Macy's quest for the fountain of youth
Giant retailer looks to give its flagship New York store a potential makeover in what would be a bold play for young Abercrombie & Fitch shoppers.
NEW YORK (Fortune) -- After years of losing ground to the likes of Abercrombie & Fitch in the battle for young and hip shoppers, Macy's is considering an overhaul of its flagship Herald Square store to lure the under twenty crowd, Fortune has learned.
The plan is still in the early stages and has not been formally discussed with suppliers. But according to three people familiar with the proposal, it entails relocating junior apparel from the fourth floor to the basement, now known as The Cellar, which currently contains a restaurant and a housewares department.
Any changes are at least a year or two away and may not happen at all, these people warn. Should Macy's decide to go ahead with the plan - which would create a club-like atmosphere in the basement, complete with dim lighting and pulsating music - it could be a key part of a strategy to reverse a prolonged sales slump at the department shore giant.
Sales at Macy's (M, Fortune 500) stores open at least a year, an important measure of a retailer's strength, have been declining since June 2007, and were off 2 percent in the second quarter. The problems are likely to be exacerbated by a slowdown in consumer spending that is forcing retailers to rethink their strategies.
Department stores have for years been losing ground to specialty retailers, which is one reason they are called aging dinosaurs. But the name goes beyond semantics. As department stores fail to attract younger shoppers, their customer base is literally growing older.
Marshal Cohen, the chief industry analyst for market research firm the NPD Group, estimates that department stores have lost 8 percent of their market share since 2003. He attributes a good portion of that decline to the migration of teens and young adults to specialty retailers, such as Urban Outfitters (URBN), J. Crew (JCG) and Abercrombie & Fitch (ANF), which routinely has a line outside its Fifth Avenue store in Manhattan.
"If my grandmother is shopping at a department store, why, as a teen, would I shop there?" noted Cohen.
By giving teens a separate entrance and their own place to hang out - similar to creating a rec room in the basement - Macy's is hoping kids will feel less self conscious about shopping where their parents shop. "It's certainly a step in the right direction," Cohen said.
There are certain advantages to introducing the concept at the Herald Square store, which, as the company's flagship, sets the tone for the rest of the chain. Billed as the world's largest store, the lore of Herald Square stretches back for decades, having served as the setting for the 1947 film "Miracle on 34th Street" and the spot where the annual Thanksgiving Day parade draws to a close.
But should the Herald Square store find success with its subterranean experiment, Macy's may have difficulty rolling the idea to its other 850 stores nationwide, many of which do not have basements.
A Macy's spokeswoman, Elina Kazan, declined to comment specifically on the plan, but says the company is always looking to improve its Herald Square location.
Going after the youth market has other risks, notably an alienation of core, older customers. Gap (GPS, Fortune 500) lost its mainstay thirtysomething shopper when it tried to appeal to a younger generation earlier this decade and has been in a tailspin ever since.
That is one reason why the British department store chain Selfridges decided to open an entirely separate concept - called Miss Selfridges - to appeal to younger shoppers, rather than convince them to frequent its traditional stores. With edgier fashions, louder music and dimmer lighting, the chain has succeeded in wooing an entirely new demographic.
Bloomingdale's, too, is appealing to a more youthful crowd with its SoHo store concept. Smaller than a regular Bloomingdale's, the SoHo model feels more like a specialty boutique than a full-line department store.
This is not the first time that Macy's has grappled with the problem of wooing the young. In 2003, it introduced a proprietary brand called American Rag that was meant to compete with Abercrombie and American Eagle Outfitters by offering its own version of distressed jeans and collegiate t-shirts. But American Rag never developed the authenticity of those other brands and came off as something of an also-ran.
In its quest for the fountain of youth, perhaps Macy's can learn a thing or two from its Bloomingdale's sibling. (Both companies were part of Federated Department Stores, a holding company that changed its name to Macy's in 2007.)
About 30 years ago, Bloomingdale's created a special juniors department in the basement of its Manhattan store to better compete with specialty retailers like The Limited, which were just becoming popular then. The retailer has since changed the layout of its store many times and now carries men's clothing in the basement and juniors on the second floor, but it has succeeded far more than other department stores in cultivating a younger image.
It goes to show you that in retailing, everything old really is new again. 
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