Macy’s Inc. Chief Executive Officer Terry Lundgren calls store managers from his car as little as 10 minutes before conducting a surprise visit.
“The first five minutes are a little uncomfortable,” he said in a recent interview at the chain’s New York office.
Lundgren, 61, spends 40 weeks a year visiting stores to make sure his handpicked managers are stocking merchandise that appeals to local shoppers. The regular store visits also help Lundgren keep in touch with the marketplace and maintain annual sales growth that in the past two years has outstripped that of rivals including Kohl’s Corp. (KSS) and J.C. Penney Co. (JCP)
The drop-ins have taken on added urgency since Americans began pulling back on such discretionary purchases as clothing; apparel, cosmetics and accessories account for about 84 percent of Macy’s revenue. Last month, the largest U.S. department store chain reported second-quarter profit that missed estimates and lowered its forecast.
“In soft times, if you’re able to give the customer what she wants, the size of the pie may be shrinking but you’ll be able to capture a greater share of the customer and market,” said Craig Johnson of researcher Customer Growth Partners.
Cincinnati-based Macy’s shares fell the most in more than eight months on Aug. 14 after missing second-quarter profit estimates. They rose 0.3 percent to $44.28 at 9:38 a.m. in New York. Through yesterday, they had gained 13 percent this year, compared with an 18 percent advance for the Standard & Poor’s 500 Index.
The My Macy’s concept stands out in an industry that increasingly relies on sales data to figure out which items to stock next season. Lundgren was once a buyer and spent much of his time grilling store associates about what customers wanted.
During the interview in a paneled boardroom, Lundgren said technology alone can’t provide an answer to what customers want.
“Only people can answer that question,” he said.
Lundgren recently learned that the Macy’s (M) store in McAllen, Texas, was stocking more smaller-sized denim for Mexican tourists. In landlocked Indianapolis, he saw the men’s shoe department had a big display of boating shoes and recalls wondering “Where’s the water, where is the ocean?”
“The unanticipated bonus that we received was the engagement from the associates, who asked for it, received it and then became totally engaged in selling it,” Lundgren said. “That for me is what really makes it work.”
The My Macy’s program isn’t without potential pitfalls, said Brian Yarbrough, an analyst with Edward Jones & Co. in St. Louis. Left-over localized inventory cannot easily be sold in other locations, and the chain might lose buying power, since some merchandise for local shoppers isn’t purchased in bulk.
“You are also putting a lot of faith and trust into local management, so there could be some risk,” said Yarbrough, who recommends holding the shares.
In 2003, Lundgren became CEO of the Federated department store chain. Two years later, he merged with rival May and went on to create the modern Macy’s, finally achieving his dream of creating a national chain under one nameplate. His triumph was shortlived when sales struggled. As he sought ways to boost growth, Lundgren recalled that as a buyer in the late 1970s, he knew every one of his store managers, department managers and key sales associates in 23 locations.
“I remembered those times as being easier to respond to the needs of individual customers,” Lundgren said.
In 2008 and 2009, he populated cities around the country with 1,600 talented and experienced merchandising and planning executives, redeployed from Macy’s regional headquarters, which he collapsed. Each of the 69 new district teams consisted of about 18 to 20 executives responsible for eight to 15 stores, compared with as many as 200 stores before.
Lundgren’s My Macy’s strategy is a unique competitive advantage, said Mark Cohen, a professor at Columbia University’s business school in New York. It helped accelerate Macy’s same-store sales growth to 3.7 percent last year, as the department-store average fell 2 percent, according to the International Council of Shopping Centers in New York.
Still, Cohen questions whether the costs to maintain My Macy’s are sustainable.
“These people are expensive,” he said. “There is always pressure to rein in costs.”
Lundgren says the depth of Macy’s embedded talent is a “huge” advantage because none of its rivals were or are in a position to match it. They don’t have the pools to tap that he did in his former regional operations, and building such teams piecemeal would be time-consuming and costly, he said. Macy’s declined to make any of its frontline managers available for interviews, saying it feared they would be poached.
Lundgren’s oft-repeated mantra to his centralized buyers is “Just say yes,” and signs bearing those words have hung in the office elevators.
“‘When you get a request, it may seem unusual to you,’” Lundgren recalls telling the buyers. “‘But they will know more about the customer wants in Phoenix, Arizona, than you will ever know here in New York.’”
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