What’s wrong with department stores?
The price of Dillard’s shares fell earlier this week after the department store chain announced its same-store sales declined four percent last quarter. The hit put Dillard’s in the company of other department store chains, including J.C. Penney, Macy’s and Nordstrom, that have recently posted sales and/or earnings that disappointed investors. While each of these chains and others, including Sears, have their challenges, the channel’s apparent slump raises questions about the overall health and relevancy of the department store sector.
Nordstrom, which has long been the darling of the department store group, recently cut its sales and profit forecast after its third-quarter numbers came in below expectations. While the chain’s total sales were up 6.6 percent in the quarter, its same-store figure nudged up only 0.9 percent. The company blamed its sales slowdown on fewer customers shopping in its stores for clothing. As a result, Nordstrom has found itself marking down merchandise to move excess inventory.
Macy’s also cautioned about its inventory levels following a decline in its third quarter same-store sales. The chain, which has seen that key figure drop for three straight quarters, has announced plans to close up to 40 of its full-line stores while ramping up expansion of its new, off-price Backstage concept.
Photo: RetailWire
Even good news within the department store sector hasn’t been good enough for investors of late. J.C. Penney saw its share price fall after the company posted a total sales gain of 4.8 percent while its same-store number improved 6.4 percent during the third quarter. Unfortunately, the chain continues to lose money, $137 million in the latest period, and is not expected to return to profitability until 2017.
- Dillard’s Becomes Latest Victim of Department Store Slump – Bloomberg
- Nordstrom Earnings Fall Sharply – The Wall Street Journal (sub. required)
- Why aren’t shoppers paying full price for Macy’s merchandise? – RetailWire
- J.C. Penney cuts its 3rd quarter loss, but investors have turned tepid on Christmas – The Dallas Morning News
Discussion Questions
Are the recent declines in share prices within the department store group a reflection of weakness in the retailing model or the herd mentality playing out among investors? How do you think the department store model will need to change to remain relevant over the next decade?
Poll
BrainTrust
Kevin Graff
President, Graff Retail
Nikki Baird
VP of Strategy, Aptos
We seem to be in a cycle where off-pricers and discounters are outperforming traditional department stores, but in a sense the segment has been in a slow decline for many years. Macy’s acquisition of May didn’t happen because it was a growth industry but because there was strength in consolidation. And both fast-fashion and e-commerce have had a more serious impact on apparel market share than once anticipated.
But Macy’s results in particular did appear to swamp the entire sector last week, including both J.C. Penney and Kohl’s who announced better-than-forecast sales. At the heart of the current department store malaise? Customers aren’t shopping for women’s apparel — the core business in this sector — perhaps because of the lack of any meaningful or exciting trend.
Colored denim and puffy coats are still selling but are not driving the shopper’s search for newness. And department stores’ dark, dreary approach to “fall merchandise” stands in stark contrast to stores like Uniqlo right now, who are in the business of selling bright color 12 months a year.
I think we have two different issues at play here: Nordstrom and everybody else.
Nordstrom is a victim of over-expansion, I think. If 19 percent of your sales are consummated on-line, do you really need to add that many doors? The Miami area has three full-line Nordstrom stores, two within just a few miles of each other. So I suspect the stores are cannibalizing each other.
For the others, I think they are back to the same problem they started from: because of the way they are laid out, department stores are very hard to shop. They’re laid out by brand instead of by type. There’s a lot of evidence that shoppers prefer more curated assortments. Department stores assume “brand” is the primary curation (within category). But it seems to me that lifestyle is a better way to lay out the store. How many of us have the patience to shop a store for a “black blouse in size 7?” It’s a day trip. So I think that’s the primary change that has to occur — in store layouts.
Of course, this is easy for me to say and really hard to actually execute. Department stores are likely contractually committed to some brand separation, and doing the Big Data analytics required to actually change the layouts and then tweaking as necessary is just really hard in a big box. Still, I think there’s no real choice. It has to be done.
With regard to investors, I think the worry around J.C. Penney is it’s still catching up to pre-Ron Johnson levels. Once it gets back there, will it continue to grow? Investors are hedging their bets. I can’t blame them.
IMHO the “herd mentality” is happening among the department stores, not so much among investors. Has been for years.
The department store model will not change other than incrementally; we need a new model. Messrs. Harding and Howell thought up the department store in 1796. It’s time for someone to step forward and offer a new possibility.
The economy may have improved but during the down times peoples’ shopping habits changed. They tried new stores, new formats and online shopping where they could easily compare prices on the same item very easily.
This helped change the perception of value and, as costumers discovered these new venues, offered shopping experiences that were different from the traditional department store. The formats were smaller, the merchandise was often more in line with current trends and the price points were less. With online shopping you didn’t need to leave home, didn’t have to search for a clerk to record the sale and there was no line at the return desk to contend with.
With their physical plant it will be hard for department stores to make the necessary changes. It would be interesting to see the impact were a department store to execute the merchandising changes Paula mentioned.
As I wrote in this post Logic Is Sinking Your Retail Sales. Here’s How To Counter It, I think department store retail is dying because logical, analytical and unfeeling employees have killed the customer experience. And it’s not just department stores.
Let me ask you …
If we are all truly logical buyers, who among us would buy the new iPhone? A Tesla? A Tommy Bahama sport shirt? A watch? A new pair of blue jeans? A new shade of lipstick?
There is a train of thought saying we are in a replacement-only economy, that retail is bloated. We all have enough of what we need and the only retailers who will survive will be those focused on replacement items.
In short, they believe there is no need for new. And that’s right, if you assume we live in a logical, analytical world.
But we don’t. Customers live in an emotional world.
How much do Nordstrom or Macy’s employees encourage emotion in shoppers? In my experience, not much. They are efficient when you ask a question, but do they initiate wonder, inspire extra purchases or encourage you to try on additional items you didn’t ask for? Not often.
And don’t mistake finding a different size for creating emotion. Don’t mistake unlocking a dressing room for engaging us. Don’t mistake triple reward points or coupons for making shopping fun and rewarding.
You can’t just offer discounts as your lead generation. There has to be substance there when customers arrive at your doors.
It’s the retailing model. Everyone shops online now. It’s more convenient than having to go to a retail store where either you can’t find someone to help you or the person you find is incompetent in their job. Another factor to consider is how dirty and unorganized stores get because they have associates who do not care. In order for this to change and for the department store to survive they need to hire quality associates and release the ones who are not doing their job.
You heard that right, get rid of the brown-nosers and keep the people who do their jobs. Also hire enough staff in order to man the floor. Don’t have one person in a department during high-traffic times. There are times I have walked into a department store during Christmastime and found one associate in the clothing department while there are 50 people there shopping.. But hey what do I know? I have only worked retail my entire life.
Let’s be honest. Department stores for the most part are being “out-retailed” by the specialty retailers. You can typically find better selection, better prices (both higher and lower), better merchandising, better in-store experiences and much better service everywhere else. The concept of the middle of the road, “middling” retailer just isn’t viable anymore.
Exceptions are found at the high-end and low-end of the department store/mass merchandiser model. But for most of us, the only time we walk through the Sears or J.C. Penney type of stores at the mall is when the closest parking spot is near their door. Sad but true.
The noted retailers are part of the big middle in the department store sector. As such they continue to get picked off by the upper end (Neiman Marcus, Bloomingdale’s, etc.), the lower end (Kohl’s, Beall’s, etc.) and the new wave of online retailers (marketplace.asos.com, stylistpick.com, etc.).
Their problems stem from the fact that they don’t have best products, prices, services, convenience, etc., when compared to those retailers above recognized for providing one or more of these desired shopping attributes.
Going forward, if the traditional department store can truly become omnichannel (omnichannel is about customers, not channels), then it may become more relevant to today’s harried shoppers.
Yes, the department store channel appears to be losing ground. The top five chains in terms of housewares sales (Kohl’s, Macy’s, Sears, T.J. Maxx/Marshall’s and J.C. Penney) declined 2 percent as a group in housewares sales and 0.9 percent in total sales in 2014 vs. 2013, according to HomeWorld Business magazine (September 2015). However, the group increased e-commerce sales 22.1 percent in the same period. So I’d say the department store channel is changing, just not fast enough.
Deja vu all over again …
It’s not just department stores. Mall specialty stores are ravaged as well. Here’s why:
First, the consumer isn’t fine despite what bankers say. Read libertarian Charles Murray or liberal economist Timothy Smeeding. The middle class hasn’t seen a pay increase in eight years. Out of desperation, minimum wage jobs are being touted as replacements for the lost low-skill manufacturing jobs. U.S. cars are now “American” cars as they are made in Mexico/Canada as per NAFTA (see cars.com).
Second, retrained shoppers. Since Lehman folded, a generation of shoppers were trained to find the better deal. And the best deal isn’t just price, it’s an experience relevant to each shopper. Online pure-plays lured shoppers with deals that put chains of specialty stores out of business. As Woody Allen might say, “who pays retail?”
Third, price is the only message that drives mass traffic. There is no “new new” that is relevant in this fragmented age of mass personalization. JIT only at a great price rules. That’s why always-on promo is the norm. It is also why retailers are being sued by the FTC on promotional frequency claims. Ever hear of Ron Johnson? AND the customer is buying tech/entertainment/food in lieu of center core, Apple vs. Spade/Coach/Tumi/Kors.
It’s both anchors and specialty stores that are losing relevance. “A” malls will remain. And B,C,D are fading fast. The U.S. was over-stored; the market is normalizing.
Dayton knew this when it shifted away from department stores and focused on discount. Dayton’s became Target.
Or as Marshall Field might have said, “retail ain’t for sissies!”
Every retail model needs to constantly evolve and create some newness. Department stores are no different. I still think the shopper wants a reliable brand at a competitive price, with the convenience to purchase/pick up. Not to mention a “deal.” Thus the growth of off-price and the relatively strong expansion of those stores, vs. traditional fuller-price models.
We’re witnessing the stratification of retail into large online mass market pure-plays and specialty vendors. The implication of this is the disappearance of mid-market retail. Department stores, as they exist today, are literally caught in the middle. To survive and ultimately thrive, department stores need to understand and in some cases define or redefine their desired pricing image with target shoppers and take action to realize their brand promise. If it’s low price and endless assortment, I would advocate they need to get serious fast about online and reduce their physical store footprint. If it’s unique customer experience and/or luxury, long live the store and more static pricing!
A quick checklist for department stores looking to get out of the middle:
Department stores are not offering enough product or service difference to trek through the stuff they pile in front of you, most of which is unwanted and overpriced. Nor are they offering enough to justify waiting in a long line to get to a hurried, indifferent and mostly ill-informed staff.
The stores are always overstaffed with cosmetics folks waiting to spray you, tell you look nice and champing at the bit to collect their commission. Customers discovered that they don’t have to do that either. Just pull up to the front of Ulta Beauty, get real service in an easy, helpful format and continue with their day.
You can’t tell from this short note, but as a retail expert, I am a fan of department stores. I hope this note will find its way to the heads of retail department store leaders and that they will make the needed changes to capture the Millennial group; the big spenders of now and the next 25 years.
I’ve felt for quite some time that main-line department store chains, particularly Macy’s, were defying gravity. Some have done a nice job building significant e-commerce businesses or yielding operational gains by using their stores as mini distribution centers. The gains from those moves now appear to be played out and the core issues with the department store model are coming home to roost.
To me the core issue is this: In a world where so much has changed, the in-store experience at department stores is little changed over the last 50 years and it was never that compelling to begin with. Department stores are going to have to find a new value prop and experience model or else disruptors like Uniqlo, Sephora, H&M and Lush (not to mention Amazon) are going to continue to chip away at sales and profitability in key categories.
It will be incredibly hard to do this well while avoiding blind alleys like the one Ron Johnson took J..C Penney down, but the work needs to start now and it needs to be grounded in deep insights about each chain’s target consumer.
My entry into the retail industry, professionally, was in the department store. I spent many years working for Federated. I *heart* department stores.
What is important to know, though, is that my first office was in a flagship store. I could walk out of my office and be smack dab on the selling floor.
With this scenario, it was not difficult for me to imagine my lifestyle there. After all, it was part and parcel of my life. I lived on every floor. Hid pieces that I wanted to pick up later. Had furniture buyers let me know when my desired piece would be going on sale.
So what does this mean to today’s’ conversation about department stores? That department stores don’t know how to sell lifestyle. They focus only on selling products.
Put that in your thinking cap, Terry Lundgren! You have a history of smart moves so I know you can do it.
And that’s my 2 cents.
You know, I agree with all the comments that the industry is doing a lot of bad things to itself, and are now reaping the “rewards” of a lot of those mistakes or apathy. But I also think there is a herd mentality for sure among investors. I’ve talked to an awful lot of them in the last week, and the going-in mentality seems to be that Amazon has won.
I just don’t think that’s true! Or at least, if the company is winning anything, it’s because 1) it’s a subsidized business that is losing money and no one seems willing to call them on it, or 2) it’s because retailers are letting them win!
Retail brands need to stand for something — anything! — other than low price or the best selection. In the internet age you can’t win on either of those, and yes it’s because in part Amazon owns both of those differentiators.
Department store brands need to stand for a lifestyle that appeals to their core shoppers and they need to do everything in their power to bring that lifestyle to life across every touchpoint of the brand — including and most especially stores. Yeah, that’s hard. Yeah, it requires a different kind of effort than picking products and hanging them on racks. But that’s the way it is. Adapt or die.
A little perspective: (share) prices and retail sales in general have been stagnating/declining for much of the year, so it seems pointless to single out department stores. That having been said, department stores have been losing market share for decades. It was, I believe, Marvin Traub who recounted how he was told it was a dying industry when he joined Bloomingdale’s in the 1940s…yes, the 1940’s.
Why this is? Take your pick. Decline of the middle class (who) they catered to, stores too big to be shopped efficiently, consolidation — of which, of course, Macy’s is the ultimate example — leading to homogenization and boredom.
OTOH, if we want to play semantics, and label Walmart and, yes, Amazon as department stores, then they’re doing better than ever.
Les Wexner was quoted at his latest investors review about L Brands saying, “Department Stores are dead. They’re just not buried yet.” I hear you, Les. The “anchor store” business model is flawed in today’s world, the technology trick didn’t work, their private labels aren’t really moving the needle and they’ve all been closing stores under the radar for years. Flat line.
But there’s hope. They have real estate. Lots of it.
If an innovative mind set took over the reigns (I know, big if), the former “departments” in these stores could become what people are looking for today from physical retail: experiences. Places where you can interact with great crew members, touch and feel and use product, play games, eat, have FUN, learn, trust and then go online and buy.
Instead of thinking “we’re great fashion merchants” (which they’ve never been IMO), it’s time for the department store leaders to start to think, “we’re great entertainers,” and start down the long, painful road of converting to just that.
The department store concept has passed its prime years ago, and with the online success continuing to grow, it will get worse. I can sit in my comfortable chair, and order from just about anyone online and never have to leave home. I have never participated in the shoving match called Black Friday, and now you can get it online without the insanity and fighting inside the stores.
The help in most department stores today are there to check you out, as self service is the way to shop, unless you want a beautiful suit, or special gown. The merchandise inside the stores is homogenized, where they all carry much of the same merchandise, and yes, we will find the best deal immediately, as smartphones can direct us to which place has the best deal. We have been over stored for years, and a shakeout is just now starting, so more and more cash starved stores will close, and online will continue to increase market share.
There will be some savvy investors who will take a chance on some cheap real estate and set up a discount outlet store, and if done right, will do well. The era of the $80 golf shirt, and $120 slacks off the rack are gone, so bring on the discount stores that can offer a lean but smart inventory, along with some extremely friendly staff, and this formula can succeed.
The recent decline in share prices for department stores directly correlates to the evolution of consumer habits and the stagnation of department store strategy.
With the proliferation of ecommerce, not only are consumers purchasing online, they’re comparing prices, products and more on their computers and mobile devices. Armed with this retail data, the consumer will head to the brick-and-mortar retailer that fits their needs and this more often than not isn’t a department store.
Meanwhile, bloated department stores remain unchanged from the pre-digital days. Embracing omni-channel retailing is only part of the solution. The other factors involve changing the department store shopping experience to fit the consumer’s need. This isn’t a one-time overhaul. It involves constant iterations based on data collection, analysis and eventually informed execution of new strategies.
Blame the hunters.
I’ve had dinner with close to 40 prominent retailers in the past few weeks. All talk about “hunting” — searching online to locate an item, and going to the store to purchase it. Department stores tend to be large, which means it takes longer to find the right department and the right merchandise. When women didn’t hold jobs outside the house, this layout was ideal, but today’s time-starved female executive doesn’t want to wander.
I just visited some European department stores and see that there is plenty of customers visiting the stores. However, business is not running well here either for the department stores.
My personal view is that department stores are in the transition phase. Fighting against the online channel is not going to end up well if the means are not changed.
I see that recreating the department stores to “Superb Showrooms” with intelligent fitting rooms and dynamic pricing (capability for example to provide quick lunch hour crazy prices) and real time inventory would make the brick & mortar stores interesting again. With something unexpected and interesting available in the stores, as well as offering to provide home delivery or pickup after the pleasant shopping experience would make department stores a winning concept again! After all, most of the customers want to make sure the clothes are fitting well. With a superb showroom concept, the department stores could be able to provide a great width of offering with just sample sizes and colors in the store and having centralized inventory at the DC level.