Macy’s reliance on stores for e-commerce weighs on thoughtful division, Retail News, ET Retail
The 163-year-old retailer said last month that it asked consulting firm AlixPartners to review its business structure after Jana Partners urged it to separate from its e-commerce arm.
The activist hedge fund said in October that e-commerce activity alone could be worth $ 14 billion, more than Macy’s total market cap of around $ 8 billion.
AlixPartners also advised HBC, the owner of Saks Fifth Avenue, on the separation earlier this year of its e-commerce business from its department stores.
Macy’s considers a similar separation more difficult due to its stores ‘large footprint and online shoppers’ dependence on it, the sources said.
Macy’s has nearly 800 stores. He said its online sales are two to three times higher per capita in areas where the stores are located, due to the convenience for customers to pick up and return items in stores.
Saks, on the other hand, has only about 40 stores, and the private company’s e-commerce business generates annual revenues of less than $ 1 billion. That’s a fraction of Macy’s ecommerce revenue, which is expected to exceed $ 8 billion this year, according to Morningstar analysts.
An online business separate from Macy’s will need to have extensive business agreements with the company that owns the department stores. They should govern everything from the distribution and storage of merchandise to promotions and marketing, in order to provide Macy’s customers with a seamless in-store and online experience, the sources said.
Such deals will have to stand the test of time as the company that owns the department stores downsizes, shutting down sites on which e-commerce business relies, the sources added.
“Introducing a lot of service agreements to compensate stores would likely reduce profitability,” Cowen analysts said in a note last month.
Macy’s did not respond to requests for comment.
Duplication of functions now under one roof, such as logistics and administration, would increase costs, the sources said.
Macy’s has gone in the opposite direction with its “Polaris” strategy launched last year, which sees annual cost reductions of $ 1.5 billion through synergies of brick-and-mortar retail with e-commerce. by the end of 2022.
In a letter to Macy’s in October, Jana suggested that a separation benefit could be an injection of money into e-commerce that would help hire top talent and invest in new technology, the sources said. He brought up the case of Saks, which attracted a $ 500 million investment from private equity firm Insight Venture Partners for a $ 2 billion valuation for its online business.
Macy’s magazine is also exploring this possibility, according to the sources.
“Our goal is to ignite a fire under this company which has an incredible brand,” said Guy Phillips, managing member of NuOrion Advisors, a Macy’s investor who is also pushing the company to make change.
Macy’s did not provide a timeline for the completion of the business review.
While Jana applauded Macy’s decision to initiate the review, she didn’t rule out a challenge from the company’s board of directors. He will have the option of appointing directors early next year if he decides the company has not made enough progress.
TRANSFER OF COTS TO CUSTOMERS
This isn’t the first time Macy’s faces have called for a breakup. Six years ago, he rejected demands by activist hedge fund Starboard Value LP to sell its real estate and then rent it out for its stores. It subsequently reduced its real estate portfolio and entered into a partnership with Brookfield Asset Management to withdraw part of it.
Department stores have seen a rebound in sales in recent months as Americans splurge on perfumes, dresses and formal wear in the wake of lockdowns from the COVID-19 pandemic. But their profitability has suffered amid traffic jams, labor shortages and inflationary pressures.
Macy’s is doing much better than most retailers thanks to its ability to pass some of the extra costs on to customers. Its shares are up 143% year-to-date, compared to an 18% increase in the S&P 500 retail index.
Macy’s said last month that it expects gross margins to increase 1% from pre-2019 pandemic levels. It also raised its full-year sales and profit outlook and expects net sales of $ 24.12 billion to $ 24.28 billion, compared to $ 23.55 to $ 23.95 billion previously.