Macy’s gains control of its inventory and markdowns
Caroline Hyde of Bloomberg (left) with Jeff Gennette, Chairman and CEO of Macy’s Inc. (right) – Photo: James Tenser

Macy’s gains control of its inventory and markdowns

At the NRF Big Show, Jeff Gennette, Macy’s CEO, discussed how process changes and improved data science helped the retailer overhaul inventory disciplines over the pandemic.

In the third quarter, Macy’s kept inventories to an increase of four percent year-over-year and down 12 percent compared to 2019.

Mr. Gennette said that as stores were forced to close in March 2020, the priority became cash preservation, prompting Macy’s to relook at how it purchases its inventory.

As is traditional at department stores, Macy’s buying typically involved assumptions around markdown money. He said, “You basically would buy something for a $10 cost and get back $1.50 to $2.00 of that back in some sort of allowance in a quarter, seasonal or yearly reconciliation.”

In a change over the pandemic, Macy’s renegotiated its vendor agreements to lower that up-front cost and reduce the “net cost” while building in a reserve for expected demand.

A related step “that was really instrumental in getting the culture from that model to the new net-cost model” was putting all merchant and supply chain partners on enterprise metrics. Said Mr. Gennette, “If you were a buyer of housewares, instead of being reviewed on the performance, sales and profitability of that category, you got reviewed on the sales and profitability of the enterprise. That then made everybody’s receipts and markdowns communal. Everybody benefited from that.”

On the improvements in data science, Mr. Gennette said demand forecasting “can be quite healthy as you kind of work through the art and science of how you build inventories” versus relying on gut instincts, last year’s numbers or trend forecasting.

Regarding allocation, he said Macy’s is doing a better job tapping data science to determine in which channel or door to place products to optimize full-price selling.

On pricing, Macy’s used to take major markdowns across five zones, with the same markdown on an item applied in varied markets across the country. Mr. Gennette said, “It was horribly imprecise.” Now, markdowns are made by door and channel level with a better understanding of likely sell-through rates for each item. Said Mr. Gennette, “That’s going to help preserve our margins and it’s also going to give us more sales.”

BrainTrust

"I wonder why it took so long for someone to figure out the buying model was ass-backward. Walmart has been operating on net cost for fifty years."

Gene Detroyer

Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.


"The real solution lies in more surgical buying, more surgical distribution and more surgical markdowns."

Jeff Sward

Founding Partner, Merchandising Metrics


"Macy’s has been stuffed with inventory for years. Literally. I thought it was part of its business model somehow (a strange part)."

Paula Rosenblum

Co-founder, RSR Research


Discussion Questions

DISCUSSION QUESTIONS: Do you see more benefits to inventory management and other areas than drawbacks in Macy’s shift to a “net cost” purchasing model and enterprise metrics for vendor partners? Are more retailers using data science to tailor markdowns by “door and channel” as Macy’s is doing?

Poll

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Gene Detroyer
Noble Member
1 year ago

Mr. Gennette certainly gave a lesson on how not to manage buying and inventory control. I wonder why it took so long for someone to figure out the buying model was ass-backward. Walmart has been operating on net cost for fifty years.

The other area that creates inventory havoc is that buyers are given a financial sales plan and encouraged to buy to it. Every retailer seems to have the plan to beat the market and competition. If every retailer buys into that plan, the market will be over-inventoried. If one retailer beats the market, another will come up short in sales and over-buying.

Jeff Sward
Noble Member
1 year ago

I have to give Macy’s high marks for a multi-layered solution. “Net cost” sounds like the smallest part of the solution as it appears to be more upfront discount versus chargebacks later in the game. The real solution lies in more surgical buying, more surgical distribution and more surgical markdowns. The move from “horribly imprecise” to a more data and location driven model is a strategy whose implementation is past due.

Paula Rosenblum
Noble Member
1 year ago

Macy’s has been stuffed with inventory for years. Literally. I thought it was part of its business model somehow (a strange part). So, kudos for overall inventory reduction. And kudos for comping buyers and entire company performance, rather than just their categories.

I have been a big fan of intelligent demand forecasting for a long time, and it’s definitely time to do it. The anomaly of the pandemic and lockdowns are, at least for now, behind us.

Macy’s (and other chains) need to be wary of door pricing, as if a customer sees multiple prices for the same item, it could be a turn-off to customers. Nonetheless, it’s the right thing to do. It used to be that we’d assume the web would have the lowest price. Now, given the cost of online returns, perhaps even that should be re-thought. Transparency is the most important thing or customer trust will be lost.

Liza Amlani
Active Member
Reply to  Paula Rosenblum
1 year ago

What she said…

Macy’s needs to get their act together and these are all positive strategic and forward thinking moves. In addition to these shifts in ways of working, I would really like to see more of Macy’s corporate walking the shop floor. And I mean every shop floor across all size doors and regions. It seems there is a massive disconnect with what leadership wants, the strategies they put in place and how it translates into what the customer experiences. The fact is, Macy’s is a mess and the overbuying needs to stop. Walking the shop floor may enlighten the Macy’s leadership team, product creators and merchants to rethink how much product they actually assort. Seeing this physically makes all the difference — some shock value may be needed.

Dick Seesel
Trusted Member
1 year ago

It’s hard to interpret Macy’s Q3 results — especially on the EPS side — without assuming that the company needed to work through its own inventory issues. To Macy’s credit, it began 4th quarter in good shape and could focus on selling current-season goods instead of 2021 “packaway” merchandise.

Macy’s may be applying a different negotiating and data science model to its business, but it also has the ability to treat each location as a mini-warehouse for e-commerce orders. (Not unlike Kohl’s and other competitors in this regard.) The Backstage strategy also gives Macy’s a built-in pipeline to clear inventory.

Gene Detroyer
Noble Member
Reply to  Dick Seesel
1 year ago

Oh, how accounting rules lead us astray. Like P&Ls list labor as an expense to be cut, balance sheets see inventory as an asset rather than a cost.

A retailer can significantly increase its profitability if it increases its turns, which means controlling its inventory.

Shep Hyken
Active Member
1 year ago

The ability to control inventory gets more sophisticated. It’s more than just data, it’s pricing strategy, vendor/partner negotiations, and more. That’s true for all retailers. And no doubt, running a leaner Macy’s — even if just a little leaner — is smart.

Rich Kizer
Member
1 year ago

Retail is about the art of presentation, customer delight and the ability to make a profit. Inventories were controlled by GMROI, remember? Simple. But with the technology being born in Macy’s, it is like a new world of potential. This type of technology will be seen growing in retail around the world, as it should be.

Danny Szanto
1 year ago

It is always appropriate to review the internal processes and make the necessary adjustments to face the changes, although I thought that a player like Macy’s was already applying the purchasing techniques (net net) and reordering models that other market leaders have already carried out for a long time. Macy’s only has to continue accelerating its changes.

Craig Sundstrom
Craig Sundstrom
Noble Member
1 year ago

Silly me: here I always thought Macy’s (and others) based their buying decisions on what they thought would sell, as opposed to the machinations of what it took to acquire. Then again, maybe lack of the former, or getting it wrong, is one of their problems.

Mark Self
Noble Member
1 year ago

Macy’s can process improve forever and it still will not fix the core problem, which is the Department Store format is close to dead. There may be a brand or two that “survive” but all these years of getting pummeled makes for a sad ending. Eventually. 🙂

Anil Patel
Member
1 year ago

​The most challenging and expensive issues that retailers face are the result of poor demand forecasting. Often, when retailers make inventory decisions, real-time data is not incorporated, which results in inaccurate inventory planning. Additionally, the bigger problem is many retailers rely solely on their gut feelings and outdated data insights when developing inventory plans. In my opinion, following a data-driven approach to inventory planning is no longer a choice but a requirement. Driving trend analysis and planning each season’s assortment will help retailers make the right decisions at the right time. Since Macy’s implemented decision-making based on real-time insights from datasets, they were able to optimize their inventory levels.