Macy’s is a no longer a retailer
Whether you look at its stock price or repeated news stories about its store closings, slowing sales or general dismay around its operations, it seems relatively obvious that without some hard decisions Macy’s is going the way of Sears.
There are many reasons why Macy’s is failing. Yes. More and more shoppers and shopping online. Yes. Compared to many other retailers, Macy’s hasn’t gotten a hold on its inventory.
But there is another reason why Macy’s is doing poorly.
Simply put, Macy’s is no longer a retailer.
Over the past five years, Macy’s has gone from being a retailer to simply a lead generation company of Citibank.
It is very likely, according to its own estimations, that Macy’s credit card income in 2017 will total somewhere between $740-$760 million in fiscal 2017.
In the 52 weeks ending January 28, 2017, Macy’s total operating income was $1.3 billion.
That means that nearly 57% of Macy’s over all operating income, assuming its retail income doesn’t collapse in fiscal 2017, will come from its credit card program.
To repeat, nearly 57 cents of every dollar of income going into Macy’s will not be from selling things to customers but from a credit card deal with Citibank whereby Macy’s only job is to recruit customers for Citibank.
Macy’s is no longer a retailer. It should report its retail income as income from ancillary activities and simply admit that it is now a company whose job it is to open credit card accounts for banks.
There is nothing wrong with such companies. There are lots and lots of companies that send out marketing letters or give away free t-shirts to get credit card applications. These companies, however, are not retailers; they are lead generation shops serving banks.
Many retailers have credit card programs, but Macy’s is unique.
Yes. It is true that many retailer’s have a co-brand credit card program. Macy’s, however, stands out.
Of the major retailer’s only five come anywhere close to Macy’s when it comes to measuring the percentage of customer’s who have signed up for a cobranded credit card program.
Cabela’s owned its own bank. It was not signing up credit card users for someone else. It was the bank. It owned the customer whether they were buying fishing gear or signing up for a credit card program.
Nordstrom, similarly, owned its own bank — which it sold to TD Bank for $2.2 billion.
Kohl’s does not have a co-branded credit card program. The 60% penetration rate is for its private label card program, which means customers cannot use the card outside Kohl’s. Kohl’s isn’t signing up credit card customers so that they can shop outside Kohl’s. The card is only good for shopping at Kohl’s.
This leaves only HHGregg, the appliance seller, with a credit card program that comes close to Macy’s level of penetration. And guess what is happening to HHGregg?
Yup. It is shutting down all its stores and going out of business.
The Core Business
It should be obvious that businesses focus on what makes the most money. Therefore, it should not be surprising that Macy’s stopped focusing on its retail woes as credit card income became a bigger and bigger part of Macy’s sale over the past few years.
This has happened in other poorly performing industries as well. Most poorly performing airlines make more money from selling cobranded credit cards than flying people around. This should be apparent from the flying experience. Next time you fly United, think about how much time they spend trying to sell you the United Chase credit card versus trying to convince you to fly United again.
It seems that Macy’s, a few years ago, looked at the airlines financial performance and said with all of its corporate might: get me some of that.
Target is the gold standard.
That Macy’s is in trouble doesn’t mean that retailers should not focus on payment issues. In fact, many retailers such as Kohl’s and Target, have done extremely well by turning payment products into a competitive advantage.
The Target Debit RedCard is an extremely successful payment card program that now accounts for nearly 17% of Target’s sales.
The customer’s using the Target Debit RedCard shop more frequently at Target, spend more money and are more loyal. And because Target does not go through traditional Visa/MasterCard banking networks for the card, each Target customer that uses the Target Debit RedCard is a higher margin customer for Target. Kohl’s chargecard program has some of these same features.
At Target and Kohl’s, retailers looked at payment offerings and decided they wanted to own the brand and the customer experience. They didn’t want to promote another company, be it a bank or a credit card network, and they didn’t want to be the type of company whose customers were more valuable outside the store than inside the store.
Macy’s made a different decision. As they say, that has made all the difference.