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Macy's Earnings Teach an Important Lesson: Think Local

Macy's earnings can teach retailers a good lesson: don't forget to think about your local customer.

Woman shopping for clothes
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Woman shopping for clothes

Many retailers have been getting lean and mean to stay afloat as consumers remain stubbornly stingy. But Macy's is a good example of a retailer that has worked to both centralize its operations while at the same time increasingly tailoring its product assortment to respond to regional needs.

The effort seems to be paying off: Macy's latest resultssoared past analysts' estimates, partly due to its localization strategy.

"Retail is a game that is won at the margins," said Bryan Eshelman, co-leader of AlixPartners global retail practice.

Retailers can "go local" in a variety of ways. Eshelman said Macy's model is more labor-intensive than the strategies that some other retailers have employed.

Although the department store chain has centralized its buying, planning and marketing operations, it also has local managers on the ground who examine sales data and travel to a specific handful of stores to study customer buying at those locations. Based on their work, individual Macy's stores may decide to stock more of a particular dress size in a particular style, for example.

"Retail is a game that is won at the margins." -AlixPartners, Co-Leader, Global Retail Practice, Bryan Eshelman

Other store chains make similar inventory moves, but without the granularity of Macy's approach. For example, a store may ship more of a specific size for a whole range of clothing to a store. That may be all it takes to make more apparel sell at a full price rather than linger on the rack and be marked down.

Eshelman cited one example of a specialty retailer with 200 stores that tailored size scales by category and location. The change led to a profit-margin improvement that added $10 million in pure profit. (He declined to identify the client.)

"As a general rule, retailers are trying to do more with less on all fronts," Eshelman said.

He thinks there is a huge opportunity for the retail industry to implement these strategies and maximize sales, which is especially important given that retailers continue to keep their inventories lean.

"It makes a lot of sense," said Wall Street Strategies analyst Brian Sozzi.

Limited inventories mean betting on the wrong merchandise can be a costly mistake for a retailer.

Sozzi cited American Eagle Outfitters as an example. The teen retailer has been struggling after making a big bet on denim that hasn't paid off.

The strategy also makes sense as consumers buy products closer to when they are needed, he said.

Sozzi expects more retailers to head in this direction, and cited Pacific Sunwear of Californiaas another example of a retailer that is localizing their products.

Of course, there are hurdles. Retailers must have the right combination of analytics to collect sales data, but it also requires the right talent to understand and interpret the nuances of that information. Logistical changes also may be required, these can often be easier to accomplish than many retailers think, Eshelman said.

Questions? Comments? Email us at consumernation@cnbc.com

Retail