Macy’s is turning stores dark for the holidays
Photo: Wikipedia/MikeKalasnik

Macy’s is turning stores dark for the holidays

Macy’s has decided that it will close two of its department stores to on-site shopping for the holidays. The retailer is choosing instead to convert the locations into dark stores that offer in-store and curbside pickup of online orders and enable product returns.

The retailer will use stores in Dover, DE, and Littleton, CO, as pilot locations for the dark store test, reports the Delaware News Journal. Macy’s did not disclose to the paper if it intends to turn any other locations into dark stores for the holiday season.

The department store chain, like other non-essential retailers, saw its online sales jump after it was forced to close stores due to the novel coronavirus. Macy’s reported a 34.7 percent decline in same-store sales (brick and click) during the second quarter as its online business jumped 53 percent. In-store sales fell 61 percent year-over-year.

CEO Jeff Gennette told analysts on the retailer’s earnings call that 30 percent of online orders were fulfilled by stores (curbside and in-store) in the second quarter and that he saw that “increasing” going forward.

We’re building out in terms of our omni-network and our fulfillment strategies, our opportunity to be able to satisfy customers however they want to shop, in a store, curbside or same-day delivery, we will be able to do that,” he added.

Macy’s and other retailers testing dark stores can go into their pilot programs knowing that many consumers are open to using them.

A recent survey of U.S. consumers by WD Partners found that 47 percent are open to purchasing from a dark box store and 40 percent from a dark grocery store. Forty-nine percent are okay buying meals from a dark restaurant.

Whole Foods made news last month when it announced the opening of a 100 percent dark store intended to serve local customers in Brooklyn, NY.

BrainTrust

"I think it’s a good short term solution given all the uncertainties around. Long term, Macy’s has to decide what it’s going to do with under-performing stores."

Paula Rosenblum

Co-founder, RSR Research


"They are transforming these to systems of higher value delivery for their customers while creatively addressing demand uncertainty in this unique retail holiday season."

Mohamed Amer, PhD

Independent Board Member, Investor and Startup Advisor


"It’s a bold experiment at a time when the rumors are rampant about Amazon and how they might use mall space."

Jeff Sward

Founding Partner, Merchandising Metrics


Discussion Questions

DISCUSSION QUESTIONS: Do you see dark stores as a good way for retailers to turn underperforming locations into productive sales assets? What do you think of Macy’s decision to convert some stores into dark locations for the holidays, and do you see other retailers doing the same?

Poll

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Neil Saunders
Famed Member
3 years ago

This is a sensible move and one that will help Macy’s cope with elevated online demand. However it has to be said that turning stores dark is also a function of the fact that too many of Macy’s stores simply do not work. They are not pulling in customers and they are not driving sales and profits. Some of this is down to the pandemic, but a lot of it is down to Macy’s atrocious retail standards, its chronic underinvestment in shops, and its inability to put together compelling assortments. After all, if stores did work properly, there would be no reason to turn them completely dark: they could and should operate as combined retail and distribution outlets.

David Naumann
Active Member
3 years ago

With the massive growth in online sales and expectations that social distancing will be a concern for many consumers through the end of 2020, converting some underperforming locations to dark stores is a smart strategy for Macy’s during the holiday shopping season. Dark stores and ghost kitchens are hot topics lately as retailers are trying to find effective ways to fulfill online orders profitably. In a few years, I suspect dark stores will become much more pervasive.

Mark Ryski
Noble Member
3 years ago

Many retailers are in survival mode and so this is a reasonable approach under this circumstance. However it’s a short-term survival tactic only. Macy’s decision to convert stores into dark locations is just that, a short term tactic to try to serve customers through what will be a brutal holiday season for Macy’s. Using high priced mall real estate for dark store distribution is a losing proposition.

Gene Detroyer
Noble Member
Reply to  Mark Ryski
3 years ago

For Macy’s, don’t you think “using high priced mall real estate for regular business is a losing proposition”? Which alternative would be more productive?

Mark Ryski
Noble Member
Reply to  Gene Detroyer
3 years ago

I was referring to Macy’s use of dark stores for distribution as being problematic as an ongoing strategy. In the short term, I think it’s absolutely the right thing for Macy’s to do — what else can they do? I appreciate that Macy’s is making the best of their difficult circumstances, but using high priced mall real estate for dark store distribution is not economically viable in the long term.

Gene Detroyer
Noble Member
Reply to  Mark Ryski
3 years ago

True. But neither is the alternative.

levineweinberg
levineweinberg
Reply to  Mark Ryski
3 years ago

But Macy’s mall real estate is not high priced. The Dover store, for example, is ground leased. Macy’s probably pays no more than $4/foot including utilities, taxes, and common area charges: significantly less than it would pay for industrial space. There’s a reason why Amazon is interested in taking over vacant mall anchors for distribution space: the inefficiency of not having a purpose-built space is at least partially offset by extremely low occupancy costs.

Gene Detroyer
Noble Member
Reply to  levineweinberg
3 years ago

Can their store be profitable at $4/foot?

Suresh Chaganti
Suresh Chaganti
Member
3 years ago

Converting stores in prime real estate to dark stores is like trying make lemonade out of lemons. It is an attempt at asset utilization that they had to do. But if Macy’s had an opportunity to design from the ground up, they would probably choose a smaller size and different location.

Gene Detroyer
Noble Member
Reply to  Suresh Chaganti
3 years ago

I suspect that if Macy’s had a do-over the alternative would not be a smaller store, but no store at all. Sadly, they are stuck today.

Paula Rosenblum
Noble Member
3 years ago

I think it’s a good short term solution given all the uncertainties around. Long term, Macy’s has to decide what it’s going to do with under-performing stores. It’s expensive real estate to act as distribution centers.

Gene Detroyer
Noble Member
Reply to  Paula Rosenblum
3 years ago

I suspect for Macy’s the decision will be made for them.

Mohamed Amer
Mohamed Amer
Active Member
3 years ago

What we are seeing is traditional silos – both physical and functional – between sales activities and distribution and fulfillment operations, dissolve in the face of changing consumer purchase behavior. Instead of thinking in line-item accounting terms and functional roles, retailers and other consumer-facing companies are reworking their sales and fulfillment networks. They are transforming these to systems of higher value delivery for their customers while creatively addressing demand uncertainty in this unique retail holiday shopping season.

Gene Detroyer
Noble Member
3 years ago

Let’s imagine two of Macy’s suburban stores. The one that is open to shoppers has staff standing around waiting to help customers who aren’t there and getting paid to do it. The other is a dark store with a balance of staff to meet the online demands and getting paid to contribute to success of the company.

Jeff Sward
Noble Member
3 years ago

I’d sure like to know more about the detailed math of this proposition. An open store with ongoing revenue wasn’t working out. Now a dark store with zero revenue works as a distribution center? I understand that Macy’s is expecting a surge in internet sales this holiday season that they have to service, but this sounds like an expensive solution. Still, I admire the leap they are making. It’s a bold experiment at a time when the rumors are rampant about Amazon and how they might use mall space (JCP). The look and feel of next year’s mall keeps getting harder and harder to predict.

Peter Charness
Trusted Member
Reply to  Jeff Sward
3 years ago

Technically the sale occurs at the time of fulfillment, so you could somewhat argue that all the revenue goes to that store. While shipping from a dark store or a customer fulfillment center isn’t exactly ringing through a POS, it’s also not right to categorize a BOPIS or curbside as having no implied revenue attached to it.

Jeff Sward
Noble Member
Reply to  Peter Charness
3 years ago

Good points. I was thinking in terms of the mall location as an incremental expense — that the sale could have been fulfilled at an existing warehouse. But if they truly needed more space, and they are locked into that lease, then a dark store as fulfillment center might just be cheaper than adding another warehouse, in the short term. As soon as the lock on that lease expires, I think the math changes. In the meantime, both Macy’s and the mall are learning some powerful lessons on what future options could be.

Gene Detroyer
Noble Member
Reply to  Jeff Sward
3 years ago

Exactly!

Shelley E. Kohan
Member
3 years ago

Macy’s decision to create dark stores is a short-term fix for a long-term problem. Based on the need to reduce cash burn and try to recoup sales from a down-trending season, using the stores as fulfillment centers make sense for the next four months. The problem faced is making sure the right stock is in the few stores that are doing fulfillment. Macy’s has been notorious for keeping goods sitting on trucks in transit and not in the right locations down to the SKU level. If Macy’s can make sure there is better visibility into the supply chain and it can improve the speed to market for Q4, it could be a savior. Other retailers may follow suit if the financials support the decision. Low inventory, a need to conserve cash and significant changes in consumer demand are making this holiday especially tough for apparel and department store retailers.

Rich Kizer
Member
3 years ago

We all realize that department stores are taking a hit with new aggressive competition from channels that did not exist only a few years ago. With declining sales trends, along with lower traffic counts, this is probably a great offensive move. Keep in mind that Mr. Gennette is not afraid of being aggressive as he has shown us by past years’ closing of fair performing stores.

Oliver Guy
Member
3 years ago

Re-purposing of locations is something retailers need to get good at. There are so many well located sites close to population centers that can be utilized for same-day delivery and other express services that this becomes a no-brainer.

Craig Sundstrom
Craig Sundstrom
Noble Member
Reply to  Oliver Guy
3 years ago

While your idea makes sense, it makes the selection of the Dover store baffling: the large (6M) Philly market is crowded with their stores and yet they chose this one, far removed and (seemingly) not near anything. It appears the intention is to test the concept in a location that ISN’T “well located.”

Peter Charness
Trusted Member
3 years ago

I never thought I would quote Donald Rumsfield but — “You go to war with the army you have, not the army you might want or wish to have at a later time.” Trying this in two stores with timing that’s just a month or two away seems like a pretty good plan to me.

Mel Kleiman
Member
3 years ago

Macy’s needs to turn more of its stores into dark stores since the quality of customer services in the stores it has reopened during the pandemic is so poor.

Ryan Grogman
Member
3 years ago

As others have noted, Macy’s hand has mostly been forced in this situation. Too many stores and too little foot traffic had them on a downward trajectory even prior to the pandemic. That being said, I think this is a smart move which drives some value out of underperforming locations and likely helps consumers get online orders fulfilled quicker. If nothing else, Macy’s is at least recognizing the PR value in a headline that reads about converting to a dark store to meet surging online demand vs. a headline that reads about having to close yet more stores before the holidays.

Joe Skorupa
3 years ago

This is another example of Macy’s being a smart back-end retailer and a poor front-end retailer. Graduates of the Macy’s school of retail executives proliferate throughout the retail industry because they know the fundamentals of supply chain, merchandise management, labor management, financial management, mass marketing, and even omnichannel commerce.

When times were good for every retailer, Macy’s made lots of money for its stakeholders. However, Macy’s has never excelled at consumer-facing retail. Its store service is poor, assortments are uninspired, and its connection to customer loyalty is weak. So, kudos to Macy’s for making another smart back-end move by opening dark stores. And too bad its front-end strategy is always a laggard.

Steve Montgomery
Steve Montgomery
Member
3 years ago

The logic behind May’s and others testing using dark stores is very sound. You have an asset that is not making you money. Your choices for what to do with it were far more limited before COVID changed consumers shopping preferences. Today what was an unprofitable store due to be closed may be a mini warehouse that breaks even or makes money.

Cynthia Holcomb
Member
3 years ago

Let’s face it, the day of the physical department store is pretty much over and has been now for about a decade. During that time, Macy’s traded discounting and couponing as their form of a stopgap against the retail innovation happening in plain sight. A non-decision decision, likely caught in a quagmire of internal political indecision favoring shareholder short-term value rather than face the risk of innovating and reinventing Macy’s vision of itself to ensure its own long-term relevancy. Layered on top of the couponing, an in-store glut of racks of clothes so dense, even the most ardent of shoppers are overwhelmed and fatigued just entering a Macy’s store.

Macy’s has exacerbated their problems by being stuck in the relics of the past. Turning two Macy’s stores into two Macy’s dark stores is just another test, a reflection of internal “what to do next to save Macy’s.”

All of this said, there is a new, rather interesting dichotomy to shopping Macys.com. A bright side. The in-store glut of racks of clothes digitally re-merchandised on Macys.com actually is easier and more interesting to shop. The product image size is larger and much more appealing than the small 3rd party images on Amazon.com. As with Amazon, there is deep product depth and customer choice but again, 3rd party sellers on Amazon create a digital shopping hodgepodge of product.

Macy’s has the opportunity to reinvent itself digitally. Turn massive inventories into easy to shop Macys.com. Bring in new retail tech going way beyond basic filters. Enable shoppers to cut through 1000s of options through the filter of their own sensory-preferences of fit, look and feel. Macy’s could be the first to cross the digital shopping sensory chasm.

And finally, stop the discount coupon game. It is annoying and downgrades the Macy’s brand. Like bait and switch, it creates a sense of mistrust and overwhelming shopping friction. When people want to buy a product they love, don’t force them to play the retailer mind game of variable product pricing. Individually relevant product recommendations, fair, competitive pricing and speedy home delivery. Reinvention made simple.

Craig Sundstrom
Craig Sundstrom
Noble Member
3 years ago

I looked it up: Macy’s has six stores in the Denver area and the Littleton store is proximate to two others, so this may be seen as making use of a saturated market. The Dover store OTOH, seems in the middle of nowhere — sorry Delaware! — and I don’t understand the logic. (Why not one of the stores in the crowded Philly market? Or maybe testing an isolated store was the whole point?)

So much for the logistics … but does the idea itself make sense? I guess I’d have to see a bit more info from them on what they hope to accomplish, but I’m leaning more toward this being an off-the-wall idea someone wanted to try. I don’t think they’ll regret it, but I’m skeptical they’ll repeat it either.

levineweinberg
levineweinberg
Reply to  Craig Sundstrom
3 years ago

The stores in the Philly market probably do much higher sales volumes. (With the possible exception of Exton Square, but that store is literally in the middle of the mall: no direct parking lot access!) Also, I believe the Dover location is a single story, which is unusual for Macy’s stores and helpful logistically if you’re turning the space into a fulfillment center.

Craig Sundstrom
Craig Sundstrom
Noble Member
Reply to  levineweinberg
3 years ago

Thanks Adam, and you are correct: Dover is a single level (at least the mall itself). But the fact remains that it’s 40-50 miles from Philly — and as much or more from DC and Baltimore — so I’m unclear on who they hope to attract; if any of those three markets IS the target, I think they’re wildly overestimating people’s willingness to travel that far.

levineweinberg
levineweinberg
Reply to  Craig Sundstrom
3 years ago

Craig: they’re not trying to attract anyone. In-store pickup, curbside pickup, ship-to-store, returns, etc. are available at every Macy’s store. The only thing unique about the Dover and Littleton stores is that you can’t shop in the store. Presumably in-store sales have been weak in these locations anyway. By turning those two locations into “dark” stores, Macy’s can make them more efficient for fulfillment and reduce shrink. I’d expect the Dover store to fulfill online orders for much of the Delmarva peninsula and perhaps some of the Philly metro area.

Casey Craig
3 years ago

Curbside pickup has been a needed resource for retailers this year to help drive sales while keeping everyone safe. Big department stores have been suffering for years, so this is a good move on their part to continue to use resources they already have available to them. The challenge here is that Macy’s will need to clearly communicate with their customers about which locations are going dark to avoid any confusion and frustration from customers looking to shop at a brick and mortar store.

William Passodelis
Active Member
3 years ago

Perhaps they are trying this as a way forward with stores in B and C malls? Maybe they are stuck with leases because my answer to a poor performing B and C mall is — close those stores! Also, as Mr. Sundstrom said the Colorado store is in proximity to two others, so this might be good use of property. But as mentioned, very expensive warehousing. As also mentioned by many others including Mr. Detroyer, many of the stores have been neglected and are beyond tired. Again, close those stores. If you don’t have the wherewithal to keep it up, or worse, you don’t have the care to keep it up — CLOSE IT! It reflects poorly! And finally, as Ms. Holcomb said, this might be a “What can we possibly try next?”

Ricardo Belmar
Active Member
3 years ago

A smart move for the holiday season as Macy’s expects a surge in online orders and needs to improve their fulfillment ability. However, this is really a short-term fix for a long-term problem — what to do with underperforming stores? Unfortunately, Macy’s is currently on a path to producing more underperforming stores than successful stores. While they are placing a band-aid on a problem they have for the holiday season, they’re not solving the real issues with the in-store experience, product assortment, and long-term fulfillment solutions.

Assuming Macy’s reports a reasonably successful season (but then, what is reasonable under the circumstances for Macy’s?). I have no doubt they will consider this test a success. It’s difficult to see a scenario where the test proves unsuccessful, so the question is, what will Macy’s do at the start of 2021? Announce they are going “all in” with online sales and convert more stores to dark stores if they are underperforming? Presumably, this would be expensive real estate per square foot to use as fulfillment centers, but perhaps the math they have calculated to account for labor, etc. shows something different? It wasn’t that long ago that Macy’s declared curbside pickup would be their holiday season savior, so this doesn’t present a positive outlook overall.