They may have seen better days, But Department stores still have a niche and are far from extinction.
The department store sector certainly has seen better days.
These days, everyone from Target and Wal-Mart to many of their own suppliers are going for a piece of the branded retail action once dominated by these storied shopping emporia. Specialty stores over the past decade have multiplied, with each one more agile than their larger retail cousins and targeting specific customers in a way that’s not possible for department stores. Kohl’s, often described as a hybrid discounter-department store, has moved into branded apparel turf decisively, giving traditional department stores a run for their money with its easier-to-shop format.
But it’s not all bad news.
Department stores still account for a hefty portion of the country’s apparel business and are an important revenue stream for major vendors. Last year, 11 of the top publicly traded department store names collectively posted sales of $130.75 billion. And while it was nothing to write home about — and is dwarfed by Wal-Mart’s annual sales of nearly $250 billion — that mark was 1 percent higher than the previous year’s.
According to the more than 10,000 people who make up STS Market Research’s AccuPanel, department stores and such national chains as Kohl’s and Penney’s captured 29 percent of the dollars spent on sportswear in 2002. Specialty stores together captured 28 percent, while the discounters took 16 percent of the sportswear pie. The problem was that department store dollars declined 4 percent, twice as fast as the 2 percent overall decline in consumption.
Despite repeated complaints from all quarters that the stores offer an unfriendly shopping environment with all-too-similar assortments from one chain to the next, no other format offers shoppers so many options when it comes to putting together complete outfits from varied sources. It faces a crisis of positioning as much as it does a crisis of market share.
While size and a broad assortment probably aren’t enough to keep department stores afloat over the long haul, there is no shortage of hope and even a sprinkling of new ideas.
As Elaine Francolino, a fixed-income analyst with Moody’s Investors Service, put it: “They’ve learned lessons from successful retailers. They’ve seen what Kohl’s has done.”And they’ve clearly seen the need for new thinking. George Jones, president and chief executive officer of Saks Inc.’s department store group, admitted: “The model is so illogical. The model is messed up. There’s a real win out there for a company that can break out of that mold.”
Jones, who joined the firm two years ago from Warner Bros., is trying to grab that win with the 241-door chain. “I didn’t come here to try to survive, I came here because I really thought there was a big opportunity for building a better mousetrap.
“The whole thing in terms of dependency on vendor allowances is a real flaw in the way things work,” said Jones. “We’re trying to reduce our dependency on some of these huge vendors.”
A.G. Edwards & Sons analyst Robert Buchanan said: “This intimate relationship between the department store and the vendors has to end. That’s the root problem for the department stores. Original thinking has gone out the window with the proximity of their relationship.”
Buchanan, prescribing a drastic change for the sector, said the stores should look into leasing out areas of their stores to vendors, basically acting as landlords taking a portion of sales.
“If you get right down to it, an average buyer at a department store spends about 10 to 20 percent of her time picking out merchandise and getting to know the target customer,” he said. “The vendors are in a much better position to run their own show.”
This would produce a more tightly edited assortment, which is more common in Europe, where department stores operate under this model, he said. One European store that has done this with immense success is Selfridges in London, which has gone from the traditional model to, as its former ceo Vittorio Radice describes it, “a house of brands.” In his view, the brands can be in anything from fashion to food to consumer electronics — as long as they appeal to the latest consumer tastes.
While some question whether the department stores should hand over control of their merchandising in such a way, the notion turns on one of the sector’s greatest strengths — its real estate.Rather than inching away from the malls, Angela Selden, North American managing partner for Accenture’s retail industry group said: “The big call to action for department store retailers is, how are we going to define the mall?”
Some are dabbling in off-the-mall formats, such as Sears, Roebuck & Co., which will cut the ribbon on a new format in Salt Lake City this fall dubbed Sears Grand. For the most part, though, department stores are tied to the malls by their anchor-driven store base. The stores need to make their stand at the malls and “create a dynamic shopping experience that dominates specific categories that matter to the customer,” she said.
Elder-Beerman’s president and ceo Bud Bergren agreed that, as a sector, “we’re not giving the customer something they’re looking for because we haven’t grown as a sector.”
Bergren’s solution? “Our growth is going to come by being a niche player.” Elder-Beerman is focusing its new smaller store formats on smaller communities, such as Warsaw, Ind., or Frankfort, Ky., where they are the better player in town.
Ninety percent of the firm’s markets overlap with J.C. Penney and half the firm’s markets compete with Kohl’s. Bergren said Elder-Beerman has much of the same merchandise as those stores as well as a better layer. “We want to be in a town where we can be the number one player,” he said.
The 68-store chain said it had recently received a number of unsolicited acquisition offers, and it’s agreed to discuss, on an exclusive basis for a limited time period, the possible sale of the company with one of the interested parties.
While larger firms are looking to grow their businesses through such acquisitions, they don’t have the luxury of concentrating just on Kohl’s and Penney’s. They battle it out in the same markets, trying to grab the same customer with often times the same product.
For Saks’ Jones, the better department store mousetrap includes differentiation across the board, in merchandise mix and assortments, with unique products and unique vendors.
Under Jones’ direction, Saks has penned agreements with the Laura Ashley, Jane Seymour and Ruff Hewn brands. Saks also acquired the mall-based pre-teen retailer Club Libby Lu with an eye toward adapting the concept to its stores and entered into an agreement with FAO Inc., to take a minority stake in the toy retailer, which in turn will open up licensed shops inside the firm’s department stores.“We have a lot of irons in the fire now,” said Jones. “What we’re looking to do is create something that will be a different kind of experience.”
Another big plus for department stores is the cash sitting on their balance sheets, said Smith Barney Citigroup analyst Deborah Weinswig. That liquidity, for the most part, will help them keep on keeping on.
How that cash is deployed, though, will chart the future of the sector. Most players across the sector are dipping their toes into new waters with concept stores, off-the-mall formats, more private label, divisional consolidation, wholesale centralization or just the addition of shopping carts. May Department Stores Co. has actively acquired its way into the bridal business, while Federated went multichannel with Fingerhut before deciding it had taken on more bad consumer debt than it could tolerate. It is, though, experimenting with new formats, some of which look remarkably like Kohl’s.
Weinswig said the department stores should invest in their existing store base, where the pricing message can be clarified and the customer service improved. “There’s a lot they could do to stimulate traffic,” she said, adding the stores could be brighter, with better signage and include even small amenities, such as Federated has done with soda and snack machines. Special events at the stores could also help drive traffic.
Almost every department store is in the midst of some sort of revamping.
“It doesn’t have to be rocket science,” said Weinswig. “It doesn’t have to be expensive. I’m not asking for the world here. They have to make the experience fun and easy.”
And, given the revenues department stores continue to rack up, it’s clear there are plenty of people who don’t consider them extinct.
Federated chief financial officer Karen Hoguet, on a conference call with Wall Street last week, said the department store customer is alive and well, according to research by the firm last fall.
“There’s actually a very strong segment that really likes the department store,” said Hoguet. “Yes, she is buying less there than she did five years ago due to all of the new shopping options, but she still very much likes shopping in the department store.”
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