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In 1990, Macy's was hardly the chain it is today. That year, four of the top 10 U.S. retailers on McKinsey & Company's list were department store companies, but Macy’s wasn’t one of them.

It’s true that R.H. Macy and Co. was described by the New York Times as “New York's biggest retailer and the operator of about 100 department stores in the East, South and West.” But to much of America, for much of the 20th century, the name “Macy’s” evoked the classic holiday movie “Miracle on 34th Street” and the nationally broadcast Thanksgiving Day parade — a famous department store in a famous city far from home.

Early in the 21st century, that changed. Through a series of fateful decisions, Macy’s transformed itself into a national retailer and the largest department store in the country, if not the world. Now, it has a murky future, muddied further in recent months by rhetoric from activist investors who would have it cleave its operations in two — one Macy’s existing only on the internet, the other only on the ground.

The magic of Macy’s, everywhere

Around its 135th birthday, Macy’s set out to conquer areas of the U.S. where other department stores had long staked their claim. In 1994, thanks to a merger with department store conglomerate Federated, Macy’s nearly quadrupled its store count; a decade later, thanks to a merger with department store conglomerate The May Department Stores Co., it more than doubled that.

By 2007, when corporate parent Federated itself changed its name to “Macy’s,” the company had already replaced scores of local department store names, affixed the red Macy’s star to those buildings and ripped away their private labels. The brand, to the chagrin of many of those retailers’ customers, was no longer far from home.

Macy's becomes a national retailer

To see how the Macy's chain took over local department stores over the years, click on the blue dots on the timeline. Click on the map's squares to see when a store became "Macy's." Some had previously switched to other names (in parantheses.)

Macy’s had taken its place as the country’s dominant full-line department store chain, with 853 stores in 45 states, the District of Columbia, Guam and Puerto Rico, under the names “Macy’s” and (far fewer) “Bloomingdale’s.” That amounted to an aggressive expansion of Macy’s footprint and brand, so what came next was a surprise to many.

Macy’s backpedaled.

First, in 2008, after dedicating resources to revamp dozens of hometown department stores in its own image and centralize their operations, Macy’s declared localization “a key component” of its growth strategy and launched “My Macy’s,” an investment in “resources in talent, technology and marketing that will allow us to ensure that each and every Macy’s store is ‘just right’ for the customer who shops in that location.” Then, starting around 2015, the company embarked on another great project: massively shrinking that store fleet.

Not long after its massive expansion, Macy's announces significant closures

Macy's square footage at peak vs today

“[Then-Macy’s CEO] Terry Lundgren was supposed to be some kind of retail hero, but it was his strategy to purchase all these brands, change the name from Federated to Macy's, put different signs up on all these local department stores including one that we had here in Columbus — and then quickly close them all,” Lee Peterson, executive vice president of thought leadership and marketing at WD Partners, said by phone. “A ‘champion of retail?’ I don't think so.”

As Amazon rises, so falls Macy’s

Amazon wasn’t a major retailer in 1990, either, of course, because it wasn’t established until 1994; the e-retailer first appeared in the top 10 in 2012, according to McKinsey’s report.

It’s tempting to correlate Macy’s downsizing with Amazon’s appearance as a top-10 retailer and the rise of e-commerce in general. After all, in 2016, weeks after Cowen & Co. analysts said they were “more confident” that Amazon would soon overtake Macy’s in apparel sales, the department store announced it would close 100 stores within a year.

In 2018, as analysts from Coresight Research and elsewhere were documenting evidence of share loss to Amazon, Macy’s added to its closure count. Then, in 2020, as Amazon moved deeper into fashion and Coresight found it was gaining yet more in apparel, Macy’s said it would permanently close another 125 stores. That was part of a transformation strategy announced pre-pandemic and recently resumed, possibly with fewer closures.

Everybody knows that Amazon was growing, so everybody thinks Amazon killed retail. There are 10 things going on, but nobody pays attention to the other nine.

Nick Egelanian, president of retail development firm SiteWorks

Amazon’s rise has certainly forced retailers including Macy’s to dedicate resources to selling online, leaving less need for quite so many stores. But it’s not solely responsible for Macy’s increasingly challenged sales. Nick Egelanian, president of retail development firm SiteWorks, calls that misperception “the real Amazon effect.”

“Everybody knows that Amazon was growing, so everybody thinks Amazon killed retail,” he said by phone. “There are 10 things going on, but nobody pays attention to the other nine.”

To find the real culprits, it helps to know what was happening when Macy’s decided to expand.

What Macy’s bought into

Most department stores — an American retail phenomenon soon found elsewhere in the world — were established in the 19th and early 20th centuries. Many share similar origin stories and evolutions, beginning as dry goods stores, dress shops or haberdasheries, and, as the cities around them prospered, growing into marvelous emporiums housed in grand structures.

Department stores traditionally sold all kinds of things (apparel, housewares, wine, books, leather goods and more), prided themselves on customer service (offering amenities like delivery, in-store pickup and styling guidance, which retailers are clambering to provide today) and flourished through much of the 20th century. They enjoyed a heyday during the post-war boom and another as consumers moved to the suburbs, where department stores anchored gleaming new malls, according to Bruce Kopytek, who writes about the history of department stores.

The early years of this century, however, did not mark a department store high point. Rather, the model was arguably on the skids, just as Macy’s was adding hundreds of stores to its portfolio. To witness the trajectory, it’s useful to travel to Minneapolis, where George Draper Dayton founded his dry goods company in 1902, a business that matured into a department store within a decade.

Like other department stores, Dayton’s (later Dayton-Hudson) opened its first suburban branches in the 1950’s. In the 1960s it expanded via a merger with Detroit-based department store company J.L. Hudson and in 1990 they acquired another top department store name, Marshall Field’s.

The department store business was thriving. Yet in 1962, in a move at first seen as folly, Dayton diversified with the establishment of “Target,” a low-price, mass market store that promised to “combine the best of the fashion world with the best of the discount world.” Target wasn’t an immediate success, but the Daytons stuck with it, according to Mark Cohen, director of retail studies at Columbia University's Graduate School of Business and a veteran of the sector.

“Dayton-Hudson created Target in the face of an emerging Walmart, and they nurtured it,” he said by phone. “And the Dayton-Hudson leadership back in the day recognized that their department store channel, which was their signature business, was going to be under fire, and that they ought to have a multichannel approach.”

Macy's appetite for growth builds despite the sector's steep decline

Department store sales as a percent of total retail sales

By 1975, Target was Dayton-Hudson’s biggest revenue producer, expanding nationally through the 1980s and 1990s. The department store business increasingly operated in Target’s shadow — and then it disappeared. In 2000, Dayton-Hudson changed its name to “Target.” Four years later the company sold off its department stores to the May Department Stores Co. And the year after that — the same year Target topped $50 billion in sales for the first time — Federated (soon to be “Macy's'') bought May.

The Dayton-Hudson leadership back in the day recognized that their department store channel, which was their signature business, was going to be under fire.

Mark Cohen, director of retail studies at Columbia University's Graduate School of Business

It’s almost as though the Daytons (the family remained in leadership for generations) could see into the future what the historical numbers tell us now. From 1992 to 2017, retail sales grew from $1.8 trillion to $5 trillion, with general merchandise sales growing in that period from $247.9 billion to $691.9 billion, according to numbers from the Gerney Research Group, using U.S. Census Bureau data. But full-line department store sales fell 43.2% in that time, as discounters, particularly Walmart Supercenters and warehouse clubs like Costco, gained market share, with annual average sales increases of 17.2%, those researchers found.

In 2006, Macy’s ran more than 850 department stores and a website and notched $27 billion in sales; in its comparable fiscal year, Target ran nearly 1,500 stores and a website and notched $59.5 billion. In other words, Macy’s had a prodigious appetite for expanding a retail model that one of its leading exemplars had ditched in favor of running a discount chain.

What happened

While Macy’s grew through mergers and acquisitions, that couldn’t stave off the decline in department store sales, and Macy’s revenue was sloping downward well before the COVID-19 pandemic.

In fact, just before their merger, Macy’s and Federated each took a spin through bankruptcy court — Macy’s after burdening itself with debt by plunking down more than $1 billion to acquire West Coast department stores I. Magnin and Bullock’s, and Federated after vacuuming up department stores including Rich’s in Atlanta, Bloomingdale’s in New York and Burdine’s in Miami.

Several forces, interconnected, continued to work against the sector — before, during and after Macy’s and Federated tied their fates together.

Two major mergers can't prevent Macy's sales struggles

Macy's net sales in billions

One was the rise of off-price stores, which for decades now have helped themselves to generous portions of department stores’ market share. A flip in fair-trade pricing policy in 1975 would pave their way. Until then, Depression-era fair trade regulations in 45 states required retailers to charge manufacturers’ minimum suggested prices. Before Congress repealed the antitrust exception allowing those state laws, most department stores rang up sales at full price knowing their competition was doing the same.

It isn’t just ‘boring retail.’ Retail isn’t failing, retail is distributing, and mid-tier retail is shrinking in accordance with the redistribution of wealth.

Brian Kelly, retail consultant

Off-price retailers would prove to be particularly fierce competitors because unlike discounters, they sold many items found at department stores. In 1985, Southern Illinois University marketing professor Jack Kaikati warned in the Harvard Business Review that off-pricers selling name-brand goods would increasingly challenge department stores unless their weaknesses, including “weak service and noncontinuity of assortment,” could be exploited. Instead, “noncontinuity of assortment” proved to be an off-price strong suit — better known as a treasure hunt — while poor customer experience became associated with none other than Macy’s.

When the fair trade laws that enabled full-price department stores were enacted in the 1930s, the goal was to save local shops vulnerable to large chains with pricing power. But by the 1970s it was the consumer who was under pressure. As the Dayton family had already noticed, discount stores like Walmart and warehouse clubs like Costco were advancing. Households were gravitating toward lower prices in part because middle incomes were shrinking and becoming harder to achieve, even with two earners. In 1971, 61% of Americans were middle-class; in 2019 that was down to 51%, according to the Pew Research Center. The problem is ongoing, according to retail consultant Brian Kelly, also a veteran of the department store sector.

In 1970, middle-class families, department stores' customer base, held a dominant share of household income. The U.S. middle class has been shrinking ever since.

Share of US aggregate household income, by income tier

“It isn’t just ‘boring retail.’ Retail isn’t failing, retail is distributing, and mid-tier retail is shrinking in accordance with the redistribution of wealth,” Kelly said by email. “To me, it’s the reason why Macy’s is failing or why Kohl’s or Dillard’s or Belk are also struggling. Department stores are done and dusted.”

Where it happened

Department stores adapted well when they moved to the suburbs from downtown. But as suburbanites grew less optimistic, cities regained some of their appeal and Gen X found something to do, malls began to lose their luster.

“It was sometime around 1950 that the first true suburban enclosed mall was built, and then the department stores reinvented themselves,” retail consultant Jan Rogers Kniffen, (who worked on the Federated-May merger, after decades at Federated), said by phone. “We figured out we could do a 240,000-square-foot store, which would be almost a third of the size of our big 600,000-square-foot downtown stores. So we can build 240s, and we can build them in every damn one of the 1,200 malls that would finally get built between 1948 and 1992. The department stores were still very healthy up until about ‘92. And that’s when the giant consolidation started.”

Mall traffic was ebbing as early as the 1990s, but disaster struck around the time of the Great Recession, when some 400 malls disappeared. Off-price stores and discounters had avoided that problem by opting for the cheaper rents and more convenient shopping found at strip centers, but malls and their department store anchors were stuck with each other. Their once mutually beneficial relationship began to deteriorate, until it went into a death spiral, a years-long trend recently hastened by the pandemic.

The department stores were still very healthy up until about ‘92. And that's when the giant consolidation started.

Jan Rogers Kniffen, retail consultant

“The mall is not like it was in the ‘80s, a hangout for kids,” Peterson said. “It’s all specialty apparel retail, predominantly, so the tenant mix in 80% of malls is wrong to begin with because it’s based on the premise, developed in the late ‘80s and early ‘90s, that we’re going to drive traffic by young people coming in to buy clothes. And I think the nail in the coffin for malls right now is work from home.”

The goods

Accessories, apparel, auto parts and services, beauty items, books, electronics, eyewear, hobby supplies, housewares, imports, jewelry, music, musical instruments, pet supplies, photography studio services, rugs, toys, and wine and spirits. These were among the many departments that gave “department stores” their name.

Unfortunately for department stores and their assortments, these are also the specialty stores that fill the malls they anchor, and the big-box stores that occupy the landscape between malls. Over the years, each Best Buy, Williams Sonoma, Kay Jewelers, Sephora or other chain store has steadily taken market share in those categories from department stores, according to SiteWorks research.

In response, department stores including Macy’s shut down department after department, and filled the empty spaces with more apparel, SiteWorks’ Egelanian said. Many of the grand “full-line department stores” were gutted, becoming “fashion department stores” more akin to Nordstrom or Lord & Taylor. Since then, as apparel sales growth has tanked, Macy’s, which does sell furniture, mattresses, luggage and more, has scrambled to diversify further. Recent efforts include an investment in tech-focused retail concept B8ta and adding back toys.

“Fashion was the savior, but then it was also the noose around their neck,” Egelanian said.

Unlike now, apparel sales were healthy in the 1980s. But Macy’s failed to account for the vagaries of retail, according to Columbia’s Cohen.

“They were getting rid of businesses like electronics and elements of home, whose gross margins or whose gross margin return-on-investment didn't look great,” Cohen said. “They were feasting on the boom in apparel and accessories that was going on, without regard to the fact that, like anything else, those things cycle up and down. But at that moment, it looked like a really great way to prop themselves up, without regard to what it would mean for the future.”

The mall is not like it was in the ‘80s, a hangout for kids.

Lee Peterson, executive vice president of thought leadership and marketing at WD Partners

In the name of efficiency, Macy’s also squandered the localized knowledge and customer relationships at each store in its fleet, as it centralized buying, merchandising and marketing. In peeling off all the local department store names and discontinuing their private labels — something previous corporate parents had avoided — Macy’s aimed to take advantage of what it saw as its powerful national brand. But the strategy engendered resentment among locals that the “My Macy’s” effort couldn’t appease, and in some places the ill will lingers to this day.

The mall location and the sameness of the merchandise turned out to be exactly wrong for the 21st century. Young consumers have embraced idiosyncrasy, seeking items via resale sites or limited drops, and no longer flock to the suburban shopping center, according to WD’s Peterson.

The question for Macy’s is: What next?

The future

It’s been more than a quarter century since Macy’s embarked on its grand national buildout, and it has succeeded in rendering itself a national retailer, if somewhat more subdued than it perhaps foresaw. The company now runs 512 stores under the Macy’s banner, plus 54 Bloomingdale’s stores and 160 Bluemercury spas; in its most recent quarter, 32% of its sales were online.

Judging from in-store shopping trend data crunched by analytics company App Science, Macy’s retains a strong following around the country, ranking fifth in the West, eighth in the Northeast and South, and tenth in the Midwest. Besting the department store, however, are its old discount foes Walmart and Target, which ranked above Macy’s in all regions.

The retailer has taken the note. In 2015, Macy’s opened its own off-price banner, Backstage, with plans to bring it to 270 of its stores and open some stand-alone locations away from the mall. Macy’s also realized the power of tech early on and was one of the first retailers to invest in e-commerce. In recent years it has employed and even acquired innovative retail concepts.

Macy’s needs to figure out how to operate profitably on the coasts, where they can really have a future.

Nick Egelanian, president of retail development firm SiteWorks

Macy’s didn’t comment for this story. But the company itself, after setting out to conquer the department store business, may now be losing faith in it. Its experiment with small-format stores in strip centers takes it full circle, to its roots as a “small dry goods shop.” Its full-line fleet is smaller than ever, after already completing more than half the 125 closures it announced in 2020 as a three-year goal, in favor of a digital-first strategy. If it goes through with the e-commerce spinoff being pushed by activist investors, which many observers warn could hamper the overall operation, Macy’s could disappear even faster from the American landscape.

But Macy’s is unlikely to change the dynamic that in the past decade led to the loss of a quarter of its market share, mostly to off-price retailers, brands and Amazon, which consistently beat it on price, product or service, UBS analysts said in November. Indeed, it’s difficult to find an observer who believes that Macy’s has a game plan for a reality where the department store is an anachronism. Macy’s may need to retrench — return to running “100 department stores in the East, South and West” — in order to reinvent itself, according to SiteWorks’ Egelanian.

“They think their big enemy is the internet, and it’s not,” he said. “Their stores are old and tired, the malls they’re in are dying, and the merchandise they sell is ordinary and overpriced. Macy’s needs to figure out how to operate profitably on the coasts, where they can really have a future. The off-price and the secondary store locations that make up the majority of the company’s stores and square footage are nothing but a distraction, making it harder and harder for them to focus on the parts of the business that can survive.”