Growing numbers of people are shopping on Amazon. This is becoming a problem for Macy’s and legacy retailers like them.
Macy’s currently ranks #7 among U.S. companies in terms of eCommerce sales, far behind #1 and 2 players Amazon and eBay. That’s also below Walmart, the #4 contender, a traditional retailer which has become an agile and fast-scaling tech company with its acquisition of Jet.com.
Q4 2018 was a disappointing showing for Macy’s, with comparable sales (on an owned plus licensed basis) reaching only 0.7%; total owned and licensed sales for the year only rose 2% over the year prior. Macy’s could not keep up the momentum of Black Friday, making for a rough Christmas season. After posting a dismal performance for Q2 2019, Macy’s scaled back their full-year earnings forecast and saw their stock fall by 15%, dampening the stock of rival department stores Nordstrom and J.C. Penney.
To try to right the ship, Macy’s is dabbling with adding third-party sellers. But its approach is typical of retailers that see the benefits of Amazon’s marketplace model but aren’t willing to embrace the more open approach needed to make it work. To stay competitive, Macy’s needs to be looking at how it can add tens of millions of SKUs, soon. Instead, its efforts leave it orders of magnitude away from competitors like Amazon and even Walmart.
It will only get worse from there if Macy’s and department stores like it continue to eschew a true marketplace platform model. High prices and a lack of selection, the main problems faced by these linear retailers, are causing consumers to look elsewhere.
Consumer behavior is not what it used to be. While shopping at department stores was a fact of life just a decade ago, 57% of consumers aged 18-65 worldwide now prefer to shop online.
Naturally, consumers want the kind of selection they are used to in the real world. This is exactly what the scalability of an eCommerce marketplace promises: enough supply for shoppers to find what they want, and enough suppliers for price competition to drive down costs.
The attempts of Macy’s and many other big retailers to bring the shopping experience online have fallen short. They incur costs by acquiring the merchandise and then selling it, not to mention the costs of shipping and the overall supply chain. This creates a natural upper limit to how much can be sold, and therefore, how much value can be brought to consumers.
The supply side is an issue, too. More brands are realizing the needlessness of distributing their items through brick-and-mortar department stores like Macy’s, when they can instead open their own outlets and control the brand experience at relatively low margins. They could also choose to list items on Amazon, which guarantees exposure to a wide audience, or open up their own eCommerce boutiques.
It’s instructive to compare the online efforts of Macy’s to the ways in which Amazon and Walmart are dominating eCommerce.
First, a quick search comparison with Amazon reveals the trouble Macy’s is having. As of August 2019, a search for “women’s clothes” on Macys.com will reveal about 36,000 items available for sale. However, on Amazon, there are 18,000 “casual women’s dresses” alone, not to mention dresses in other categories such as Club & Night Out or Wedding Dresses. The current online selection offered by Macy’s, which we might estimate to max out at under 5 million SKUs, comes nowhere close to the 375 million SKUs that Amazon boasts.
Then there’s Walmart, which might seem more comparable to Macy’s as a big legacy retailer making a play in eCommerce. Walmart took the faster, if more expensive, route towards becoming a marketplace platform: M&A. With its acquisition of Jet.com, Walmart added more than 45 million SKUs to its online outlets, creating remarkable value for consumers.
If traditional retailers want to thrive in modern eCommerce, they will have to make bold moves to open up to third-party sellers. Only then will they have a shot at attracting a large, growing customer base, and creating the network effects needed to scale and compete at the highest levels.
Macy’s, for its part, seems to see the writing on the wall and is at least taking steps in the right direction. With its Vendor Direct program, customers can order online and have items shipped directly from third-party sellers. This program enabled Macy’s to double its online SKUs, and it’s set to reach 1 million SKUs before 2020 according to their Q2 2019 SEC filing. But that’s a drop in the bucket compared to the selection offered by Macy’s marketplace competition.
The caveat here is that Macy’s is tightly controlling the selection, offering customers a curated and “personalized” experience. This approach won’t enable the scalability Macy’s needs to compete with Amazon.
So we see the pieces of the puzzle slowly coming together: more third-party sellers, more online SKUs, and even the kind of ship-to-store and store pickup options which are part of Walmart’s eCommerce success story.
But will Macy’s escape the death spiral it has been in over the past few years? Better yet, can it achieve tens of millions of SKUs within just 12 months — the kind of velocity needed to stay alive and well in an eCommerce world dominated by Amazon and the like? Maybe, but only through drastic action and an all-in commitment to the marketplace model.
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