RETAIL: Slipping Macy’s Seeks Tonic in China E-Commerce
Bottom line: Macy’s slow move into China reflect the company’s extremely conservative approach to overseas expansion, and is more designed as a PR exercise to deflect attention from its flagging performance at home.
Macy’s
US retail giant Macy’s (NYSE: M) is looking to China as tonic for its sputtering sales at home, with the company trumpeting a major new e-commerce venture in partnership with 2 major local players. I had a slight sense of deja vu when I saw this latest series of announcements, since I could have sworn I’d seen Macy’s name appear in some China-related headlines before.
A quick check revealed the company did make a timid move into China e-commerce back in 2012, when it invested $15 million in a company called VIPStore, which was set to offer some of Macy’s private label products in its Omei.com site. (previous post) Reports a year later said Macy’s was once again looking to go into China, saying it was eying an online presence rather than build traditional brick-and-mortar stores. (previous post)
A quick check of the Omei.com site comes up empty, indicating that site has probably failed or is undergoing some kind of major retrenchment. The later reports in 2013 appear to be accurate, though it does seem surprising that Macy’s has taken more than 2 years to finally make its newer e-commerce debut.
Macy’s in China
Such a slow approach is often prudent for the tough China retail market. But in this case timing of the news also looks aimed at trying to create some excitement around an otherwise boring old-time retailer using a department store format that is rapidly losing relevance in today’s retailing climate.
According to the latest announcements, Macy’s will finally take the China e-commerce plunge in a joint venture partnership with Fung Retailing, a privately held company that operates 3,000 stores throughout Asia. (company announcement; Chinese article) In a separate announcement, leading Chinese e-commerce company Alibaba (NYSE: BABA) says the new Macy’s China store will operate on its main Tmall online shopping mall platform. (company announcement)
No Bricks-and-Mortar
Macy’s will own 65 percent of the new joint venture, which will start with an e-commerce pilot set to launch later this year. Alibaba and Macy’s have been working together on a project basis over the last year, and Macy’s notes that it began selling products into China as early as 2011 via its global website. It added that no brick-and-mortar stores are planned for China at the moment, but that it could consider such a move later.
Like the VIPStore move back in 2012, this latest investment looks relatively modest at $25 million over the next 18 months. Macy’s said it is targeting $50 million in China e-commerce sales for 2016, again a very modest figure for a company that posted $6.1 billion in sales during its latest reporting quarter.
All of this leads to my earlier assessment that this move looks quite timid, and is also a bit of a public relations exercise to offset disappointment at performance in the company’s latest results released at the same time as these China announcements. Macy’s latest report showed that net sales actually dropped about 3 percent for its latest quarter, while profit fell by an even larger 26 percent. The company also lowered its full-year sales forecast for 2015, citing a weak first half of the year.
Investors clearly weren’t buying into the China story, and instead were focused on Macy’s struggling performance at home, with the stock sinking by nearly 7 percent in the 2 days after it lowered its 2015 guidance. The cautious China sales target is probably a prudent move as Macy’s tests out the market, though the fact that it’s taken so long to finally take the plunge shows just how conservative the company is.
At the end of the day, e-commerce is probably the right way to go for western retailers looking to enter China, or perhaps a hybrid model that uses online shopping with a limited number of real-world brick-and-mortar stores. But Macy’s approach seems just a tad too conservative in China’s fast-changing retail climate, and I suspect the company doesn’t expect to earn any major revenue or profits from the market anytime soon.
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