The stakes are higher than ever for the department store sector after a rough 2019, during which retailers across the board reported negative growth.
Their efforts to overturn the sales decline — such as rampant discounting to boost traffic — have proven to be largely futile, if not counterproductive. Credit agency Moody’s estimates that the average operating income in the department store space dipped 20 percent last year.
“We see that 2020 will continue to have significant challenges for department stores,” said Christina Boni, vice president and senior credit officer of Moody's Investors Service, despite the fact that “the consumer backdrop remains strong and retail as a whole continues to grow.”
In other words, it doesn’t bode well for large multi-brand retailers that other sectors in the industry are thriving. Off-price big box giant TJX Companies has seen shares grow 25 percent in the past year, while brands like Nike and Moncler have found success in pivoting toward their own direct channels. To compete, the likes of Saks Fifth Avenue, Neiman Marcus and Bloomingdale’s doubled down on promotions, offering products at steep markdowns that end up hurting their margins as well as their relationships with vendors.
According to US Bureau of Labor Statistics data compiled by S&P Global, the pricing for women’s and girls’ apparel was down 2.2 percent year-over-year in December 2019. That’s compared to a 2.3 percent increase for consumer products overall.
Not every player has survived this downward spiral. In August, Barneys New York declared bankruptcy and its intellectual property was ultimately sold to Authentic Brands Group in October. Opening Ceremony, a pioneering boutique of New York’s downtown fashion scene, announced it would close its two flagship stores earlier this month, further signalling the diminishing relevance of multi-brand stores. Neiman Marcus Group is among the most at-risk, with a junk bond credit rating of Caa3 from Moody’s, which indicates a “significant risk of default,” Boni said.
All the while, creative efforts to engage customers, such as Nordstrom’s Local concept and Saks Fifth Avenue’s new beauty floor in its Manhattan flagship, have driven anecdotal success, but no single department store has demonstrated a true, lasting transformation. Both Nordstrom and the Hudson’s Bay Company-owned Saks Fifth Avenue saw growth in 2018 but sluggish sales in the following year.
“There’s a sense of urgency, now more than ever,” said Steve Sadove, who was CEO and chairman of Saks Fifth Avenue between 2006 and 2013. “Companies like Walmart and Target and Best Buy all reinvented themselves,” he added, and department stores have yet to do the same. Although industry sources don’t foresee a major bankruptcy in the near term, incumbents in the space will continue to lose market share if they maintain their current pace of change.
Need for drastic transformation
What does reinvention look like? No one is quite sure and so far retailers are taking a far less radical approach. Nordstrom, Saks Fifth Avenue and Neiman Marcus have underscored their commitment to customer service as the focus of their 2020 strategies, while Macy’s and its sister chain Bloomingdale’s began dabbling in the rental and resale markets. Meanwhile, these department stores have all ramped up experiential offerings to entice customers into their stores, such as the rotating Carousel pop-up space at Bloomingdale’s and the new Saks Fifth Avenue restaurant L’Avenue. It’s unclear whether these efforts will be enough to keep up with consumers and maintain market share.
Retailers should be taking big risks investing in experiential retail, according to Robert Burke, a retail consultant. This means more wining and dining, health and fitness and even more out-of-the-box thinking.
Department stores used to own the intersection of fashion and culture, but have since lost that status to social media, according to Jeremy Bergstein, chief executive of The Science Project, a creative agency that focuses on direct-to-consumer retail. To reclaim their influence, they could consider partnerships with media and other distribution channels. Lifestyle blog-turned-store Goop, for instance, recently produced its own docuseries on Netflix.
“Department stores have to really use the next year to shake it up more than they have,” said Burke. “Department stores cannot look like department stores any longer — they need to be more personalised … and allocate space in unique ways.”
Setting the stage for change
Despite their dismal sales and disappearing margins, Neiman Marcus, Hudson’s Bay and Macy’s have all made critical improvements in 2019. Neiman Marcus successfully refinanced about $4 billion of debt to postpone repayment dates, while Macy’s made strides in reducing its debt load.
Saks Fifth Avenue, meanwhile, is in the midst of a go-private effort led by Hudson’s Bay Company’s Executive Chairman Richard Baker. As a private company, Hudson’s Bay will be relieved of the scrutiny it currently faces every quarter to deliver sales results. While Chief Executive Helena Foulkes said in a recent earnings call that its strategy will remain the same no matter the outcome, the board of directors said in a statement to shareholders that privatisation will allow the company to maximise the value of its real estate portfolio.
Its largest minority shareholder, Catalyst Capital Group, said it agreed to the deal in early January, and a meeting to approve the transaction is scheduled for February.
Privatisation will also allow Hudson’s Bay Company to re-explore its M&A aspirations, according to Sadove. In 2017, Saks Fifth Avenue was reportedly in talks to acquire Neiman Marcus but the negotiations were eventually curtailed. “The synergies are still there,” he said.
Customer loyalty over acquisition
For both Saks Fifth Avenue and Neiman Marcus, the focal point for 2020 will be personalised customer service.
According to Saks Fifth Avenue President Marc Metrick, the retailer plans to use technology that informs sales associates of their shoppers’ purchase histories to improve recommendations. For instance, if a shopper were browsing for a winter jacket from Saks Fifth Avenue's website, this information would be forwarded to her in-store stylists, who would then reach out to her through email or text. Saks Fifth Avenue is working with Salesforce and Commerce Cloud to power these capabilities, as well as continuing to develop its own software, Saks Connect.
“It’s about stickiness,” Metrick said, pointing to Amazon customers’ loyalty to the Prime service. “If I need batteries, I’m walking by stores that sell batteries every day from [work] to my apartment in Manhattan. But I order from Amazon because it’s easy and they know me, and I use them for everything because they’re front of mind.”
Neiman Marcus Group CEO Geoffroy van Raemdonck also highlighted customer loyalty as the best strategy for large retailers to beat e-commerce competition. “Harnessing the power of ‘I know you’re online, I know you’re in [stores] and I’m available to you 24/7’ – that’s really where we can win,” he said in an interview with BoF in September. “Retailers like us can totally have a space in [the] industry and can totally win because customer loyalty drives a very good advantage economically. Customers who come back have a cost acquisition that is much cheaper than new customers.”
To do so, Van Raemdonck outlined a process of accumulating data on individual consumers and using it to predict their needs. “Let the customer leave more fingerprints behind them by sending them emails, tracking what they look [at] online, by tracking what they said to our sales associates,” he said.
Meeting shoppers where they are
Beating e-commerce competitors like Farfetch and Net-a-Porter on customer loyalty online and off is a smart play for brick-and-mortar retailers, demonstrating that they’re finally learning to be channel-agnostic and following the customer where they want to be.
“Their focus needs to be on working with the tide of how people want to consume, purchase and interact — not trying to fight it,” said Jack Bedwani, founder of The Projects, a brand consultancy that specialises in experiential retail and has worked with the likes of Barneys, Coach and Target. This means using store space to create community; being highly competitive when accommodating sales, such as offering same-day click-and-collect and in-store events such as product launches, previews and access to designers.
Most retailers are already using these tactics to engage their customers, but the best example is Nordstrom. The Seattle-based chain, which recently opened its long-awaited New York flagship, offers online shoppers the option to browse by products that they can pick up the same day from their local store, as well as in-store activations that feature exclusive product drops. The Nordstrom Local program, though still in its early stages, has proven to be popular in its initial market of Los Angeles, where sales grew 1 percent faster than other markets overall.
Nordstrom has now opened two Local stores in New York, betting that the inventory-less locations will draw customers in with the convenience of pick-ups, returns, alterations and other offerings, such as free return services to other online retailers. And earlier this week, the retailer announced its new resale shop, which will not only offer consumers secondhand products to purchase but also allow them to sell gently used items of their own to Nordstrom.
Still, Nordstrom's landmark expansion into New York last year will be a big bet: William Blair analyst Dylan Carden estimates that the company's operations in Manhattan won't "produce much, if any, contribution profit."
Meeting shoppers where they are could also mean smaller and fewer stores. In January, Macy’s announced it will close 28 stores and one Bloomingdale’s location in addition to the 100 stores it marked to close in 2016.
“Bigger is not better,” said Burke. “It’s the unique smaller experiences that feel more personal today, like what we’re seeing with Goop’s retail expansion as well as specialty stores like The Webster.”
Rethinking wholesale
As brands like Prada and Moncler are growing their own direct channels over wholesale, retailers will have no choice but to adapt accordingly. This means offering more agreeable terms to vendors — such as cutting back on discounts — as well as considering the concessions model, where instead of buying bulk products for the season, the department store allows brands to set up shop-in-shops and manage their own inventory with their own sales associates. Although department stores would make less money per sale, they avoid the issue of excess inventory every quarter.
The model is more popular overseas, used in hybrid with traditional wholesale by Le Bon Marché in Paris and Selfridges in the UK.
“I believe [concessions] will be more of a part of the department store business model in the coming years,” said Kelsey Groome, managing director at retail consultancy Traub. She points to Bloomingdale’s as an early adopter, using a concessions contract to bring new European brands into the country, such as it did with the Kooples.
Ultimately, even if a department store takes all the right steps today to mitigate slowing growth, the retail industry at large continues to suffer with no end in sight.
“The sector has lost the momentum that returned in 2018 and 2017,” Moody’s wrote in a report published earlier this month. “Progress is becoming that much harder to achieve in the face of seismic changes in the retail landscape. In reality, it will be very difficult to stabilise operating margins, given chronic sales weakness and market share loss to alternative retail channels.”