Saks, Macy's Make Cuts at Stores but Progress Online

Saks announcement that it is cutting jobs and slashing its capital expenditures falls in line with an earlier announcement from Macy's saying it would shutter stores, but those developments also may foreshadow the next major change in the rapidly evolving department store sector.

Department stores face significant challenges, including failing malls, more effective competition and a consumer who is increasingly looking to get more for cash spent. The immediate problem for Saks is the consumer. Steve Sadove, Saks chairman and CEO, said the economic downturn and corresponding "decline in luxury consumer demand" required Saks to take "decisive" measures, among them a nine percent reduction in the company's workforce, the cancellation of 2009 merit-based wage increases, the suspension of company matching contributions to the 401(k) plan for a year and the elimination of benefit accruals for employees still on the company pension plan. Saks also said it plans to half its capital expenditures, with spending largely limited to completing a project in its New York flagship store

Macy's faces similar challenges and last week announced that it would close 11 poorly performing stores, citing consumer spending and competitive issues related to new mall openings for the decision.

Now, some of this sounds as if Macy's and Saks are using the recession as cover for what are unpopular moves. Shoppers don't like to hear about lay offs because, beyond natural sympathy, it makes them feel as if they are going to get less service for their money, and any closing suggests a longer drive to the store, even if the store is in a newer, shinier mall. Right now, though, times are tough and people make allowances.

Yet, that isn't all that's going on here. In talking up long-term prospects, Sadove emphasized that the Saks brand still resonates with the customer. At Macy's, amid rumors of cuts coming to regional offices, chairman and CEO Terry Lundgren also argued for the continued strength of the company's brand.

Brand is the point, and how it can be used an opportunity. In a conference call on third quarter sales, Sadove said that the company's direct business, including online and catalog, was a "bright spot" producing a 10 percent comparable sales gain, and while the company doesn't break out sales within the category, you can bet web sales are driving that business. He added that the company had developed a test program using the direct business as a clearance vehicle to supplement its Off Fifth outlet stores. Again, smart money says Saks isn't holding on to excess inventory until its next catalog run but experimenting with online sales.

Macy's made a major online push this holiday season, creating the Believe promotional web site to drive sales to Macys.com and showcase its portfolio of celebrity labels, including Martha Stewart Signature. It recently announced that online sales were up 39 percent in December and 26 percent in the November/December time frame.

Sales at Saks and Macy's demonstrate that customers are purchasing less at those stores, but the same figures demonstrate that they still respond to the brands online. Department stores have the opportunity now to see how much they can leverage their web presence. In developing their brands online, they have fewer real estate and labor costs to worry about and an almost infinite flexibility to showcase the labels that draw consumers to them.