brand,” says Gonzalez. “Gift-with-purchase is a good thing.”

Lundgren adds, “[Gwp] has clearly been a big part of the business, no question, for us and for others.” He recalls, however, that last year Macy’s executives were particularly excited when the organization began working with vendors to invest in touting their latest innovations. “That has to become more a part of our growth in the future,” says Lundgren. “The large majority of our vendors agree with that [approach] and they are anxious to make a move in that direction.”

In addition to retooling its promotional strategy, Macy’s also broke from its established brandedbeauty- counter merchandising philosophy to make room for Impulse Beauty, an effort that spotlights smaller-size, niche brands. The concept borrows from the gondola-fi xtured environment made ubiquitous by specialty chains like Sephora and Ulta, plus drugstore forays into the prestige market, namely CVS Pharmacy’s Beauty 360 and Duane Reade’s Look Boutique.

“The opportunity that we had was to add to the mixture that we had with emerging brands,” says Gonzalez.

Impulse Beauty’s brand mix—housed in an at least 1,000-square-foot area— includes Benefi t Cosmetics, Bare Escentuals, Philosophy, Smashbox Cosmetics, Laura Geller, Laura Mercier, Dior, Stila, H2O Plus, MD Skincare, Bliss and the Frédéric Fekkai hair care brand.

It’s that mix of established department store brands and emerging lines that gives Macy’s an edge over competitors, says Gonzalez.

“The Impulse assortment of brands are carried in other venues. That is the same for our traditional assortment,” she acknowledges. “What is unique is the ability to shop all of these brands under one roof—from Estée Lauder, Clinique, MAC and Chanel to Urban Decay, Sue Devitt and Bare Escentuals. No other retailer has that complete of an assortment to service the customer’s every need.”

The concept has helped Macy’s break a longstanding impasse. In past generations, ceo’s have tried to recruit edgy, small brands, but with little success.

“The beauty of Impulse is that it allows us to bring in these smaller niche vendors that the former [business] model wouldn’t allow for because you needed to do enough volume to afford a staff full time,” says Lundgren. “So, you might be missing these relatively small-volume businesses that would do $50,000 to $100,000 in a store on an annual basis, which is great, but it isn’t enough to afford a staff.”

He continues, “The best part of [Impulse Beauty] is that we can bring in a number of these niche brands and, collectively, they fund a staff to service the entire space. That creates more opportunities for us to bring in some of these smaller, unique brands.”

Impulse Beauty has clearly taken root, leaping from testing in a few pilot stores on the West Coast in 2009 to a projected 100 stores across the country by year’s end.

“It brings a lot,” says Gonzalez. “We have such strength in our big brands, but lots of customers like the ability to touch and play on their own without somebody bothering them. There are people who just want to rush in and replenish a product, there are people who want to browse on their own, and sometimes they are the same people who want a full makeover and consultation.”

As Lundgren points out, the typical Impulse Beauty shopper is “younger and more contemporary, similar to the Impulse apparel customer.”

The youth market is what all retailers are chasing. “The challenge for Macy’s and every department store is it has to get a younger customer base than they’ve had,” says Walter Loeb, former retail analyst and president of the consulting fi rm Loeb Associates Inc. “For awhile, Macy’s customers were aging gently. This is not something that’s tolerable at this point.”

Leslie Blodgett, executive chairman of Bare Escentuals, says Impulse Beauty zeros in on younger shoppers who are already shopping for clothing and accessories at Macy’s. “First and foremost, it’s targeting those who are already shopping at Macy’s. It’s less about taking them away from another format,” she says. Bare Escentuals has counter displays in 91 Macy’s doors, and by year’s end, the brand will be featured in 49 Impulse Beauty shops (all in Macy’s stores where it does not have a counter). “It was a smart idea on Macy’s part,” says Blodgett. “Macy’s already had a younger consumer who was buying apparel, but they weren’t necessarily buying beauty.”

Aurelian Lis, general manager of North America for Benefit Cosmetics, generally gives good marks for the Impulse initiative, so far. “Overall, it’s a good new approach,” he says. “The customer is in a different mindset than in the traditional department. They want to play and experiment.” He adds that the Impulse concept has to reach three plateaus. The store has done well with the first two—letting the customer get to the product and communicating vital information like price and product function. The third step is more subtle. “The beauty staff has to create an environment that gives the customer permission to play,” Lis says. “It takes more time to perfect that.”

Benefit has Brow Bars built into its brand presentation in the store and the company has 100 service locations throughout the Macy’s chain. The brand is in the process of launching a skin care line, B.Right Radiant Skincare by Benefit, a move that has raised expectations. Lis also notes that Macy’s has been at work upgrading the staff. “People are better trained than they were a couple of years ago,” he adds.

Karen Grant, vice president and global beauty industry analyst for The NPD Group, sees the overall use of space as more innovative, inviting and compelling with a sense of home being created among the different floor formats and a more democratic feeling among the European, American and niche brands. She also applauds the reorganization into pairings of a merchant with a vision and an executive in charge of execution, which makes for better alignments. The trick, she says, is to have a certain homogeneity, but also the ability to differentiate from the competition. “The service element has to be different,” she observes, noting that there has been more education given to the sales associates and a little less gift mania to drive volume. Although the gwp promotions remain a big traffic driver.

As for luring new customers into the store, Grant sees the role of Impulse Beauty as a magnet to lure those already shopping in the store to make another purchase— “How to drive or create an environment where you get the most out of your consumers. It’s getting all of the juice out of the orange.”

Grant points out that Macy’s has been willing to try new formats in general. A small example is a merchandise standout on the cosmetics fl oor displaying hot items from different brands. It all adds up to one objective—“let’s keep our consumer in our store with us.”

Of course, some observers don’t see a dramatic change in the level of service working its way down to the selling fl oor yet. “I don’t think we can say the customer experience in beauty is so much different from what it was years ago,” says one vendor, speaking not for attribution. He quickly adds, however, that the chain is “doing really well” in beauty, now that the distraction of the merger has been put to rest, with brands like Clinique providing a big boost last year and Impulse Beauty coming on strong.

Gonzalez says the concept’s mix offers a nice complement to the service-intensive skin treatment business at the beauty counters. “We do have some treatment product in there, but really the home run is the color,” she says, later adding, “Our research has shown us that a good amount of the customers who are buying at Impulse Beauty are Macy’s customers who were not buying color and treatment. So, it’s been additive.”

In the past, she has said that 40 percent of Impulse Beauty shoppers are Macy’s customers who previously purchased in the store’s beauty department. For those who did shop beauty at Macy’s, Gonzalez says they are now simply buying more.

“It’s not, ‘I’m buying this instead of that.’ It’s allowing them to explore and find products that they might not have seen before because they were hidden behind a counter,” she says.

“Part of what we need to do is to make the beauty departments more exciting by constantly injecting new ideas,” which, in her view, energizes the entire offering.

“Customers really respond to variety. That’s why they come to Macy’s.” That point was driven home when Gonzalez was asked if the store is considering doing an Impulse Beauty private label brand, like Sephora’s namesake line. “I’ve thought about it and decided not to do it,” she quickly replies. “In beauty, people really do respond to brands. That’s what my focus is right now—acquiring the right kind of brands for Impulse Beauty.”

Two brands slated for a spring launch are Essie and Living Proof, as Macy’s seeks to add nail polish and expand its hair care offering.

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Special Issue
Beauty Inc issue 04/22/2011

Clearing room for a hair care assortment is a bit like crossing the Rubicon since department stores have historically left those products to the mass market. “It’s an obvious opportunity for us,” says Gonzalez, acknowledging that Macy’s does not sell hair products in its main beauty department.

“We’ve been talking about it for a long time,” adds Lundgren. “It’s one of those businesses that if you bring in one vendor, is it going to be enough volume in every store to pay for an associate who can talk about hair? The answer has been ‘no’ in the past,” says Lundgren. “Now, bringing it in as part of Impulse you can make that work. It’s a natural for us.”

He clarifies that the products have to bring innovation and lend themselves to an assisted-sell environment.

“There are certain customers who care a lot about the hair products that they use,” he says. “If all you care about is the lowest possible price, you can just put soap in a bottle and call it shampoo. There is plenty of that out there.”

On the subject of whether the early Impulse Beauty units are showing a compstore increase, a Macy’s spokesman says, “Results have been very positive, both in the original pilots and the rollout locations.” Although Macy’s refused to comment on the amount, one industry source said the chain is aiming to do $500,000 at each Impulse Beauty unit “and has succeeded in quite a few cases.”

Macy’s continues to tinker with the concept to improve productivity. “One thing I learned was that we weren’t using the end-cap displays correctly,” says Gonzalez. “So, in some of the new [shops] that we’re opening up, we’re actually merchandising the end caps with product and that’s an opportunity to use our space more effectively. Also, in some of the very early pilots [stores] we tried duplicating product that was already in another part of the floor. That was too confusing to the customer. We didn’t need to do that.”

Since Macy’s trump card in competing with the mass market is the service provided by beauty advisers, the question then becomes what can Impulse Beauty offer that is not already available in the market. “We have a staff there and they’re trained on all the brands,” says Gonzalez. “We have a person who coordinates all the information from all the vendors so that we can make sure that [the staff is] fully trained.”

 

Last fall, Macy’s implemented a storewide sales strategy for its employees called Magic Selling, an acronym that stands for: Meet and Make a Connection; Ask Questions and Listen; Give Options, Give Advice; Inspire to Buy and Sell More and Celebrate the Purchase.

“[Service] is the next major step for us,” says Lundgren. “We trained 130,000 employees last year. We’re retraining them now, because you just can’t do it once and then just hope for the best, you really have to make it a culture shift and a change and a focus on engagement as opposed to just ringing the register.…It is the most expensive training initiative we have ever embarked upon.…We’ve made incremental progress each year, it’s time to make big progress.”

Gonzalez adds, “This is about selling skills, it’s not about product information. It is about selling skills that you can use whether you’re selling fragrance, treatment or selling a handbag. It’s how to engage with a customer.”

With the budding Impulse Beauty experiment and so many Macy’s doors, the organization has been reorganized to give senior merchants and planners a telescopic view of what’s happening at the grassroots level.

In the spring of 2009, Macy’s put in a structure that pairs every gmm with a companion general planning manager with the same product scope. Likewise, every divisional merchandising manager has a divisional planning manager. And all buyers report to the chief merchandise planning officer, Julie Greiner.

As a gmm, Gonzalez works with Farrell Foster—executive vice president and general planning manager of cosmetics, fragrances and shoes—who leverages the broad brand strategies down to a door-to-door level.

While Gonzalez is working on assortment strategies on the top level, Foster says his job is to implement those decisions by each location “and make sure that we register who the customer is in each one of the buildings, make sure we’re distorting the categories that are right for each one of our buildings and make sure that we deliver on our commitment in regards to receipts to drive the sales piece of it at a location level.”

Lundgren sums it up: “Muriel buys it and Farrell distributes it.”

Beneath that level there are eight merchandise planning managers responsible for planning cosmetics. They report to a national planning manager, who reports to Greiner. In addition, in each of the 69 local store districts, there is a district merchant for cosmetics, who is responsible for store-level execution in 10 to 12 stores. These district merchants are part of the store’s organization. “With this structure, the district teams are organized around approximately 10 stores, and the whole team is active in those stores every week. They live in these 69 cities around the country, that’s what they do. The information that they feed up is filtered through these eight regions and then that gets to Farrell and Muriel for their decisions and execution,” explains Lundgren.

“It should’ve been done this way forever and probably was 50 years ago when we only had eight stores in each one of these companies. It’s almost back to the future,” he says.

“We now have this filtering system through the organizational structure that allows information to fl ow to Farrell’s organization to help us respond to the product they’re looking for and become locally relevant.” Lundgren continues, “That was really our vision. We said, ‘How do we get closer to the customer? How do we capture the information we know that the cosmetics department in NorthPark, Dallas, has that we couldn’t capture when we were trying to buy that product from San Francisco? Now we’ve got an organization structure that, to my knowledge, no other retailer has.”

Macy’s interest in local buying habits enables the team to zoom in on retail hot spots. One such hot spot is the Impulse Beauty unit in a D-level store located in, of all places, Delaware. That little shop turned out to be the most successful in the Impulse location, right behind the Herald Square outfit in New York.

“Through on-the-ground intelligence and feedback from the field, we really know who this customer is,” says Foster. “This particular store is located near a university, so it’s a younger customer base. Understanding the right product for the right store with a great selling effort has made this the number-two store.” Gonzalez adds that another hot spot was found in the Flushing section of Queens in New York. “We discovered certain stores that were in heavily Asian areas that, when we put the right selling people behind the counter, the business absolutely skyrocketed,” she recalls.

Each small success helps to boost the company’s confidence.

Lundgren says, “There is a broad group of competitors in the beauty world today and we’ve demonstrated in this past year that we can take market share from everyone and we intend to do that in 2011 and beyond.

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Muriel Gonzalez

Photo By Peter Stemmler

Farrell Foster

Photo By Peter Stemmler

Appeared In
Special Issue
Beauty Inc issue 04/22/2011

Who's Who At Macy's

Terry J. Lundgren
A native of Long Beach, Calif., Terry J. Lundgren began his retailing career in 1975 as a trainee at Bullock’s, a Los Angeles-based division of Federated. Over the next decade, he held positions of increasing responsibility in buying, store management and human resources. In 1984, he was named senior vice president and general merchandise manager, moving up to president and chief executive officer three years later. He left Federated after its acquisition by Campeau Corp., joining Neiman Marcus and rising to chairman and ceo. He returned to Federated in April 1994 as chairman and ceo of the Federated Merchandising Group, at a time when the company doubled in size because of numerous acquisitions. Lundgren led the acquisition of May Department Stores Co. in 2005, again doubling the size of the company. Lundgren graduated from the University of Arizona, where he is an active supporter of the Terry J. Lundgren Center for Retailing.

Muriel Gonzalez

Executive vice president and general merchandise manager for cosmetics, fragrance and shoes, Muriel Gonzalez has had significant experience on the retail and brand side of the beauty business.

She began her career at Bloomingdale’s, and her early experience included stints at Saks Fifth Avenue and John Wanamaker, where she quickly rose through the ranks. From 1991 to 1999, she was senior vice president of marketing for Estée Lauder USA and Canada. Her retail experience includes merchandising and marketing. At AnnTaylor Stores Corp., for example, she was executive vice president and chief marketing officer.

Farrell Foster

Farrell Foster joined Broadway Stores Inc. in 1994 as a department manager. Two years later, he moved to Burdines in Miami, where he was promoted through the planning and finance ranks to become vice president for gross margin, financial and capital planning. When the Macy’s merchandising and merchandise planning organization was unified in 2009, Foster became group vice president and national planning manager. Today, he is executive vice president-general planning manager for cosmetics, fragrances and shoes, a position he assumed in November.

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Appeared In
Special Issue
Beauty Inc issue 04/22/2011

Terry J. Lundgren’s Expansive Vision:
The CEO’s Four-Pronged Plan

 

It’s In the Mix: Offer beauty shoppers a one-two punch by combining the power of the big brands on the traditional floor with the playfulness and innovation of niche brands in Impulse Beauty.
Nationwide Is on Our Side: Use cross-country media campaigns to communicate innovation and excitement, thus lessening the dependence on gift-with-purchase.
Public Service: Create a renewed emphasis on training—and retraining—sales associates to transform the store’s culture into one that readily engages with customers.
Think Small: Reorganize the management structure and pair merchandise managers with planning counterparts so that executives can better predict and react quickly to local business drivers.

 

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