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If I Were: Macy’s/JCPenny

The first way to view the ongoing struggles of department stores like Macy’s, JC Penny, Yonkers, and others is by likening them to their internet adversaries. From this vantage we see their hip, sprawling, prime-retail stores as grossly inefficient warehouses, bleeding margin on

  • customer acquisition: advertising to get people in the door
  • labor: presentation, refolding, cashiers, and cleaning
  • storefront: cost/sqft to be in the (strip)mall

These costs recur, so that for any item we can imagine (and if we had the data could calculate) the daily cost to sell that item, or similarly view how every additional day on the shelf further decreases the potential profit on that item.  Now, the whole idea of department stores is that you can use profits in one seasonal department to offset losses in others, so this is simplistic, but it communicates the basic challenge of retail.

One way to move more product and offset the cost of physical retail is to also sell online, using your brand loyalty to compete directly with the online-only retailers.  In some cases this loyalty can sustain higher prices, but in many cases it seems that department stores must price-match online-only retailers product-for-product.  And since the department stores’ cost of inventory is higher than online-onlys’, they must accept reduced profits. (Many were able to make up this loss by their close relationships with leading brands, potentially giving them access to wider product variety, better product targeting to regional stores, and likely better terms.)

But people still shop for clothes in-person, suggesting that the stores provide some value that they’re not capturing today.  So the second view on department store struggles is their historic value proposition of convenience, selection, and reasonable cost/frequent sales.  With retail items costing slightly higher than online, we’re left with an immediacy that next day shipping can’t quite match and a product selection that, while decreased in breadth from online, can be classified and filtered to a much greater extent by personal criteria.

Given this, I wonder how a showcasing model would change these underlying businesses.  Instead of selling customers in-store items, the retailer should prefer, say, two-day shipping from the regional distribution over the depletion of the in-store inventory.  I think the retailer has a choice as between selling an in-store unit with 50% of the original margin remaining versus inventory from a more cost-efficient warehouse where, say, 95% of the original margin remains.  If ship-to-home is the default, advertised-sale price, the retailer could still sell in-store items at slight $5/5% markup, as a soft preference for selling items from the retailer’s most efficient units.  Moreover, by shifting the retailer’s distribution strategy from inventory-on-shelves to more efficient warehouses, they might better compete with online retailers by aping their efficiencies–in no world does it make sense to expose 5 identical products of every single item to customers, this is just an artifact of the era when the store was the warehouse.

So, if I were Macy’s/JCPenny, I’d seal the deal in person and deliver in two days.

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