Macy's (NYSE: M) has struggled to adapt to customers' changing shopping habits in recent years. The COVID-19 pandemic has added to the iconic retailer's woes.
However, Macy's management hasn't given up on finding creative ways to use its assets to serve customers better. This holiday season, the retailer is trying something new: It has turned two of its full-line stores into "Omni Service Centers" that essentially act as mini fulfillment centers.
What is Macy's doing?
Macy's recently designated its stores at the Dover Mall in Dover, Delaware and Southwest Plaza in the Denver suburbs as Omni Service Centers. Customers can still use these stores for in-store or curbside pickup, returns, Macy's credit card bill payments, and some other services. Macy's is also offering customers the option to shop virtually, interacting with sales associates on various social platforms. However, in-store shopping has been discontinued at these locations.
Instead, both stores will serve primarily as fulfillment centers. Macy's says that this is to meet the surge in e-commerce demand it has experienced lately. (Digital sales jumped 53% year over year last quarter.)
Of course, fulfilling online orders from stores is nothing new for Macy's: The chain has been doing so for nearly a decade. What's unique about the new Omni Service Centers is that they will only handle orders placed online and won't be open for in-store shopping.
Why these locations?
Macy's hasn't said why it chose the Dover Mall and Southwest Plaza stores for this new program. However, there were probably a couple of contributing factors.
First, neither store is an especially high performer. The COVID-19 pandemic has aggravated the problem of weak traffic for mid-tier malls. By contrast, two other Denver-area stores within 15 miles of Southwest Plaza were upgraded in recent years as part of Macy's Growth150 program to boost traffic and sales at top-tier locations. In Delaware, Macy's Christiana Mall location (about 40 miles from Dover) is also a Growth150 store. Macy's would probably prefer to drive customer traffic to those recently modernized stores if possible.
Second, the stores' locations are useful for fulfillment purposes. The Southwest Plaza store is 700 miles from the nearest Macy's e-commerce fulfillment center, so it's a convenient hub for shipping to customers in Colorado and other Rocky Mountain states. Meanwhile, the Dover store is Macy's only outpost on the Delmarva Peninsula, and is also significantly closer to the Philadelphia metro area than any of Macy's fulfillment centers.
Why close the stores to shoppers?
Some readers might wonder why Macy's is not allowing in-store shopping at these locations, given that the stores need to be staffed regardless. The department store chain presumably isn't doing a high volume of in-store sales at either location right now, and there are advantages to closing the interior to the public.
For example, closing the stores to shoppers will reduce shrinkage (lost and stolen merchandise). It also will allow Macy's to organize the space in a way that makes sense for quickly picking and packing online orders, and worry less about presenting merchandise attractively.
Macy's will also be able to test how customers react to this new arrangement. In particular, Macy's should get useful data on how ending in-store shopping at a particular store and continuing to offer order pickup and returns both impact e-commerce sales and traffic to other Macy's locations.
An interesting test
Macy's has been shrinking its store fleet steadily in recent years, closing underperforming locations as foot traffic has plunged at low- and mid-tier malls. It plans to close nearly 100 additional full-line stores over the next two years. It needs to retain as much sales from remaining stores as possible, whether in nearby stores or online, which has proved challenging in previous rounds of store closures.
Turning the Dover Mall and Southwest Plaza stores into fulfillment centers is an interesting test of whether offering pickup and returns at otherwise closed stores helps retain sales. If it does, Macy's could consider converting additional stores slated for closure into small-scale fulfillment centers. Alternatively, it could move more aggressively to open small-format stores that offer pickup and return services near the full-line locations it plans to close.
There's no guarantee that turning lower-performing stores into fulfillment centers will be profitable for Macy's. It's worth trying, though, and it's good to see the company continuing to test new strategies to adapt to the changing consumer environment.
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Adam Levine-Weinberg owns shares of Macy's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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