What to Watch: Can Department Stores Regain Relevance?
Don’t give up on department stores just yet.
After a tough 2023 marked by revenue declines, they’re entering the new year with changed managements, new formats, less dependence on the traditional business model, and fresher, controlled inventories.
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For decades department stores have lost business to off-pricers, outlets, mass merchants, online and Amazon. Their fortunes have been tied to America’s middle class, which is shrinking, and the assortments suffer from redundancies.
It can be argued that they operate too many stores, are overly dependent on older audiences and need a higher percentage of younger customers. While their downtown flagships maintain relevance, cities across the U.S. are suffering from the post-pandemic surge in working from home, a declining quality of life and reduced tourism, impacting business.
“Department stores have got to find ways to convert shoppers into multiple-item buyers and elevate traffic. A lot of that impulse purchasing has been lost,” said Marshal Cohen, chief retail adviser for Circana, which researches consumer behavior and consults with retailers and brands.
Cohen also cited a lack of innovation and newness, and said, “Department stores also must create a sense of urgency. If a shopper sees something and decides to wait before buying it, they need to know it won’t be still there later.”
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Department stores also need to step up efforts at personalization; clienteling, including post-purchase followups; omnichannel integrations; improving private brands for greater product differentiation and margin gains; increasing in-store services, experiences and ties to pop culture, and offering more food and beverage. All that requires money and taking risks.
But department stores are fighting back. In the year ahead, look to Macy’s to further its rollout of scaled-down off-mall stores, simplify its pricing, and remake private brands. The company is becoming less dependent on its traditional full-line big boxes, albeit gradually, but remains saddled with scores of locations starving for capital improvements. Certainly change is in the air, with Tony Spring succeeding Jeff Gennette as Macy’s Inc.’s chief executive officer in February, and Olivier Bron succeeding Spring as Bloomingdale’s CEO. And a low-ball bid to buy the business from Arkhouse and Brigade Capital last December put Macy’s in play, meaning additional bidders and higher offers could emerge.
Nordstrom last year showed progress in its turnaround efforts. It went into the black in the third quarter despite sales declines across all channels, and spelled out three top priorities: improving the Rack off-price business; increasing inventory productivity, and further optimizing the supply chain. Rack’s mantra is to deliver “great brands at great prices.” To that end, the company has assigned more dedicated roles at Rack and improved the buying team. “We see a lot of opportunity to add profitable new Rack stores. We are getting really great returns on those investments,” CEO Erik Nordstrom told analysts.
At the Nordstrom department stores, “We see opportunities with different inventory models to allow us to have a greater selection whether we own the merchandise or not,” Nordstrom said. “Step two is using data capabilities to curate the offer.”
At JCPenney, after many years of top-level management change, strategy shifts and reversals, meddling by shareholder activists and private equity owners, there’s a new game plan under owners Simon Property Group and Brookfield Property Partners, which bought the business out of bankruptcy, streamlined it and cleaned up the balance sheet in 2020. Marc Rosen was installed as CEO in fall 2021, and two years later Penney revealed plans to pump more than $1 billion into its business by fiscal year 2025 to improve stores, the website, customer experiences and operational efficiencies.
A big part of Penney’s agenda centers on efforts to capture more customers in the 20-to-40-year-old demographic while maintaining its older, traditional, working-class family appeal. The company has rolled out JCP Beauty departments with masstige, prestige and mass brands, is pursuing additional collaborations with designers and celebrities, and has been advancing its private label programs by sharpening what each existing label stands for, while adding new ones.
Kohl’s Corp. is making progress on merchandise initiatives, store improvements and operational efficiencies. While the retailer continues to post sales and profit declines, executives expect improvements in 2024.
Kohl’s has four strategic priorities: enhancing the customer experience; accelerating and simplifying value strategies; managing inventory and expenses with discipline, and further strengthening the balance sheet. It also has a smaller store prototype yet to be green-lighted. CEO Tom Kingsbury, addressing analysts and investors, recently predicted the company is “set up to be successful in 2024…It will take some time for the full impact of our efforts to be realized.”
Kingsbury cited “meaningful investments” in stores, including expanding pet products, gifts and impulse items in beauty, wellness, electronics, toys and snacks; simplifying in-store signs and graphics; consolidating checkout areas, and “stabilizing” apparel and footwear businesses. On Sephora, which has shops-in-shop in Kohl’s stores, he said there’s increased confidence that it will turn into a $2 billion business at the retailer by 2025.
Within the troubled department store sector, Dillard’s is an outlier yet recently the business has felt the pinch of consumers pulling away from discretionary purchasing. Still, it’s considered the strongest player in the field, based on its sustained profitability, solid execution, inventory control, restrained expansion, shopper loyalty dominance in its core regions — the South and Southwest — and extensive ownership of its retail real estate.
In an upgrade last April to BB+ from BB-, S&P Global Ratings indicated “Dillard’s store ownership, minimal balance sheet debt, and good merchandise execution will help navigate potential declines in consumer demand…We note Dillard’s management team has strategically employed operating initiatives that have helped maintain growth and achieve robust EBITDA [earnings before interest, taxes, depreciation and amortization] margins. For example, it has taken a disciplined approach to inventory management to limit promotional activity.”
S&P concluded that Dillard’s has “an improved competitive standing within its regional markets.”
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