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Department stores have come out punching.
After taking their licks from a number of corners, be it competitive new formats that encroached on their original turf or a bruising price war with mass merchandisers, department store retailers are taking action.
And despite declining sales that have many retailers against the ropes, the bout is far from over.
Many top players have begun aggressively counterpunching, even as they stand in the deep shadow of the Great Recession. Two of New York’s most storied emporiums—Bloomingdale’s and Saks Fifth Avenue—have unveiled radical redesigns of their flagships, while others, such as Macy’s, Dillard’s and Lord & Taylor, are experimenting with new formats.
In October, Bloomingdale’s opened arguably the most advanced high-tech selling floor in America. At the unveiling, chairman and chief executive officer Michael Gould stood amid a beauty department festooned with slick, pulsing videos and state-of-the-art counters, but what was on his mind was people: those who sell product and those who buy it.
“We believe very strongly that the key to this floor, as fun as the ticker tape is, as fun as the 3-D [screen] is, as fun as any of those things are, the thing that will determine our ultimate success is the ability to clientele the customer—know who that customer is and how to touch that customer,” he says.
As impressed as a customer may be with the news ticker atop Clinique’s counter, it’s her interaction with the sales associate that she’ll tell a friend about, Gould believes. “It’s all about the people,” he emphasizes. “The answer to our business is not figuring out how to have more [gifts-with-purchase]. The answer to our business isn’t going on sale. The answer to our business is simply, how do we build a relationship with a customer and not rely on someone maybe making a transaction?”
In other words, following years of a creeping me-too–ness that resulted from an era of mergers and consolidations, retailers are returning to the customer-first mantra that allowed department stores to gain domination decades ago.
Gould was referring to research results from the big-three beauty brands that shows the average shopper visits a department store only two to three times a year. Gould asserts that the customer is using cosmetics regularly, but shopping elsewhere. “They’re going somewhere else because there’s no loyalty—no one has touched them,” he says. His driving point is to build a business one relationship at a time.
Take a recent Lancôme gwp promotion. “The first day in New York, [we] probably had 2,000 transactions,” says Gould. “I said to [the Lancôme staff ] when I was on the floor the next morning congratulating them, ‘Were 2,000 business cards given out the day before? Do we have 2,000 thank-you notes going out? Do we have a process where people are going to get a phone call or an e-mail saying, ‘You know, Miss Keaning, I hope you really liked that [item] you bought, but what do you think of that moisturizer? You must be out of it by now. Could I send you a regular-sized bottle?’
“Now it’s gone from a transaction to a relationship,” he declares. “The future is how you move a business from transaction to relationship. And it’s only going to happen this way. It’s not going to happen any other way.”
Nailing the relationship rather than the transaction plays to the historical strength of department stores—namely, their armies of sales associates—as opposed to many of their modern-day rivals, who depend largely on models of assisted self-service or no service at all. “Beauty is the most individual category we sell,” says Terry Lundgren, chairman, president and ceo of Macy’s. “The potential for cosmetics may be even greater than the rest of the store. That work is still in front of us. The challenge that the manufacturers and we have together is to make clear to the consumer about how important it is to take advantage of the beauty advisers in our stores.”
Jean-Paul Agon, ceo of L’Oréal, sees the problem in stark terms. “Go back 30 years. The department store was a place of enchantment for consumers,” he says. The solution is simple: “Re-enchantment.” On this score, Agon gives the new Bloomingdale’s beauty floor high marks. “This is probably the most beautiful store in America,” he says.
It should be, considering the cost. According to sources, the renovation cost $45 million to $55 million including vendor contributions, and vendors are hoping for 10 to 20 percent sales gains as a result. That would be welcome news to a channel where declines have become the exception rather than the rule. According to Euromonitor International, overall U.S. department store sales are forecast to decline an estimated 14 percent in 2009 to $117.5 billion, from $136 billion in 2008, and to decrease 3 percent in 2010 with continued declines through 2014.
Also trying to staunch the flow is Saks Fifth Avenue, where, across town, construction—albeit to a lesser scale on the beauty floor—is under way. Thus far, La Mer, Bobbi Brown, MAC, SK-II, La Prairie, Laura Mercier and RéVive have unveiled shiny new counters. In all, the Manhattan flagship has renovated 50 percent of the 65,000-square-foot main-floor beauty department, and a final phase of heavy lifting is planned for spring. Moreover, large-scale renovations are happening throughout the store and the chain, says Stephen I. Sadove, Saks’ chairman and ceo.
“A lot of what we are doing, in terms of renovations, allows the consumer to interact more with associates and the products,” he says. “We have lots of technology built into the service environment—skin-analysis technology at SK-II or adjustable lighting at Chanel. We believe the overall experience, choice and exclusivity of the brands we have, and the ability to get the level of service as well as personalization, is unique.…We can compete with anybody in the vertical space.”
Saks has spent the last two years training its staff across the store on a point-of-sale computer system, which puts sales associates in touch with their customers, as a way of spurring sales through appointment selling. But the retailer is combining high tech and high touch. To that end, rather than having a makeup artist and a sales associate at the beauty counter, for example, the two positions now have been consolidated. “Everybody is a sales associate and makeup artist, which is allowing us to have much more interaction with the customer,” says Sadove. “Now, all of the artists understand how to use the technology to better serve the customer.”
Saks also has concentrated on training to improve the selling effort. Ron Frasch, Saks’ president and chief merchandising officer, says, “We could spend more capital fixing up stores. We could add this brand or add that brand. But for our company, the differentiator is—whether it’s in the cosmetics world or the shoe world—it doesn’t matter, it’s all about service.”
Whether the top-to-bottom overhauls silence critics remains to be seen. The most vocal observers assert that department stores have changed little over the last decades, growing increasingly indistinguishable from each other in a time when the competition—namely, a new crop of retail concepts including Sephora, Ulta, Space NK and Bluemercury—have enticed shoppers with a mixed approach of assisted sell and an assortment of hard-to-find indie brands.
Also at play are the lingering effects of the recession and the undisputable fact that how and why people shop has changed considerably. In WSL Strategic Retail’s most recent research report, Reboot: How America Shops, 54 percent of women surveyed said, “I don’t shop at certainplaces because I’ll be tempted to overspend.” The shoppers listed malls first, followed by department stores, as the outlets they try to avoid.
“These shoppers are saying, ‘Sorry, I have to pay my rent, and I cannot afford to walk in anymore.’ That’s a big issue,” says Wendy Liebmann, ceo and co-founder of WSL Strategic Retail.
She anticipates department stores will have to close more doors, and heap luxury into the ones that remain. “We’re going to see a shrinking of the business. It’s going to be a more focused business with a more special experience geared toward the high-end consumer, who expects a lot more than she’s offered at the moment.”
Acknowledging that contracting the business runs counter to department stores’ all-out growth mission over the last decade, Liebmann says: “It’s going to be incredibly painful—much like what is going on in the mass market, where there is [stockkeeping-unit] rationalization taking place and brands cut out of the mix. But ‘less is more’ is going to be the road to survival.”
Marshal Cohen, chief industry analyst of The NPD Group, agrees, saying, “When department stores were the dominant player, they were not as big as they are today. They weren’t under the same pressure to sell as much merchandise as they are today. But future success is not going to be about volume growth, it’s about profitability. The future is not about being bigger than you were, but better than you are.”
Macy’s, the nation’s largest department store chain with 800 doors, aims to do just that and get closer to consumers with its My Macy’s initiative, designed to bring more local relevance to its store offerings.
“Understanding that consumers are different in different markets, and even within a market and a store—the men’s customer might be different than the women’s—and knowing those customers and their specific needs will be more critical to establishing yourself as different,” says Lundgren.
To that end, Macy’s has fortified the field with 1,600 additional people in 69 cities across the country, or districts. “For each district, they supervise between 10 to 12 stores,” explains Lundgren. “This group of 17 to 20 individuals has very specific skills as former buyers or planning executives, and they are influencing the product for the specific stores in their districts’ cities and markets.”
He cites a team in Chicago, which identified a need for a broader selection of larger-size women’s shoes and has since created an entire section of size 11 shoes. “Sales have gone through the roof,” says Lundgren. “There is no technology that tells you in the last month we had 100 requests for size 11 shoes in women’s. Only a sales associate behind the counter tracking this data and providing this information to the district merchant can capture that.”
Retailers are making other bold moves, as well. Many have struck exclusive deals with desirable brands to entice consumers, and implemented computerized clienteling software to enhance the relationship. Many of those efforts came to an abrupt halt last fall, though, when spooked consumers stopped shopping, either out of guilt or necessity. Heavy-handed promotions—including on the beauty floor—began shortly after. The long-held concern about training consumers to wait for the sale became a moot point.
“One of the fundamental issues in U.S. department stores is the addiction to sales,” says Paco Underhill, founder, ceo and president of the consulting firm Envirosell. “It’s like heroin: The more you do it, the more ways you do it,” he continues, adding that aggressive promotions quickly erode margin. “If you don’t have the margin, you don’t have any money for innovation.”
The tactic seems to have encouraged consumers’ newfound frugality. “Everyone is celebrating how little they spend on something rather than how much,” says Underhill. “But, if price on a product remains consistent—like for an iPod—everyone accepts it.”
But as department stores reevaluate their past missteps, there is opportunity, Underhill believes, including “shedding underperforming stores, downsizing, doing a better job of focusing on who the consumer actually is and being responsible to local markets.”
Exacerbating matters, department stores have dramatically cut spending in recent years. “This group has been underspending on capital expenditures,” says Morgan Stanley analyst Michelle Clark, noting Macy’s capex spending dropped to $450 million in 2009, from $1.1 billion in 2007. A Macy’s spokesman noted that Macy’s higher spending in 2007 was due to the remodeling of its recently acquired May Department Stores Co. units. Department stores also have reined in sales, general and administrative spending, the bulk of which goes to staffing.
As a result, finding a sales associate in a store can be difficult, says the analyst. Morgan Stanley’s research found that, on average, customers had to visit five different registers before they were able to make a purchase. “We’re at a point where they need to start reinvesting,” says Clark. She anticipates a more restrained approach to holiday promotions, compared with last year’s price slashing. “The key theme will be less promotional activity than a year ago,” says Clark, recalling that in November 2008, Saks discounted its designer merchandise by 75 percent heading into the season. “This year, they need to re-create an element of scarcity: If the consumer wants it, she’ll have to buy it immediately, not wait for the sale.”
Blinded by a sea of sale signs, shoppers seem more taken with the notion of value over steep discounts. Their collective practical mind-set has led some established department store beauty brands to break with tradition and loudly tout the prices of their products. The Estée Lauder Cos. Inc.’s flagship Estée Lauder brand recently conducted an experiment in the NorthPark mall in Dallas. In both Macy’s and Dillard’s, the brand prominently displayed the price on every item. Conversely, in Neiman Marcus and Nordstrom, pricing was not called out. At the end of the test period, Lauder found the Macy’s-Dillard’s businesses performed 11 percent better than its two luxury-focused peers.
Also in Dillard’s NorthPark store, Lauder put up a header that read, “Mascara from $19.50.” Mascara sales surged 30 percent as a result.
Thia Breen, president of North America for the Estée Lauder Cos. Inc., says the task of reinvention does not fall on department stores alone. “We have to do it with them, too. We’re partners,” she says, noting one of the key questions to emerge out of the global financial meltdown was whether the customer is changing. The answer, she says, is a resounding yes. “She is thinking more about value than she has ever done in the past.”
Included in the value equation is what Lauder refers to as “high touch,” or creating the ultimate prestige experience. To that end, the brand is working to offer a dual-sales approach, one catering to shoppers who want to browse, another to those who want to “grab and go.”
“The mode of shopping that the company is focusing on involves both replenishment and browsing,” says Breen.
To cater to hurried shoppers, the Lauder-owned Clinique brand outfitted its installation at Bloomingdale’s 59th Street store in New York with an Express Service counter that promises satisfaction “in a New York Minute.”
Breen notes a woman who walks into a MAC store generally wants to sit and have a makeover. But, she cautions, “If she doesn’t get that, she’ll walk out without anything. She wants service when she wants it.”
There is more opportunity to be had. For instance, Underhill says retailers with glittering flagships in Manhattan—Saks, Bloomingdale’s, Bergdorf Goodman—have yet to meaningfully reach out to tourists at tony New York City hotels. The city is, after all, the world’s second-largest tourist destination after Paris, he says. Why not take a page from European retailers and offer store tours, personal shopping services, currency exchange information, restaurant menus and a directory in more than one language, he suggests.
There are more ideas to mine abroad. Underhill notes, for instance, that the São Paulo, Brazil–based luxury department store Daslu houses a cosmetic surgery clinic. Botox at Bloomingdale’s? Maybe, he says: “The world of retail will change more in the next five years than it has in the last 50.”