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Macy's regional buying strategy is criticized

By SUZANNE KAPNERF
The New York Post

Even as Macy's spends millions of dollars to create a national brand through advertising and store renovations, behind the scenes the company still operates through seven regional buying offices, a system that analysts have panned as outdated and costly.

Macy's argues that its regional divisions allow it to better tailor merchandise for different stores, ensuring that marquee locations such as Macy's Herald Square carry more upscale items than do stores in less affluent neighborhoods.

But analysts point out that Macy's is one of the few large retailers to still rely on regional buying offices. J.C. Penney, Kohl's and Nordstrom are among those that have switched to central systems, yet manage to pepper stores with local flavor, these people said.

As Macy's sales continue to lag expectations, the company's cost structure is increasingly becoming a topic of conversation. This is especially true as savings from its merger with the May Department Stores Co. start to run their course.

"Macy's cost structure is too high, and, as a result, their prices are too high," said Robert Buchanan of A. G. Edwards. "That is a key reason why they are likely to lose market share."

Buchanan estimates that Macy's could save $100 million a year by eliminating all but two of its buying offices. He favors the retention of regional merchandise managers to ensure that products are tailored to individual stores.

Such a move would help bring Macy's expenses in line with competitors. According to Buchanan, Macy's expense-to- sales ratio is 32 percent compared with 27 percent for Nordstrom and 25 percent for both J.C. Penney and Kohl's.

Macy's has tried centralized buying in its home department with disastrous results, making it less likely the company would move quickly to streamline other divisions, observers said.

The move to central buying for bedding, furniture and other items for the home pre-dated Macy's, then known as Federated Department Stores, 2005 merger with the May Co.

Logistical problems with warehouse and distribution centers overwhelmed the Macy's team. Then the housing slump kicked in, further hurting sales of home goods, which have been among the company's weakest performers.

The pressure to cut costs by centralizing operations comes as Macy's finds it increasingly difficult to integrate the roughly 400 stores it acquired from the May Co.

Macy's is adding more promotions and adjusting merchandise through a seven-box grid. Prices range from good, better, best. Styles are lumped into four groups with traditional being the most conservative and fashion the most trendy.

Tinkering with the merchandise only works if consumers perceive products sold at Macy's to be of comparable or better value to what competitors are offering, analysts said.

For instance, towels sold at Macy's under its private label Charter Club brand for $16 stack up poorly against Target's Fieldcrest towels, which regularly go for $11.99, said Robert Passikoff of Brand Keys.