The Future of Retail Looks Like Macy’s, Not Amazon

Macy’s will be the most successful retailer of the next five years, not Amazon.

Department stores are alive and well in 2015. Frequently dismissed as dinosaurs outmaneuvered by digital players, department stores can not only survive the dramatic fall-off in foot traffic seen over the past few years but will ultimately fare better than pure-play e-commerce. Contrary to long-held conventional wisdom, department stores will be among the biggest winners in retail.

The Achilles heel of Amazon and other pure play online players is solving for the last mile. Last year, Amazon spent $6.6 billion on delivery and received $3.1 billion in shipping fees. For consumers as well, high delivery speeds and low-cost shipping options are often outweighed by the burden of being at home to receive packages. Meanwhile retail chains are using their physical stores as flexible warehouses for efficient online fulfillment, catering to consumers for whom omnichannel is an expectation rather than a perk.

Nearly every high-scoring brick-and-mortar retailer in L2’s Department Stores Index provides real-time inventory or click-and-collect, or even both. Nordstrom and Macy’s, both among the fastest-growing e-commerce retailers, are digitally rising above the pack with innovation and investments that embrace digital and bridge clicks and bricks. Nordstrom’s new “Scan & Shop” feature within its Catalogs app links the print catalog to digital and m-commerce. On Instagram, where Nordstrom enjoys a robust following of close to 900,000, the retailer uses Like2Buy to make its feed shoppable. Nordstrom has also extended its social media investments to emerging platforms such as Wanelo. Meanwhile, the company recently announced plans to add a fulfillment center in Pennsylvania, since nearly half its customers are within a two-day ground delivery radius.

Macy’s is also shifting resources to fulfillment, building a massive direct-to-consumer center in Tulsa and moving to a larger Sacramento facility, while closing underperforming stores at a rapid clip. The company launched click-and-collect in 2013, a service that only 35 percent of American department stores in L2’s Index currently provide. All told, Macy’s has one of the most sophisticated omnichannel businesses in the country. Its digital wallet - accessible via mobile web or the Macy’s mobile app - integrates payment options, the store’s loyalty program, and special offers. Macy’s iPhone app now lets shoppers sort products by local availability, a function that became available on the desktop site in 2014. In-store shoppers can use the app to ship an item home or check prices, reviews and inventory.

Embracing digital is neither easy nor cheap. Macy’s (with cash flow per share of $12.22) and Nordstrom ($6.68) enjoy the advantage of extensive cash reserves. Macy’s has funneled an estimated $2 billion over the last five years into tech and e-commerce investments. This big bet on digital is paying off: Macy’s outpaced Amazon in shareholder returns by a healthy distance in 2014, as did Nordstrom. Macy’s outdid Amazon over the five-year period between 2010 to 2014 as well.

Meanwhile weaker retailers like Sears and JCPenney are looking to digital as a lifeline. Sears now enables collection of goods ordered online at curbside and offers an array of apps, one that allows users prepare a fitting room by scanning items around the store. Globally, however, a large cohort of department stores are digitally challenged, including prominent players such as Printemps in France and Takashimaya in Japan.

Department store brands that don’t evolve fast enough are unlikely to survive, as the future of retail is about combining clicks and bricks for a seamless omnichannel experience. The strongest digital brands are already going global, in terms of both bricks (Macy’s will open an Abu Dhabi store in 2018) and clicks (Nordstrom is the No. 6 retailer online in Dubai).

For more on the digital strategy of 56 department store brands, download a copy of L2's Digital IQ Index?: Department Stores.