Macy’s and the iconic regional department store chains that the company acquired over the years—Kaufmann’s, Hecht’s, Robinsons-May—were once the crown jewels of downtown shopping districts and the key anchors of bustling malls across the country. They were destinations for shoppers who wanted to browse extensive housewares departments, find the latest fashions, or have a leisurely afternoon lunch.
But now Macy’s is struggling along with much of the retail sector. After disappointing sales during the holiday season last year, Macy’s said it was slashing 4,800 jobs and closing 40 stores. Sears and J.C. Penney announced store closings as well, leaving big empty spaces in America’s malls, a third of which are predicted to close in the decade ahead.
A big part of the Macy’s problem is that to get more people through its doors in recent years it turned itself into a discount store. Type Macy’s into Google and “coupons” returns as one of the top hits. Those ubiquitous coupons were coupled with constant sales to boost revenue from quarter to quarter. When consumers walk into Macy’s and most other retailers these days they never expect to pay full price for any product in the store.
The same is increasingly true of college tuition as well: few students and parents expect to pay the published sticker price listed on a college’s website. This week we learned that the tuition discount rate for first-time, full-time freshmen hit a record 49.1 percent, according to the National Association of College and University Business Officers. Unlike Macy’s, few colleges hoist advertisements for sales at their entrances, but higher education is essentially following the same failed playbook of the retail sector by discounting the product so deeply, and for so many people.
As Mike Coyne, vice president for finance and administration at Susquehanna University in Pennsylvania told me, tuition discounting is not a strategy, but “a symptom of demographics and personal finances.”
First, there are fewer high school graduates in the Midwest and Northeast, where many tuition-dependent small colleges are located. Second, median per-capita income in the United States, when adjusted for inflation, has been essentially flat since 2000. The typical American family makes slightly less than a typical family did 15 years ago.
“There are parents in New Jersey and elsewhere who used to make $120,000, $150,000, and whose jobs were downsized in restructuring or eliminated because of automation,” Coyne said. “Those jobs used to pay for college tuition.”
While this fall’s incoming class at Susquehanna surpassed its enrollment goal of 650 freshmen, it cost the university a percentage point higher on its discount rate than it had planned.
Still, Coyne feels fortunate to have hit the enrollment goal because “there’s nothing worse than empty beds.” After all, even students with deep tuition discounts bring in some revenue. Some 10 percent of private colleges and nearly as many public colleges have missed their enrollment goals in recent years, according to annual surveys by the Chronicle of Higher Education.
Compared to other schools right now, Coyne said he is satisfied with the university’s financial standing. But like other higher education financial officers, when he looks back at the trends of the past 10 years he sees worrisome signs for the future. The discount rate for higher education overall has been growing. Earlier this decade it was closer to 40 percent. A decade ago it was in the mid-30s. And 20 years ago, the discount rate at most colleges was south of 25 percent.
What that means is that even as the sticker price of college increases year after year—the tuition figure that gets all the attention from the public—schools are actually bringing in the same or even less in actual revenue after grant aid is subtracted from a student’s tuition bill. Like any business, a college needs cash on hand to pay employees, bills, and debts, and most of all, maintain the campus and invest in the future.
Continuing to discount a product more and more every year eventually leads to the death spiral that many retailers find themselves in right now. So does that mean higher education will follow the retail sector and witness a rash of closures and mergers in the coming years? It’s unlikely given the political realities and government subsidies. Just look at how difficult it was to close tiny Sweet Briar College in Virginia (and ultimately unsuccessful).
Rather, this latest discounting study “suggests that we are nearing the end of solutions based on pricing for higher education,” said Rick Staisloff, founder of rpk Group, a consulting firm, and a former vice president for finance and administration at what is now known as Notre Dame of Maryland University. Colleges now need to focus on the other side of the equation—cutting the cost of educating students. “My experience across institutions nationally is that we have not focused sufficient attention on cost,” he said.
Higher education has never been good at controlling costs. Last decade, construction cranes were ubiquitous on college and university campuses to build ever more luxurious residence halls, recreation centers, hi-tech classrooms, and state-of-the-art research facilities. For many institutions, much of that construction was financed by debt. The amount of debt taken on by institutions between 2000 and 2012 nearly doubled, to more than $300 billion.
As Larry Bacow, the former president of Tufts University, told me, there is “no natural constituency” for cost control on campuses. “Universities compete by advertising their inefficiencies—small classes, lots of hands-on experiences, the intimacy of the student experience,” he said. “We tell students to come here because we’re essentially the most labor-intensive provider.”
Colleges and universities with large endowments can afford to be inefficient if they believe it provides a better student experience. But fewer than 100 universities in the United States have endowments of more than $1 billion. For all others, financial and demographic realities will require them to adopt new approaches to delivering courses and different choices about how to spend their money—whether on the latest campus amenities or on reducing costs. If not, many colleges and universities risk following Macy’s and other retailers in the race to offer their products next to free.