Nick Campbell and Kyle Sturgeon of MERU recently sat down with Michael Krauter, a former Macy’s executive, to discuss the retail landscape and how to survive in an increasingly competitive environment. The following is excerpted from a longer conversation.
MERU: Just to start with some recent news, I don't know how closely you still follow Macy's but their last quarter was pretty tough.
Michael: Very tough. Their comps [same-store sales growth] were much more difficult than expected. I do think there is some upside from getting rid of the bottom 20-something percent of their stores.
There are a lot of segments in retail that are doing very well. Obviously, Amazon is the single biggest one. They’ve always been strong in hard goods. They've now become a significant part of the apparel business.
Who's doing well is off-mall. Take the off-price business: Ross Stores, T.J. Maxx, Marshalls, Burlington Coat, all are doing very, very well. The dollar business is 35 billion or more and growing. And there’s Costco. The off-mall venues are performing better than the malls now.
MERU: Do department stores have a reason to exist?
Michael: Yes. Department stores have made mistakes that can be fixed, but they have to evolve their strategy and have more exclusive merchandise. They need to have goods that the customer can't scan the UPC and say, "I could buy it in five places." What's a good example of that? Crate & Barrel. They basically create their own merchandise, so they don't have that price comparison issue.
MERU: How should retailers think about their omnichannel strategy?
Michael: Your goal as a retailer is to serve the customer in any way they want to buy. You run into limitations, and you try to overcome those. The warehouse only has so much space; the website is limited in how many SKUs you can support; stores have a limited assortment. How do you take these things and leverage them together to grow sales?
One of the first things you do is set up processes so if a customer can’t find something in the store, an order is placed on the website. The second thing is if the warehouse doesn’t have enough products for the website, you enable fulfillment from the stores.
However, you have to create the right incentives. We could have team members with the mindset of, “I'm not giving up my stock.” They’re worried about losing sales. You have to give the store credit for anything that flows out the back door. You need to have everybody in the game. Otherwise, you run into, “I can't find that handbag in my store.” That's human nature.
MERU: You need good systems.
Michael: Great systems. The algorithms you use really matter.
Once you have good systems, you open up additional opportunities. You can begin to offer stuff that you don't stock anywhere in a brick-and-mortar store. You can begin to offer merchandise that's in a vendor's warehouse. That's a big opportunity, extending your assortment beyond what you physically own.
MERU: What advice would you give retailers today?
Michael: Understand how the competitive landscape is changing. It's beyond Amazon. It's about off-price. It's about different retailers who are taking market share.
Product differentiation we talked about. I'd have more real estate off-mall. I'd be making a bigger shift to reduce inventory levels and create more open-to-buy.
I think T.J. Maxx just came out with their results. They were up 1% comp. Their inventory was down by almost 9%.
Michael: It’s incredible. Turning your inventory faster is critical because you want to be able to make opportunistic buys. If you’re always overstocked, you don’t have that flexibility.
MERU: Thanks for your time.
Michael: Thank you.
Nick Campbell is a Managing Partner at MERU. He just completed an assignment as the Chief Restructuring Officer for Eastern Outfitters, a $400M sporting goods retailer based in Connecticut.
Kyle Sturgeon is a Managing Partner at MERU. He has served numerous retail clients, including apparel, auto parts, entertainment, and restaurants.
Michael Krauter is an independent retail executive. Over the course of a 30+ year career at Macy’s, he held numerous leadership positions in-store operations, planning & allocation, and merchandising.