The department store was pronounced dying, if not dead, with the recent release of dismal first-quarter earnings, despite rising consumer optimism that saw increased consumer spending in six out of ten retail categories (US Dept. of Commerce).
While the challenges are real, department stores also have significant potential to stage a renaissance. They do not have to die.
In the 1990s, battling specialty stores like Best Buy who captured the dominant market share in a specific product category, and facing competition in multiple categories, the department stores of that era chose to focus on apparel. They also emphasized regional or national expansion as their customers abandoned urban centers for suburban and rural areas.
However, these adaptations left the modern department stores ill-prepared for their current environment. The over-reliance on apparel meant that department stores did not benefit from the rapid growth of consumer electronics in the age of the Iphone. Worse, a standard stable of brands meant little differentiation between department stores.. It also meant that department stores increasingly ceded inventory management and assortment optimization over to wholesale brands and focused on promotions and extracting vendor allowances. Sprawled across the country, department stores were left with unproductive stores in malls with dwindling traffic as a new generation of consumers shopped online and in resurgent downtowns.
None of these challenges prevent department stores from adapting to the new retail environment. Indeed, pessimists forget the considerable assets that department stores have — brand equity over and above that of the wholesale brands they carry. Nordstrom’s reputation for customer service, for example, far exceeds that of any brand it might carry and is the main reason for customer loyalty. Having been in the business since the turn of the 20th century, they have also accumulated significant tangible assets such as real estate and credit card accounts. With a million square feet of selling space, Macy’s Herald Square flagship could easily be worth more than the $3.7 billion valuation that Saks Fifth Avenue received on its 5th Avenue store. Finally, department stores also possess a rich knowledge infrastructure of merchandising know-how and store operations – these intangible assets require considerable investment in human resources and organizational culture and can stymie wholesale brands who might be tempted to operate their own stores.
Without a doubt, there is work to do if department stores are to adapt, survive and grow. They need to reinvest in the customer’s store experience and build rich retail environments that meet multiple needs. This means diversifying their assortments away from apparel. Colette in Paris not only stocks the latest trends in apparel but also complementary electronics, food and objets d’art. A diversified assortment aimed at delighting the customer also leads to a focus on the department store’s brand and prevents department stores from turning into glorified landlords for wholesale brands. Department stores would also be wise to emphasize store profitability in key areas over regional or national expansion. Unproductive stores incur costs that are not in line with sufficient profit ratios. They also distract department stores from what should be a core competency – inventory flow and management. The deep discounting seen in recent years is largely a symptom of poor inventory planning and a reliance on promotions to maintain store comps and clear excess inventory. While difficult in the best of times, these undertakings could shift department stores from a position of obsolescence to one of opportunity.
A century ago, John Wanamaker built some of the first department stores in the United States and acquainted a nation with desire. Steel temples to the consumer, the stores in Philadelphia and New York City, were great spectacles aimed at all the senses — some say he even invented Santa Claus! They sold everything from finished apparel to home accents and fresh flowers. They gave Americans their first taste of color. They built the tradition of gift-giving at Christmas. They delighted people and made retail more than the sum of transactions. There is absolutely no reason why a century later, department stores could not do the same. A renaissance is not far off, if only our imagination can see it.