Macy's Smart Strategic Move Steals Customers from JCPenney

Over the past eight months, an interesting trend has emerged -- sales at Macy's (M) have taken off, while JCPenney (JCP) sales are lackluster. In a Wall Street Journal blog post, John Jannarone posits the theory that the two trends are connected: Macy's has gone a bit downscale and is taking Penney's customers. That's probably right on, and a smart move by Macy's given the economy and new-frugality consumer attitude that many think is here to stay.

But Macy's can't be given credit for going down market because of the downturn. In fact, Macy's has been moving slowly out of the luxe category every since its spree of buying up regional top-line department stores including The Bon Marche and Rich's in the '90s and early '00s. As they added more and more units, they became more of a mass-market department store. It sort of had to happen, since there are only so many luxury-goods buyers out there.

Given what's happened with the economy, Macy's move turned out to be prescient. While Neiman Marcus (NMG) and other luxury chains took sales hits, Macy's has been one of the first department-store chains to bounce back.

Macy's took a brand with more of a luxury reputation and offered merchandise Penney's shoppers could afford. In essence, as Target (TGT) is to Walmart (WMT), Macy's became to Penney's. And that's a great spot to be in right now -- a high-class reputation but delivering affordable goods. A reputation for better style sense, but swimming in the mass-market pool. If you're a working-class teen looking to buy some clothes, and you can afford the duds at Macy's, whyever would you go to Penney's? You wouldn't.

As Jannarone points out, Macy's is now in an enviable position. They charge a bit more than Penney's for many of the same items, yet more customers flock to Macy's to buy them. That's the power of brand equity. By rights those shoppers should go pay less at Penney's, but they don't because they want to be associated with the Macy's brand -- or they wouldn't be caught dead saying they shopped for clothes or accessories at Penney's.

If Macy's ever want to go back upscale, it could probably do it, but Macy's is smarter to stick with what they're doing now. Through careful merchandise and pricing decisions, they've become everybody's affordable-luxury department store. And that spot ought to stay sweet for years to come.

Photo via Flickr user Bob B. Brown