Macy’s: reinventing customer experience through data analytics

Traditional retailers have been significantly impacted by the increasing penetration of e-commerce. Macy’s has focused on developing its data analytics capabilities to survive the fourth industrial revolution.

Value creation

Macy’s is an icon of American retail and one of the oldest and largest department stores, with 775 stores in the US [1]. The traditional business model of the company consists of purchasing high quality merchandise from many suppliers and reselling the goods in their stores [1]. By offering a superior selection of products, an exciting shopping environment, and superior service, the company creates value for customers [2].

The company has been impacted significantly by the entrance of online retailers. The Amazon effect [3] has negatively impacted the financials of the company over the last 5 years. The penetration of new competitors has incentivized cost-reduction initiatives as well as the digital transformation of the company. The use of data has been critical for understanding customers behaviors to increase customer spend and loyalty, and for analyzing operations to reduce costs. Those initiatives have enabled Macy’s to capture value by sustaining healthy margins.

 

Use of data and its challenges

To combat the new entrants, Macy’s has strengthened its omnichannel experience. One of the 5 pillars of its new strategy is to adopt new consumer and technology trends to improve its value proposition.

Use of AI for enhancing customer service

Macy’s developed a website virtual agent based on the Microsoft Dynamics 365 AI solution for customer service. The virtual agent answers more than one quarter of customer queries, reducing the company’s costs[4]. The roll out of the initiatives was not difficult since it was based on an external solution. Although this initiative reduces  Macy’s cost structure, I believe it is not a competitive advantage since it has been implemented for multiple companies.

Use of predictive analytics to grow customer spend

Macy’s has invested in a predictive analytics solution from SAP to better understand customer buying behavior and optimize email and website marketing campaigns [5]. Based on past consumers behavior, the software helps the company to target customers more efficiently to increase their spending.  Since Macy’s decided to implement an external and standardized solution, the initiative’s roll out only took 3 months. The initiative has increased online sales by 10% through more targeted emails to customers.

Use of Google Cloud data management for warehouse optimization

Warehouse optimization is critical for reducing costs and meeting shoppers’ expectations. By having all the information centralized and by applying real-time inventory management, Macy’s has been able to optimize the inventory allocation and reduce costs [6]. Although the implementation of the technology provided by Google seems to have been a success, the company’s cultural transformation has been challenging. To successfully implement the cloud technology, it is critical to have leadership on board, training the employees and selling the benefits of the new solution [7].

Experiment to improve customer experience

In addition to using external solutions, Macy’s has deployed an internal team to analyze data [8]. The team members work as consultants within the organization and support other teams in analyzing data for improving decision making process. Macy’s uses experimentation to improve customer experience. By conducting A/B testing, the team optimizes different website elements such as layout, design, style, pricing, promotions, headlines, and photos [8]. The company uses the t-test to analyze if a change in the website (e.g. color of the button) increases the conversion ratio of customers. The company has invested in increasing the size of the team.

 

Going forward

The digital transformation of Macy’s and the use of analytics represents an opportunity for the company, but also a challenge. Educating the organization to make data-driven decisions requires continual efforts as an important strategic imperative. Creating a robust team to conduct experiments that increase customer conversation is also a critical task that requires time and capital investments.

To reduce the impacts of the Amazon effect, in February 2020 Macy’s announced that it will double down on its digital growth strategy and will reduce elements of its traditional business. The company plans to close 125 stores in the next three years, cutting 2,000 jobs and reducing costs by $1.5 billion in 2022 [9]. I believe that Macy’s has implemented a robust strategy for improving its omnichannel customer experience and reducing costs. Going forward, the company should take advantage of its physical stores by personalizing its in-store experience with data analytics, providing a competitive advantage versus online retailers. Boosting loyalty program and being obsessed with customer experience are critical for thriving in the fourth industrial revolution.

 

Appendix: how Macy’s uses advanced analytics and big data 

 

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Bibliography
[1] Macy’s. “Annual Report 2019.” https://www.macysinc.com/investors/sec-filings/annual-reports/content/0000794367-20-000040/0000794367-20-000040.pdf. Accessed on April 2020
[2] https://www.macysinc.com/investors/sec-filings/annual-reports/content/0000794367-12-000096/0000794367-12-000096.pdf
[3] Investopedia. “Amazon effect.” https://www.investopedia.com/terms/a/amazon-effect.asp. Accessed on April 2020. ha
[4] Microsoft. “Macy’s uses AI-driven virtual agent to transform online and mobile customer service.” https://customers.microsoft.com/en-us/story/macys-retail-microsoft-ai. Accessed on April 2020.
[5] SAP. “Macy’s gains better insight into customers with predictive analytics from SAP.” https://news.sap.com/canada/2014/05/macys-com-gains-better-insight-into-customers-with-predictive-analytics-from-sap/. Accessed on April 2020.
[6] Google. “Macy’s uses google cloud to streamline operations.” https://cloud.google.com/blog/topics/customers/macys-uses-google-cloud-to-streamline-retail-operations. Accessed on April 2020.
[7] Ricoh. “The cultural impact of cloud migration.” https://www.ricoh-usa.com/en/insights/library/articles/the-cultural-impact-of-cloud-migration. Accessed on April 2020.
[8] Tableau. “Macy’s: cracking the code of A/B testing and market basket analysis.” https://www.youtube.com/watch?v=TtLGgd27kQk. Accessed on April 2020.
[9] Wall Street Journal. “Macy’s to close 125 department stores.” https://www.wsj.com/articles/macy-s-to-close-125-department-stores-exit-weakest-malls-11580850007 . Accessed on April 2020.

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9 thoughts on “Macy’s: reinventing customer experience through data analytics

  1. Thanks for this great post, Andres!

    I think that these initiatives are very interesting and will hopefully help Macy’s overcome some of the challenges it has been experiencing for years. However, I’m concerned about the realistic potential and use of Macy’s in-store mobile initiatives. I think that one of the consequences of the rise of online shopping is that fewer millennials shop in department stores. I’m concerned that the older generation will not be tech-savvy enough or interested in using their phones to get answers to their questions while shopping. They might find it as a hurdle and prefer the traditional way of asking a sales representative for help.

  2. Great post, Andres! I was reading about Macy’s recently and learnt that they are struggling financially. A shift toward digital technology could be a strategy to move to lower-cost models (e-commerce). Based on your research for this blog, do you think they can leverage data and analytics to optimize their business model such that they can revive the financial health of the company? Possibly downsizing their retail footprint ( lease costs?) or optimizing supply chains due data analytics and demand prediction? What do you think?

  3. Thanks Andres for sharing this insight into Macy’s! I’m wondering about the specifics of Macy’s cost-benefit analysis in terms of how much time / capital it will take to make this transition, and what is the path toward recouping the investment and driving further growth? Additionally, digital transformation is a defensive move for a large incumbent, and it is just table stakes for retailers going forward. I wonder if there are specific elements of its digital transformation that can differentiate it enough from its competitors to enable Macy’s to capture share.

  4. Really liked the post! Shocking that through the targeted advertising they were able to grow their topline by 10%! A worthwhile investment to say the least.

    While they’re using traditional means to improve the online UX, I wonder if there are more opportunities to use analytics to improve the in-store customer experience. Perhaps through AR, geolocation analytics (in-store shopping behavior insights), or other creative means to improve the shopping (and browsing) experience. Also, as they increase their presence online, it might behoove them to derive ways to more intimately tie the in-store with the online experience.

  5. I like all the new initiatives that Macy’s is undertaking to improve their position. What is missing I think is not the strategy how to compete with Amazon but how to compete with all the DTC brands that are so focused on attracting customers with their mission, the green manufacturing, their donations to different causes, etc. These brands are all the new generation is following and Macy’s needs to have a plan how to bring them in on the top of all the operation optimizations. They can use AI data to see what are the behaviors of this young customer segment and when they buy from Macy’s what do they look for. If Macy’s was able to partner with these brands or grow in house similar ones, they would be in a much better position.

  6. Thanks for a great article Andres! I’m a bit of a skeptic regarding how useful these measures taken by Macy’s will be in the long run. Seems to me that they’re playing catch-up with Amazon at this point. By this I mean that the technology and AI solutions they’ve implemented are not sources of a competitive advantage, given that most (if not all) reputable online retailers already have them (they’re kind of a must to compete in the space). I believe Macy’s will have to be more innovative in the solutions they’re implementing and take more risks in order to generate the results they’re looking for.

  7. Great article! It is nice to see how a traditional business is utilising data / AI to improve their business operations. I believe to remain competitive and fight off competition from other retailers and Amazon, the company may need to embed these capabilities in their organisation. I am interested to see how they have shaped their organisation to include data and AI and how these topics integrate with their other departments. To continue to be innovative in providing these solutions, I believe they will need a strong data team and works seamlessly across the organisation.

  8. Very interesting post and thanks for sharing! It is always interesting to read about incumbents try to adjust its business model in order to stay relevant in a declining industry, especially when it comes to a segment that Amazon has come to dominate. Although Macy’s is going to great lengths to maintain some semblance of a market presence by leveraging AI to evolve the customer experience with the various IT initiatives, I don’t believe that they will be able to survive in the long run. Like other large department stores before them have experienced, Macy’s business model was built around the premise of in-store experiences across various brands but as we have seen the changing customer behavior in the past decade is not conducive to this such strategy. As a result, it is my feeling that Macy’s is just using AI because they know they need to do something different but I am hard-pressed to believe the investment will provide the anticipated returns.

  9. Interesting read! Macy’s is definitely making huge bets to survive in this industry. In addition to digital transformation, Macy’s is focusing on introducing new store concepts to cater for Gen Z’s interest in experiential retail.For example, Macy’s opened a new concept called “Market by Macy’s” which is basically a small store that sells curated local products offering both branded and private label merchandise from local designers. I wonder if they this is where the biggest value add of their AI models would be i.e. in using AI to curate the best merchandise.

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