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Macy’s Recent Success Hinges on Physical Stores

When it’s deliver-or-die, supply chains become the lifeblood of a company. To that end, the fashion industry has embraced technology to navigate today’s hyper-complicated supply chain, with myriad solutions shaping the first, middle and last mile. Call it Sourcing 2.0.

While so much of the U.S retail industry languishes, Macy’s thrives: it reported that comparable store sales in the fourth-quarter jumped 2.8% to $27.9 billion while earnings shot up 19 percent to $3.86 billion. And the centerpiece of Macy’s strategy, defying the trend toward click-and-order sales, is brick-and-mortar stores.

Speaking to investors on a recent earnings call, Macy’s Chief Financial Officer Karen Hoguet emphasized the centrality of physical stores in the age of cyber-retail. For Macy’s, omnichannel capability amounts to a fully integrated sales strategy, seamlessly coordinating its e-commerce with stores that double as fulfillment centers. This means that products purchased online can be picked up in a store, and that products purchased in a store can be shipped directly to a shopper’s home.

Macy’s continues to invest heavily in its physical stores. It maintains more than 800 across the U.S. and its renovations of the iconic Herald Square location are very near completion. The shoe department on the second floor houses almost 300,000 pairs of shoes. And now stores will be equipped with a special merchandising program that “localizes” the offerings, essentially customizing the apparel selection to accommodate the sensibilities of local consumers.

The focus on the physical store is a departure from what competitors like Sears are trying to accomplish, which is to shift more decisively to online retail. Closing down stores all over the U.S. and Canada, Sears’ onmichannel approach attempts to substitute physical stores with Internet presence, rather than find ways to collaboratively combine the two. Sears CEO Eddie Lampert said, “The consensus about decreased store traffic also highlights another decision that has steered our work: we very often need less space to serve our members better and we may need fewer locations as well. As difficult as these changes are, we believe the alternative of failing to plan for or even see where the retail industry is heading would be far, far worse.” And while Macy’s poured millions into the overhaul of its flagship store in Manhattan, Sears has announced its intention to shutter its flagship store in Chicago this April, as part of a strategy to shift from brick-and-mortar sales to online retail.

Some experts think Macy’s trailblazing success in this regard, coupled with some anxiety among retailers about the effectiveness of cyber-sales delinked from traditional store operations, will inspire others to follow in its lead. A recent study conducted by the Edgell Knowledge Network (EKN) revealed 63 percent of the retailers surveyed identified their biggest concern as the accelerated adoption of new technologies by both customers and competitors. Moreover, 42 percent complained that their companies suffered from a lack of an IT department skilled enough to meet these challenges, and 48 percent worry that investment in new technologies wouldn’t produce an adequate rate of return.

Nevertheless, technological advancement is no guarantee of commercial success. EKN research director Guarav Pant explained that investment in omnichannel strategies is just one part of the retail puzzle. He said, “People think that if you put all of the technological bells and whistles in the store, it will be the best store. But it may end up being a mausoleum of technology. If [some technology] doesn’t work for the brand, it doesn’t make any sense.”

The trick seems to be to see each as an indispensable compliment to the other, rather than competing alternatives. Paul Coby, CIO of John Lewis, captured the dynamic relation between the two in a recent speech. He said, “If you put a good online and store experience together, you’ve got a bit of magic.”

Macy’s has certainly had its share of challenges: persistent economic uncertainty has hamstrung consumer spending, thinning the store traffic the retailer can normally rely upon. Also, Macy’s strategy to pivot away from the sorts of products that fetch higher margins–jewelry and watches, for example–took its toil on its profitability. And Macy’s had to contend with the struggles of its competitors, who offered a flurry of promotions and discounts, pushing it to follow suit.

Still, Macy’s stellar fourth-quarter results provide compelling evidence that the retailer is marching toward success, and reinvigorating the importance of the physical retail location in the process.

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