Department Store Woes: Part I

The selling period between Thanksgiving and Christmas is critical for retail – and 2016 holiday sales did not disappoint. According to the National Retail Federation (NRF), spending between November and December rose 4% to $658.3 billion, beating the projected 3.6% increase. Nonstore sales (e-commerce) rose an impressive 13%. Unsurprisingly, Amazon accounted for the lion’s share of this growth at 38% of total online revenue (next in line was Best Buy with a 4% share).

And yet, retail news has been pretty bleak lately – filled with grumblings from some prominent players. In the past couple weeks, major retailers have reported holiday performance figures that drastically swerved from the overall retail trend, causing significant drops in share prices: Nordstrom -9%, Macy’s -14%, and Kohls -19%. Macy’s reported a 2.1% decline in holiday sales, coupled with the announcement of 68 store closures and the elimination of 10,000 jobs. Sears experienced a more precipitous sales drop of 12-13%. They’ll be closing 150 unprofitable stores this year. JC Penney also reported a decrease in holiday same store sales (-0.8%). Nordstrom, which has historically been the strongest of the bunch, has repeatedly missed sales targets and even reported that traffic levels in stores are at their worst levels since 1972.

So, while overall retail sales grew, it appears that not a single department store shared these results.

“The decline in mall-centric apparel and department store sales should not be confused with the overall growth of retail this year — and this holiday.” –Craig Johnson, president of Customer Growth Partners

Why are department stores uniquely singled out? Why did they so consistently miss the mark? In light of such a stark contrast between department stores and overall retail performance, I have to ask: is it possible they brought this upon themselves?

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I know that sounds odd, but entertain this idea for a minute. Department stores have been suffering for awhile now – the lackluster performance from this holiday season is the continuation of a much larger trend. According to Craig Johnson, president of Customer Growth Partners, department stores accounted for only 1.6% of total retail in 2016 (excluding automobiles, gasoline, and restaurant sales). This is slightly off from 1.7% in 2015, but down dramatically from 5.2% in 2000 and 10% in the 1980s. It would be foolish to think department stores could hold onto their 10% share for 30 years with no change – think of all the innovation that’s occurred since the 80s, all the ways we as consumers have changed. The fact that this penetration changed makes sense – now, the question is why?

There was a time when department stores were the darlings of the fashion industry. As opposed to specialty retailers and small general stores, department stores had the floor space to take advantage of industrialized production and transportation in the late 19th century – two advancements that enabled retailers to offer a wide variety of goods to urban buyers. Department stores catered to the rising generation of middle class women by offering restaurants, gardens, reading and writing rooms, and superior customer service (some went as far as sending their elevator operators to charm school!). You’ve heard the saying “the customer is always right,” but did you know it was Marshall Fields (of the Marshall Fields department store) who first said it?

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Bottom line: these stores were more than just places to shop, they were public landmarks and spectacles. People would travel to city centers specifically to visit department stores – they were novel, exciting, and they combined variety, accessibility, and value like never before.

The 1950s and 60s saw a surge in the number of suburban shopping malls – each of these needed to be anchored by a department store in order to survive. For rural America, these were fashionable places to shop, places where friends could gather – destinations in their own right.

So what happened?

For starters, explosive growth turned the previously special shopping experience into something more commonplace. In 2005, Macy’s had 240 stores. The following year, with the conversion of the Federated and May Department Stores nameplates, the total store count came to 730. Perhaps 240 was a more manageable number, but the jump to 730 meant there was always a Macy’s nearby – no matter where you lived. No need for dedicated shopping trips to the city – you could easily stop by your local store whenever you pleased.

Is too much accessibility a bad thing? Previously, people would have to plan their day around a trip to the department store – partly because it was further away from home but also because the stores themselves had so much to offer and experience. However, when I have a Macy’s (or two) on my way home from work and know that I can easily drop by to pick up what I need, I don’t necessarily want to wander through the maze of departments to find what I’m looking for – much less spend my entire day there. I want this trip to fit into my schedule – I want it to be convenient. I’m now dedicating less of my free time to shopping because I’m expecting it to be fairly straightforward. When this isn’t the case (or if I can’t find parking and traffic is insane around the shopping mall), I’d rather not waste my time.

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Ah, we seem to be getting somewhere. Enter our good friend, the internet.

The first online retail transaction occurred in 1994, and since then we’ve never looked back. E-commerce brought the concept of convenience to a whole new level – one that department stores couldn’t hope to match. Almost overnight e-commerce took all the benefits department stores offered, made them their own, and beat them at their own game.

“What’s more, the convenience of e-commerce has unbundled retail, removing the friction that provided much of the raison d’être for one-stop-shops like Macy’s, where a wide range of products can be found under one roof.” –Macy’s Inc: The Slow Death of an American Icon, BoF

In 2017, Amazon is set to displace Macy’s as the top seller of apparel in the U.S. – they’ll also be adding 100,000 jobs over the next 18 months, in contrast to all the department store layoffs.

How are department stores fighting back? By building out their own e-commerce platforms, of course. Selling online is no longer an option, it’s a necessity. Consumers expect an online presence, and retailers are chasing this opportunity as feverishly as they pursued the growth of physical locations.

Is this wise? Like I said, providing an e-commerce site for your customers is a necessity in this day and age. And yet… At one point, expansion of physical locations was also necessary to stay relevant in a rapidly changing retail landscape. Was a 300% increase necessary? Obviously not, since department stores are now being forced to backtrack. Are we heading for a similar situation with e-commerce? How can we be wise and future-minded about growth, while still capturing and enjoying the benefits of this increased sales potential?

E-commerce is growing rapidly, but it’s expected to plateau around 20-25% of the total fashion and apparel market [will we be just as shocked when the growth in e-comm sales drops off?]. As retailers pivot to capture this opportunity, two considerations come into play. First, department stores have invested heavily in having the best physical locations – what is the effect of building out an e-commerce platform on their profitability?

“…their entire organization – marketing, sales, fulfillment, distribution, inventory management, staffing – is aligned around that physical presence, driving their cost structures, management approaches, and technology investments.” -Ted Schadler, Vice President and Principal Analyst at Forrester Research

Nordstrom’s CFO Mike Koppel noted last year that the cost of building out its e-commerce infrastructure had grown faster than sales. What will it take to see the return on this investment? How much growth are retailers banking on, and what will actually come to fruition?

Second, how does investing in e-commerce affect our original problem: the demise of department stores? If a retailer’s website is easy to use on a variety of electronic devices, if they have free shipping and no-hassle returns, haven’t they just given me every reason not to visit their store?

“The better [their] website becomes, the less incentive you have to actually go to their stores. In other words, they are cannibalizing themselves.” –CNBC

Maybe this isn’t such a terrible thing – in the end, I’m still making a purchase. But wasn’t the point to grow? For there to be a net gain somewhere? Retailers are now trying to course correct and get those online shoppers into stores, using offers like “buy online, pick up in store” and allowing you to reserve your size online so it’s waiting for you in the fitting room. The hope is that once they get you in the store, you’ll add on to your purchase. Online you can easily stick to buying exactly what you came for, but in stores, surrounded by physical product, grabbing a few extra items comes fairly naturally.

It’s understandable that there would be a few hiccups as department stores try to navigate their way through this new space, but at what point do we stop to reevaluate? Do we expect growth, whether we’re talking about physical store count or e-commerce penetration, to continue indefinitely? Or are the headwinds ever significant enough to call for a change? Is being the biggest always the best?

As we ask these questions, it’s important to note that e-commerce isn’t the only way retailers are cannibalizing their sales. Think: what other segment of the fashion industry is growing right now?

To be continued…

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