KEY POINTS
  • As retailers focused on e-commerce and faced supply-chain challenges during the pandemic, store appearance often became an afterthought.
  • Walmart shares were downgraded by a research firm earlier this year because of its sloppy stores, and Macy's has been criticized for its poor presentation.
  • Neil Saunders, managing director of GlobalData Retail, said it's time for retailers to clean up their act — or risk losing customers.

In this article

A man shops for clothes in Macy's department store in Herald Square, New York.

Crumpled piles of clothes. Unpacked boxes of inventory. Half-empty shelves. And employees rushing through aisles to grab items for online orders.

That's what some consumers are finding as they shop in stores again.

Retailers adapted stores and workforces as more sales moved online during the pandemic. Portions of sales floors became staging areas for curbside pickup. Employees got trained to pack online orders, as well as help with customers in stores.

For some retailers, that has turned a store's appearance into an afterthought. Bare spots on shelves and unkempt displays at Walmart prompted a research firm to downgrade its stock earlier this year. Macy's, the storied department store that now must fend off internet savvy rivals, has also faced ridicule for its poor presentation.

The coming months may be especially crucial for retailers as they try to woo shoppers back to stores, where sales tend to be more profitable. Consumers have money they've stashed away after saving on commuting costs, eating out and traveling. Some have stimulus checks waiting to be spent. These shoppers may hit the mall to buy merchandise that has been off their radar for months: dresses, blazers, heels, swimsuits and make-up.

Neil Saunders, managing director of GlobalData Retail, said it's time for retailers to clean up their act — or risk losing customers. He snaps photos on shopping trips to better understand companies' strategies and execution, which he then sends to his clients and posts across social media. He is quick to point out where retailers fall short: shabby signage, sloppy apparel or puzzling choices, such as setting up a large umbrella display at a store in Arizona, a state known for few rainy days.

"Having a store that's very messy and illogically laid out is quite very difficult for the consumer, because the consumer has to sift through a lot of things and they have to do a lot of searching to find the things that they want," he said. "And because people have gone online more during the pandemic, when they're coming back to shopping, their tolerance for that will have reduced even further."

Foot traffic is already picking up, as a growing number of Americans get Covid-19 vaccinations and feel comfortable venturing out again. Store visits across the country nearly doubled year over year during the week of March 22, according to Placer.ai. That followed a 60% jump in store visits the prior week, according to the research firm, which uses cellphone data to track consumer behavior.

Yet consumers may hang on to pandemic-related expectations, such as a heightened desire for safety and cleanliness.

Kelly Haws, a consumer psychologist and professor of marketing at Vanderbilt University, said store presentation will shape whether consumers feel eager or anxious to shop. She said cleanliness is most important for many consumers because of the global health crisis.

"Being organized and clean is going to be more important than ever for people," Haws said. "That's going to give them signals of safety."

'A tossed salad'

Retail analyst Scott Mushkin started visiting different Walmart locations in the fall. What he saw inspired him to visit even more stores on a cross-country road trip and ultimately, to downgrade the company's stock to sell in January. He said the low-cost retailer's disorganized stores and numerous out-of-stock items raised bigger concerns.

Mushkin, CEO of R5 Capital, said he saw huge variability, even in the same region during the same period of time — such as a store that didn't have any vacuums and another where they were piled high. He took photos of abandoned carts of inventory, empty shelves, clearance racks blocking walkways and clothing in a heap on the floor.

"You see a store that's just completely tossed," he said. "It's like a tossed salad."

Mushkin said he has visited roughly 60 SuperCenters in about a dozen states since late last year. He said the low-cost retailer's disorganized stores and numerous out-of-stock items raised bigger concerns.

Walmart is trading lower this year, after hitting a 52-week high of $153.66 at the beginning of December. Shares closed at $139.80 on Monday, narrowing the gap between its value and R5 Capital's price target of $131. The retailer also missed Wall Street's expectations when it reported fourth-quarter earnings in mid-February.

Walmart has had out-of- stocks and empty shelves at some stores in recent months. CEO Doug McMillon attributed it to high demand and supply chain challenges during the pandemic.

In interviews during the pandemic, Walmart CEO Doug McMillon has expressed his own frustrations with out-of-stock inventory. He attributed the trend to unusual demand and supply-chain crunches created by Covid-19 and said the situation is improving.

This fiscal year, Walmart plans to invest $14 billion in its business, up from about $10 billion to $11 billion in prior years. The stepped up investment includes the cost of turning a portion of dozens of its stores into high-tech fulfillment centers that use automation, rather than employees, to put together most of its online orders. Ultimately, this could reduce the number of employees picking orders in the aisles of Walmart's stores — and free them up for other tasks.

The company said it is also redesigning stores to make them sleeker and easier to navigate. It plans to have the new design in 1,200 stores by the end of the fiscal year.

Competing priorities

With the rise of e-commerce companies like Amazon, retailers have had to split their focus between digital initiatives and brick and mortar and make tough decisions about where to direct investment dollars. How much should be spent on a website versus refreshing and remodeling stores? Should employees tidy shelves and cater to customers, or pick and pack online orders?

Those debates have only intensified during the pandemic, as the shift online accelerated rapidly.

Stores that were making a gradual shift to offer services like the ability to buy an item online and pick it up at the store had to find a way to offer the service immediately. The "bolted-on" e-commerce features can make a shop seem cluttered and stressful for customers who come for a laid-back and enjoyable shopping experience, retail strategy analyst Steve Dennis said.

"There are lots of retailers that their stores were born for a different age," he said. "It was basically a place to go select what you want and now we are putting all these other demands on top of it."

Macy's has become a target of criticism for its store presentation, in part because of investments being spread wider and thinner. The department store chain's problems have been brewing long before the pandemic. Sales fell for three consecutive years, from 2015 to 2017, as shoppers increasingly looked elsewhere for shoes and handbags. Revenue dropped again in 2019 and then last year, during the health crisis, fell about 28%.

On recent trips to Macy's stores, visitors have shared photos of naked mannequins, bare shelves and merchandise askew. This includes Saunders, of GlobalData Retail, whose boots-on-the-ground research is sometimes shared widely on Twitter.

Saunders told CNBC he has noticed a large and growing gap between the look of Macy's website and social media channels, and what customers see when they walk into the stores.

"Macy's has done some good investments in digital, but it really has neglected a lot of its stores," he said. "The problem with that is, the store is often what shapes one's perception of the brand."

While Macy's may be trying to reel in a younger audience with e-commerce investments, he said, it has to "get the balance right and do both," or risks sinking sales.

The company has argued its investments are working, though. CFO Adrian Mitchell told analysts during an earnings call in late February that Macy's has made "very good progress" on improving inventories and cutting out clutter in stores.

Macy's stock hit an all-time intraday low of $4.38 in early April 2020. Shares have since clawed their way back, closing Monday at $17.06. The company has said it expects 2021 to be a time for recovery and rebuilding, with momentum growing in the back half of the year.

Mushkin, who downgraded Walmart, said he saw that tug-and-pull dynamic between brick-and-mortar and e-commerce at Walmart, too. Inside of stores, he said numerous employees walked through aisles plucking items for online orders for customers who would later collect them in the parking lot or get them delivered. Shoppers, however, struggled to find items they needed and waited in long lines at the store.

"There are growing pains," he said. "It was a 100-year pandemic that created havoc across not only their supply chain, but everyone's supply chains. ...The question is: Why is it worse at Walmart?"

If Walmart and other retailers don't improve their store experience, he said, they will push even more customers toward online options that require more store labor and generate lower profits. Or, he said, they will lose customers entirely.

Plus, other experts say retailers can't think about investments in stores and websites in silos.

"It's not an either or," said Steve Sadove, former chairman and CEO of Saks and now a senior advisor for Mastercard. "You have to make choices so that you can make the investments in both. And you're going to have to then make trade-offs because you don't have unlimited resources."

That's the model that has been embraced by the likes of Nordstrom and Target — retailers with different prices but a similar reputation for well-organized stores, with boutique-like destinations inside, even as online sales grow.

An increased number of mannequins feature clothing and shoes throughout the remodeled Target store in Orange, California.

Target CEO Brian Cornell has said customers who shop online through curbside pickup or its home delivery service, Shipt, have a deeper relationship with the brand and tend to shop more at its stores. The company has put money toward store remodeling and made them a destination by striking deals with retailers, including Levi Strauss & Co., Ulta Beauty and Apple.

Macy's has also acknowledged that stores help drive digital revenue. CFO Mitchell recently told analysts that its digital sales per capita are two-to-three times higher in markets with Macy's stores. And conversely, the retailer's ongoing store closures over the past few years have resulted in digital sales dropping in some markets, especially when there was only one Macy's in a single market to begin with, Mitchell said.

"Stores are providing the critical nodes to our digital customers," he said.

One category of retailers, though, seems to get away with sloppiness in stores: off-price retailers. These companies also have a much smaller presence online, if at all. Customers planning to visit TJ Maxx, HomeGoods, Ross or Burlington likely anticipate they will be digging through mounds of merchandise, picking through piles of mismatched shoes, and rummaging through tags on clothes to find the perfect bargain in all of the chaos.

This experience, often referred to as treasure hunting, is what makes these discount apparel and home furnishings businesses so unique. It's what keeps customers coming back for the thrill. And experts say customers who were used to this sort of browsing pre-pandemic will be eager to return soon.

'One of your best salesmen'

Most others in retail, including department stores and big-box chains, could benefit from drawing a little inspiration from the past.

Because before retailers had websites, they had stores. Just stores. That was the single place a sale could happen. Retailers poured money into eye-catching window displays and trendy mannequins. Employees were trained to keep merchandise organized. If a customer picked up a shirt in a department store and set it back down on a shelf, it was immediately refolded.

Mannequins in retail stores, like in Nordstrom pictured here, are meant to draw shoppers in and inspire customers to put together similar outfits.

"Everything always had to look neat," said Jan Whitaker, who has written books about the history of department stores. "You couldn't have merchandise spilled all over the place. ... Even the basement stores, which were the lower price stores, didn't look messy or horrible either."

Victor Gruen, an Austrian-born architect best known for pioneering the design of shopping malls in the United States, knew cleanliness was the way to win customers over.

Gruen was confident — and it showed in his blueprints — that the right lighting, strategic floor plans, snazzy window displays and brightly colored signs would draw people and turn a shop into a "machine for selling," according to his biography "Mall Maker," by M. Jeffrey Hardwick.

His advice may be prove to be timeless.

"A good storefront is one of your best salesmen," Gruen once told merchants, according to Hardwick's book. "On its dignity and good taste people will base their opinions of your entire business."

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