The Final Breath for Department Stores
Hayley Winter, Dartmouth Business Journal
Old clichés such as “bigger is better” are being swept under the rug as dozens of America’s largest department stores begin a process of drastically downsizing their businesses.
The shift from traditional brick-and-mortar shopping to e-commerce has posed a challenge for major department stores such as Macy’s, Neiman Marcus and Sears. As each company struggles to maintain an edge over its competitors, troubling business decisions have come in the form of layoffs, store closures and redistributions of funds.
For example, in response to a 4.7 percent drop in holiday sales and a 47 percent stock plunge in the past year, Macy’s announced over 36 store closures and a substantial wave of layoffs.
By the end of fiscal year 2016, the Neiman Marcus Group had $4.6 billion in debt and faced a loss of $470 million.
Sears, the former monarch of the catalog business sector, risks falling under the weight of their substantial real estate portfolio. Its revenue has nearly halved in the last decade, exhibiting no growth since 2005.
So what is the primary catalyst for this deterioration? Experts point their finger at the increasing preference for online shopping over traditional brick-and-mortar stores. E-retailers are driving the majority of growth in sales of consumer goods, and many traditional retailers are rapidly closing physical stores and shifting resources to e-commerce.
“We are dramatically overstored. And that’s why we’re going to close tens of thousands of our stores,” Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, warned in a Bloomberg BusinessWeek interview. “We are overstored and the fastest growing area is online. In a battle for market share… you go after every dollar and only the strong survive.”
However, the problem is not a reluctance to invest in e-commerce but the inability to turn around profit. To compete with e-retailers such as Amazon and Net-a-Porter, many physical retailers have already heavily invested in e-commerce. In recent years, Neiman Marcus bought MyTheresa, Nordstrom acquired Trunk Club and HBC (owner of Saks Fifth Avenue) bought Gilt Groupe. While these ventures have boosted revenue, they have not always increased profits since these websites sell products at very low margins. Nordstrom, for example, took a $197 million write-down on Trunk Club because it was unable to generate sufficient profits.
Additionally, in the past, the success of traditional retail had hinged on achieving economies of scale and driving revenue through quantity. But in today’s age of high digital output, customers that do make the trip to physical business locations are seeking more of an experience. According to Brendan Witcher, an analyst at Forrester Research, there is little differentiation in the shopping experiences of major department stores with large physical footprints.
“They’re trying to be good at everything,” Witcher told Business of Fashion. “It’s about creating unique customer experiences.”
Struggling department stores should look towards the retail strategies of nimble brands that have heavily invested in in-store experiences. Retailers, such as TOMS, Martin Margiela and Nespresso, have created interactive or themed physical locations to help differentiate their brands and boost their value propositions. While department stores have the unique challenge of designing shopper experiences for large open spaces, they need to better persuade shoppers to shop in-store in order to compete with online retailers. One possible solution is to down-size and increase the revenue per square foot by enhancing the in-store experience.
“With the rise of e-commerce and mobile shopping, and as consumer preferences change, retailers are finding that they no longer require the large spaces that were effective just years ago,” David Berliner, Business Partner for consumer products at BDO USA, said. He describes the process as “right-sizing” stores from ultra-sized spaces.
Unfortunately for department stores, though, e-retailers are not the only businesses taking away market share. Off-price retailers are also siphoning customers away with their impressive discounts.
In today’s fast-paced fashion world, styles rapidly fall out of favor before retailers can effectively turn around profit. Popular goods are ordered in mass, but when styles are changing so rapidly, department stores are often left with large stocks of products that are no longer in demand, further contributing to the overuse of space.
Off-price retailers often buy unbought designer goods and re-sell them for a significant discount. With off-price retailers such as TJ Maxx and Marshalls generating $147 more per square foot than Macy’s, it is unsurprising that major specialty stores are keen to participate in the chase.
Facing a 42 percent stock drop from a year ago, Nordstrom is hoping to capitalize on its off-price chain, Nordstrom Rack, to help supplement its struggling department stores. Due to the resounding success of Nordstrom Rack, the company expects to have 300 Nordstrom Rack stores by 2020. As Nordstrom has done, department stores can potentially re-organize their brand architecture to offer off-price products and better compete with off-price retailers and fast fashion stores.
Finally, with the structural technological shifts that have occurred in the last decade, department stores have no choice but to invest in keeping up with the constant evolution of digital enhancements.
Owing to the prevalence of smartphones, the consumer’s shopping experience is becoming more personal. New features include touchscreen purchasing, virtual sizing and virtual fitting in dressing rooms. Proximity marketing, which allows customers to zero in on location-based promotions via Bluetooth, is gaining popularity. Struggling physical retailers can adopt these relatively low-effort changes to draw shoppers to their physical locations.
Moreover, it is imperative that department stores utilize technology to capture young shoppers. Given that 72 percent of millennials prefer paying for experiences over physical objects, according to a poll conducted by Harris, it appears likely that there will be a structural demographic shift that hurts department stores. Already, the average age of shoppers at major department stores is rising. Eventually, department stores will need to replace baby boomer shoppers that are aging out, and integrating technology can help attract young consumers.
Indeed, the rapid deterioration of the country’s major department stores is alarming. However, based on the successes of the few physical retailers that have managed to fend off e-retailers, best practices for struggling department stores include improving in-store shopping experiences, investing in technology, expanding omni-channel distribution and tapping into the off-price retail sector.
Admittedly, these are not bullet-proof solutions, but the cost of doing nothing seems to be too high for America’s department stores.