With Widening Income Gap, Upscale Retailers Outperform Middle-Tier Stores

As part of a $400 million makeover at its flagship store in Manhattan, Macy’s is renovating space for designer boutiques that feature wares from Gucci to attract luxury customers, including foreign tourists, in time for holiday shopping. Consumers at the formerly mid-tier department store can still find $11 pumps on the clearance rack, but they can also try on $500 designer boots.

The retailer says its strategy, called “My Macy’s,” is to learn what customers at different locations want, and then bring those brands to them. But for Macy’s, that means moving up-market. The company, which also owns Bloomingdale’s, is undergoing its upscale makeover as rivals Nordstrom and Neiman Marcus each prepare to open their first Manhattan stores in 2018 and as the high-end and luxury stores continue to outperform discounters like J.C. Penney and Kohl’s.

“There’s been a widening income gap, so those trying to make a living getting customers in the middle have been struggling,” said Dan Hess, CEO of Merchant Forecast, an independent retail research firm.

In the mid- to late-2000s, the average American consumer was what retail economists call “aspirational.” That’s the designation for people who a shop above their income demographic for items such as name-brand purses, shoes and watches to give them an appearance of status.

“There were certain kinds of items, if you didn’t have one of those you were just nothing,” said Patty Edwards, managing director for investments at The Private Client Reserve at U.S. Bank in Seattle.

That “affluenza,” as Edwards describes it, ended with the recession in late 2008 and early 2009. During the slow economic recovery, several niche luxury brands like Louis Vuitton, Saint Laurent and Alexander McQueen continue to post booming sales as upper-end consumers enjoy higher home values, 401(k)s and stock portfolios. Now, Macy’s is betting on adding to its bottom line with more profitably priced items that are likely to attract wealthy shoppers as well as aspirational consumers.

“It’s the theater of retail,” Edwards said. “You want to belong to the club that shops in XYZ store, because not only do you buy underwear or make-up there, you could, even though you don’t have the money for it, buy a purse with some high-end brand on it. Or at least you could say, 'I'm shopping with such and such who shops in this high-end boutique.'”

Macy’s is expected to report quarterly earnings Wednesday up 8.5 percent from a year ago, and Nordstrom to report Thursday that profits rose 4 percent, according to S&P Capital IQ. Meanwhile, Kohl’s is expected to report an 8.6 percent drop in profit Thursday, and though analysts expect J.C. Penney to report a nearly 14 percent rise in quarterly profit, it comes with an expected loss of 79 cents per share, down from last year’s loss of $1.85 per share.

J.C. Penney lost loyal customers, billions of dollars and its identity as a discount retailer when former CEO Ron Johnson tried to modernize the store with designer boutiques and fewer clearance prices in 2011.