For Macy's, going downmarket looks like the way ahead

By Sruthi Ramakrishnan

(Reuters) - Macy's Inc's (NYSE:M - News) planned push into the off-price retailing sector, dominated by chains such as TJX Cos Inc's (NYSE:TJX - News) TJ Maxx, shows the venerable department store chain has faced up to new realities of retailing in the United States.

For the past six years, Macy's has focused more on cutting costs and streamlining its operations rather than expanding as a way to fuel earnings. Now, that has changed.

Macy's said this week it would spend $1.2 billion to expand internationally and set up off-price stores, which sell items such as seconds, returned goods and off-season merchandise at prices that squeezed middle-class customers have found increasingly attractive since the 2008 recession.

"It's a new world. Since so many peoples' salaries are off-price they also need to shop that way," said Robert Brusca, chief economist at consulting firm Fact and Opinion Economics. "Macy's is bending to the reality of retailing."

The customer mindset has also changed, analysts said, as even higher income shoppers who tightened their belts and traded down during the recession have stayed with off-price retailers.

The move will give Macy's the opportunity to stake a claim on three main types of shopper - the luxury buyer, through its Bloomingdale's chain; middle-income shoppers through its namesake stores; and the more bargain-hungry crowd attracted to TJ Maxx, Ross Stores (NasdaqGS:ROST - News) and Burlington Stores (NYSE:BURL - News).

TJX's sales have increased 6 percent in each of the past two years, while Macy's sales have grown an average 0.75 percent.

"If you're looking for growth vehicles going forward in this retail environment, it (off-price retailing) has to be a consideration," research firm Retail Metrics' President, Ken Perkins told Reuters.

"... It's something very very wise to look at."

Perkins noted the success of upmarket retailer Nordstrom Inc's (NYSE:JWN - News) off-price Nordstrom Rack stores, which have generated almost all of its parent's recent growth.

Nordstrom Rack's sales have grown at least 10 percent every quarter for the past two years, while the company's overall sales growth has ranged from 0.4 percent to 8.9 percent.

Macy's' holiday-quarter sales rose just 2 percent.

"This new phase we have entered has the opportunity to take our company to a whole new level of success," Chief Financial Officer Karen Hoguet said on an earnings call.

"We have the ability to create a larger relationship with existing customers and make inroads with customers that have not traditionally shopped either Macy's or Bloomingdale's."

(Additional reporting by Siddharth Cavale; Editing by Ted Kerr)