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The Great Department Store Debate: ‘Irrelevant’ or Reborn?

Retailers and brand chiefs defended their formats in the wake of Leslie Wexner’s dour appraisal last week.

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Leslie Wexner

AP Photo/The Daily Reporter

Allen Questrom

Allen Questrom

Clint Spaulding/PatrickMcMullan.com

Paolo de Cesare

Paolo de Cesare

Courtesy Photo

Kenneth Cole

Kenneth Cole

Thomas Iannaccone

Mindy Grossman

Mindy Grossman

John Aquino

Leslie H. Wexner has reignited an old industry debate: Are department stores dinosaurs headed for extinction?

“Department stores are irrelevant,” the chairman and chief executive officer of L Brands Inc. said at his firm’s investor meeting last week. They don’t generate near the traffic of restaurants and food establishments, or embody “the emotional content” of Apple and other concepts in the mall, Wexner said. “The average Apple store probably draws more traffic to a shopping center than any department store does.”

He’s a hardliner on outlets and the apparel business as well. There’s no room really for either in his specialty empire. Outlets are “easy money and mark the beginning of the end for brands with high emotional content,” he said. Coach Inc. “cut its own throat” by growing its outlet channel, he added. Wexner also took credit for recognizing a decade ago that apparel shopping would shrivel, as other merchandise categories blossomed.

Given his track record for corporate reengineering and catapulting Victoria’s Secret Pink and Bath & Body Works, Wexner can’t be ignored, whether one regards him as industry soothsayer or just someone who occasionally sounds off.

His logic isn’t bulletproof. True, department stores aren’t the powerhouses of yesteryear and there are fewer of them and maybe still too many. J.C. Penney and The Bon-Ton Stores Inc. are struggling; Saks Fifth Avenue is barely profitable, and Neiman Marcus is piling on debt. Nevertheless, Macy’s, Nordstrom and Dillard’s Inc. have been on a roll, and retail’s new kingpin, Richard Baker, chairman and ceo of Hudson’s Bay Co., says he’s ready to pour money into all of the department store holdings he’s heaped together — including Saks.

Baker wants to “catapult Saks to the pinnacle of luxury, and as part of that, we are committing to spend $200 million to renovate our Fifth Avenue flagship and do what it takes to turn it into the most glamorous and luxurious department store in the world,” he said recently. He’s also experimenting with Lord & Taylor, testing new locations cautiously to see whether L&T could be an alternative anchor in lifestyle centers.

Belk Inc., too, is moving forward, fortifying flagships, adding stores in Texas, and looking to hit $6 billion in revenues in five years. It’s picked up its marketing game with the theme “Modern. Southern. Style.” and has expanded exclusive offerings, such as Cynthia Cynthia Rowley for women and Made Cam Newton for men. “Our business has grown each of the last several years,” chairman and ceo Tim Belk told WWD. “We are continuing to invest in our brand and believe the future is bright.”

Overseas operators also are stepping up their expansion games. Lane Crawford and Galeries Lafayette both opened stores in China in the last month — in Shanghai and Beijing, respectively. Andrew Keith, president of Lane Crawford and Joyce boutique, said at the Shanghai store opening that “the appetite for multibrand [retailing] has grown” in China.

Other retailers and brand chiefs defended their formats in the wake of Wexner’s dour appraisal. Here’s what they had to say.

• Terry Lundgren, chairman, ceo and president of Macy’s Inc.: “Note that our sales have grown by more than $1.2 billion in each of the past three years. If you look back over the past 10 years, our company’s sales and earnings have more than doubled, and market capitalization has tripled. Macy’s is very proud of its track record of strong growth that has allowed us to gain market share and continuously improve in a very competitive industry,” he said, choosing to let his company’s performance speak for itself, rather than get back at Wexner.

Lundgren countered Wexner’s department stores as “irrelevant” comment by stating that Macy’s has “an enduring culture of growth.” He also said Macy’s employs 176,000 people, added 5,000 full-time jobs this year and is hiring an additional 83,000 workers this holiday season. “That’s exactly what our country needs. We are making a significant contribution to GDP [gross domestic product].”

Millard “Mickey” Drexler, chairman and ceo, J. Crew Group Inc.: “I have known Les a long time. He’s a pioneer in the specialty store business. He’s a great merchant. When Les talks, I listen. Regarding department stores, the only comment I would make is that when I first met Les years ago, he made his feelings clearly known. He was saying the same things he said Wednesday and not more kindly. My decision to leave the department store business and take a job at Ann Taylor was, I suspect, based in large part on his strong opinions.

“Regarding the outlet business, as I interpret it, there must be integrity in the business and in the pricing of goods and if one can find the same brands and same goods in many different channels — online, outlet centers or department stores — it absolutely hurts the integrity of your business. I do think there is an opportunity for outlet-store businesses that have different goods and are not just changing a stitch here or there. It’s a different business and should be treated as such. When the outlet business becomes the chief profit driver, the growth vehicle in the business, it’s the tail wagging the dog then, and what Les is saying is very valid.”

Philippe Houzé, executive chairman, Galeries Lafayette Group: “To me, the traditional department store is dead. You see, I am ready to go a step further than Mr. Wexner. I don’t know him personally, but I rather admire him for his personal achievements. The traditional department store is dead, long live the multispecialist lifestyle concept store! If a department store is not a chameleon that had adopted all of its predators’ strong points, then indeed it is in serious trouble.”

Saks and Neiman’s, both recently sold, “are not companies on the brink of extinction. In fact, today’s department store, or concept store, has to be click and brick, it has to be a permanent lifestyle theater, it must know how to combine events, culture, art, gastronomy and designers’ creativity. To quote an old slogan we have remained faithful to: There should always be something happening. And if a store has managed to nurture that, then it has reinvented itself and it will captivate its customers. If you talk in terms of categories, then you are still on the old model of the department store. I think you have to forget that notion. That’s why I prefer to talk about a multispecialist lifestyle concept store. I think you have to forget the department store in the sense of a store organized by categories. That is dead and buried. On the other hand, look at the fabulous job that world-class department stores like Selfridges, Saks and Nordstrom are doing. They no longer have anything to do with traditional department stores. People call them that because they are not sure how to classify them, but Colette in Paris looks quite pale in comparison with these stores. They are super-Colettes.”

Mike “Myron” Ullman 3rd, ceo, J.C. Penney Co. Inc.: “People are looking for newness and new ideas and like the social experience and convenience of having a lot of ideas in one place. A department store is not a thing. It’s an environment. Les Wexner has created exciting environments, but I just believe that when done well, department store environments are as relevant as ever.”

Allen Questrom, former chairman and ceo of Federated Department Stores Co., Neiman Marcus Inc., J.C. Penney and Barneys New York: “What do you call a department store? Wal-Mart has many departments, and you can make many choices. Penney’s is a department store, and Neiman Marcus is a department store. In the 1920s, they sold major appliances. Those times have changed, and it’s been modified. I don’t find that Macy’s is irrelevant. Their business has been good. I don’t think department stores are irrelevant. There are too many of them but they’ve been saying department stores are irrelevant since I’ve been in the business. They were in a dominant position in the 1950s and 1960s. Maybe not as much now.

“I think Les is right” about outlets. “If you are a Coach, Ralph Lauren or Saks Fifth Avenue, maybe these outlets have the same product or they sell different products for their stores. If it’s truly an outlet store and they’re selling the same line, it besmirches the name on the door if it’s the first line. People start to see the name differently.”

On apparel’s significance: “Right now, there isn’t a lot going on in fashion that’s new and different. People are buying jewelry and shoes and looking for ways to make themselves look different and new. People are buying new cars now because they haven’t bought a new car in the last 10 years and there are all these new gadgets. The great thing about American department stores is the ability to have people come up and create new ideas. Ready-to-wear is undergoing a fallow period. Two or three years ago, everybody was buying colored jeans. Now women are going back to being more dressy and guys are wearing ties. I don’t think apparel is irrelevant. Maybe it is less important today, but maybe that’s because there’s nothing new. I think there are going to be some new trends for spring.”

John King, ceo of House of Fraser: “Department stores, like all other retail stalwarts, must change with the times — this doesn’t mean that they become any less relevant. At House of Fraser, we believe that offering a truly multichannel shopping experience is the key. We’re committed to investing and evolving our offering across all platforms and differentiating our proposition to deliver the best customer service in the market. Securing the best national and international brands for our customers and investing in our exclusive house brand portfolio such as Biba will ensure ongoing relevance.”

Helen David, Harrods general merchandising manager: “As a globally recognized brand and one of the most iconic shopping destinations in London, our buying teams constantly seek exclusivity and a reason to buy — with both leading designers and labels. Our strategy continues to be focused on creating an exceptional shopping experience with beautifully crafted collections and constant newness all under one roof….We look at our customer and our market and we aim to meet and exceed the expectations of our customers daily through exclusive previews, trunk shows and client events which cannot be found elsewhere.”

Paolo de Cesare, ceo, Printemps: “We are not interest in entering this debate. If anyone has doubts concerning the relevance of department stores, I invite them to visit Printemps in Paris. The store enjoys traffic of 40,000 to 50,000 customers a day and sales of over $1 billion — quite an achievement for a 148-year-old retailer.”

Kenneth Cole, chairman and chief creative officer, Kenneth Cole Productions Inc.: “The retail landscape is continuing to change at rates that could not have easily been anticipated in time enough to prepare for where it is at the moment. I don’t believe that department stores are any less relevant today than brick-and-mortar retail is as a whole. Outlet stores aren’t ‘brand killers’ when they are allowed to distinguish themselves from their full-price alternatives, and I don’t believe that apparel has necessarily become less significant. People don’t buy apparel, I believe they buy clothes that fill lifestyle needs, and will buy them in apparel stores or anywhere else that best facilitates easy and reliable service.”

Barbara Kahn, Patty and Jay H. Baker Professor of Marketing at The Wharton School: “I have to give Wexner credit — he’s getting a whirlwind of publicity. He must know something. Wexner has created fun in the store. That’s what it’s always been about. Some retailers, such as J.C. Penney, that are stuck in the middle, are neither here nor there, while Macy’s has been doing very well. They understand the omnichannel experience. I do agree with Les Wexner that the retail landscape is changing and you have to adapt. Those that don’t change will be dinosaurs.” With outlets, “You have to be supercareful. You’re always walking a tight rope if you don’t discriminate between value-priced merchandise and your top line. Coach was treading too close. I think Coach has damaged its brand to some degree.”

Mindy Grossman, chief executive officer of HSN Inc.: “Brands are addicted to outlet store strategies to satisfy external expectations of growth. It is brand dilutive. Apparel will always be relevant but customers’ desire today to define themselves as individuals extends to many more categories — including technology.

“This debate is moot. The standard definitions of retail are antiquated. The question is not whether any particular ‘destination’ is relevant or not. It is about what a relevant experience needs to be to engage and inspire customers. That ‘destination’ could be physical, digital or even virtual.

“The future of retail comes down to one word — experience: using the insights you have on your customer and their behavior to create meaning and relationships, engaging them in new and different ways, providing a culture of generosity and giving them a reason to interface with your brand every day…and finally, having the ultimate trust to engender ongoing loyalty through service, transparency and community.

“We have to lose old vernacular and redefine our business models in what we call a ‘boundary-less’ retail world where there are no artificial barriers, driven by innovation and collaboration and leveraging the power of technology to create a seamless experience for customers.”

Anita Bhappu, associate professor, program chair of retailing at the University of Arizona: “Currently the model is threatened.” However, “I see a lot of potential in reconceiving the space. Space can be repurposed for dining and other activities that draw the consumer into the store. You can’t do that with the online marketplace.

“I think the whole idea of discounts and promotions is troubling. There’s always been that tension. Am I willing to sell it at a lower price? I would have to agree that heavy promotion and discounting erodes the brand’s value.” At stores such as Saks Fifth Avenue, where you pay market price and get the experience, and Saks Off 5th, “I think there’s an overlap, but not really a big one. They are two distinct brands.” On apparel, “I would tend to agree with [Wexner]. It’s not that it’s not as important, but it’s not as important to other things we sell today.”

 

• Michael Gould, chairman and ceo, Bloomingdale’s:  Wexner is “right about department stores being goners unless they know why anyone comes to the store. What’s the store about? What’s the experience? There’s no five-star restaurant in Manhattan where you can’t call up and order delivery, so why does anyone go out to a restaurant? Why do people go to movies?”

But he took issue with Wexner’s take on outlets. “There is a balance’ between using outlets for growth and not allowing them to dwarf the core business. Gould cited Coach as a brand whose “mind-boggling” outlet volume is problematic for the label’s image.“I wonder about Nordstrom,” Gould continued. “They’re talking about doing 110-115 more outlets, some a block apart, some in the same malls in the store’s lower level. They say it’s a different customer.”

Bloomingdale’s has ramped up e-mail blasts marketing its own outlet business. Gould said the outlet channel is “small but very profitable for us. It’s an entrée into the brand, a way to taste the brand. I don’t think the outlet business is all or nothing. I think [Wexner] is off on that.”

• Scott Malkin, founder and chairman, Value Retail PLC: “It’s easy to throw stones at a world that’s changing rapidly, but I think it’s overly simplistic to point the finger at outlet stores. Outlet stores aren’t precipitating the changes, consumers are. He, or more to the point she, expects to be served wherever she goes.” He said the “omni-channel” model isn’t a do or don’t question anymore—retailers must provide multiple options, but its challenging to keep the brand consistent and protected.

• Joshua Schulman, president of Bergdorf Goodman: “People have been sounding the death knell of department stores for as long as they’ve been in existence.” He said Neiman Marcus is “very committed” to a multichannel approach. Their outlet business, Last Call by Neiman Marcus, has its own sourcing teams, which combine sale merchandise from Neiman Marcus and Bergdorf Goodman with product they source directly.

 

Paul Charron, industry consultant and former Liz Claiborne Inc. chairman: “I’ll stick up for the department stores. A number of department stores have lost relevance because they failed to evolve and listen to the consumer and drive the virtues of customer service through everything they do. To suggest that somebody like Nordstrom is irrelevant is preposterous. To suggest Neiman Marcus for luxury brands is irrelevant is preposterous. There is no question that mainstream department stores have done things that are disrespectful to long-term branded values, with their constant promotions.”

However, “department stores have been very good to a lot of brands. The returns you can get at a well-managed department store business are not inconsequential, in operating profit percentage and return on invested capital. The bottom line [for brands] is you don’t have to spend all that money on inventory and store leases.

“I think for a number of people, their outlet operations tend to have the effect of killing the goose that laid the golden egg. Outlets are a proven venue, which the consumer likes. I think it’s about 4 to 5 percent of all retail sales. Les [Wexner] may not like it, but it’s a legitimate channel. Many brands have overdone outlet stores. If that’s all they do, then it’s a brand killer. But companies like Ralph Lauren and PVH are wonderful brand managers. VF does a wonderful job in managing their brands. For a brand to sell through department stores and their own specialty retail stores is masterful, you get the best of both worlds. For some people, who I would argue are less-than-satisfactory brand managers, they do use the outlets, which degrades the brand image. An outlet strategy for a contemporary brand today is an intelligent response. An outlet strategy is certainly appropriate.”

Max Azria, chairman and ceo, BCBG Max Azria Group: “Based on what Mr. Wexner said, one would believe he was 30 years old, not 76. The retail business is about a multitude of details and each department store has a unique message and mission. Like the rest of the industry, department stores are constantly working to progress and meet the needs of their consumer. They will always have the advantage of offering the market a multitude of brands.”

Bud Konheim, ceo of Nicole Miller Ltd.: “My retail hall of fame is Les Wexner and Mickey Drexler, and probably some others who have no problem saying what’s on their mind. Things rise and fall. I don’t know if I’d use the word ‘irrelevant.’ The scene is changing. The hot things are H&M, Forever 21 and Zara. Then you have the Internet on the rise. It looks like it’s supplying everyone’s increases. I think if you got Leslie Wexner on the phone [for a follow-up] he would hedge and say ‘becoming irrelevant.’ It’s Darwin, it’s not Leslie Wexner. You have to give the guy credit for being a groundbreaker. He’s thoughtful and he’s got credibility. He had tremendous retail success, which was built on innovation. I agree with the idea that outlets are killing brands. Familiarity breeds contempt. If Hermès was in every outlet, it wouldn’t be special anymore. Les says extreme things to make a point. If Leslie Wexner says something, you have to pay attention. He’s on the mark most of the time.”

Ariel Chaus, ceo of Bernard Chaus Inc.: “With all due respect to Mr. Wexner, I disagree. I think the department store channels still have a lot of viability. You’re seeing them trying to adapt to the changing retail environment and how they’re trying to modernize their stores. I think all things considered, they’re doing a good job. When you look at top management at key retailers, I have a lot of faith in them.

“I think you have to be cognizant of the off-price channel. We like to run a very clean distribution. And we are very protective of all of our brands in the off-price channel. I think when you look at women’s ready-to-wear, I still think it’s the core of every brand, and it’s the largest volume of most retailers today, and it’s still what’s drawing her into the mall and into the retailer. Although it’s been difficult for several years and probably underperforming, you’re seeing it start to pick up, such as at stores like Nordstrom. I think it’s about speed to market, offering her newness, being more relevant and being more updated. Apparel is still really important and will get her in the door. Look at the way this company has been growing. We’re launching new brands and our existing brands are growing double digits, and we see a lot of opportunity. As far as I’m concerned, I see a lot of growth and opportunity.”

Stephen I. Sadove, chairman and ceo, Saks Inc.: “Department stores are certainly not the dominant players they were 50 years ago, but they are certainly not irrelevant. It all starts with the consumer, who wants to shop anywhere, anytime they want. There is still a role for brick-and-mortar, but the future is largely going to be omnichannel. It’s not a matter of one or another. Sometimes the consumer wants the experience of the department store. She wants to touch and feel the product. There was a time when people were saying that no one would shop the department store anymore. That hasn’t proven to be the case. There is also a role for outlets. Sometimes consumers want brands and a deal at the same time,” and the value they provide.

Stephen Ruzow, industry consultant: “There are lot of people who really enjoy the department store shopping experience. It’s a great place to be seen and to see people. It’s a great place to go for lunch….Where else can you see so many brands under one roof? If you’re not a brand devotee, you want to see what’s new and what’s exciting. People like to see more than one brand at a time. Department stores have done an incredible job in e-commerce. They make it very easy to buy and return things, and people enjoy the shopping experience.…Outlets are ‘easy money.’ I think there are brands who wouldn’t have certain customers if they did not have outlet stores. There are customers who shop exclusively at outlet stores. There are Saks Off 5th customers who have never been in a Saks Fifth Avenue in their lives, and Coach outlet shoppers who haven’t been in a full-price Coach store.” Do you want that customer? “If you ask Ralph Lauren, you sure do. It’s a hugely profitable part of everyone’s business. Your flagship stores aren’t making money, your outlet stores are cash cows.”

Kathy Gersch, consultant, Kotter International, and former Nordstrom Inc. executive: “There was always some discussion at Nordstrom about cannibalization, whether dot-com and Nordstrom Rack would affect the Nordstrom stores. But they moved on from that. From a brand perspective, the consumer understands the difference between Nordstrom and Nordstrom Rack. It’s not confusing to the customer. There are some customers that overlap [shop both] and there are some that shop one or the other. With Nordstrom and the Rack, consumers are not expecting the same experience. With Coach, there are much more complex branding concerns. People shopping the outlet are expecting to see the same product as in a Coach store. It’s a different product but the problem is perception. There’s also a risk with wholesale accounts. The outlets might have an impact on where they are able to wholesale.”

Robert Burke, president and ceo, Robert Burke Associates: “That’s a blanket statement, saying that department stores are irrelevant today. It’s not true as there is plenty of growth in some regions of the U.S. Online sales are only about 7 percent. Sales are still mostly coming from brick-and-mortar.”

Walter Loeb, consultant: “I feel Wexner made some very good points. Department stores, however, will be around since they are the only place where a customer can get a coordinated outfit and see the latest fashions. Macy’s, Dillard’s and Belk are morphing into more fashionable stores. J.C. Penney and Kohl’s cater to the budget customer and Bloomingdale’s and Nordstrom are fashion-aware leaders in the industry. Saks and Lord & Taylor have to be redefined. At one point Wexner wanted to get into the department store business. Carter Hawley Hale was his target.

“Outlet centers are different businesses now. It is less about being a clearance center for the former season’s merchandise and more about becoming regular-price selling for the budget-level consumer.”

David Lamer, founder of CORE Brand Advisors: “The truth for many brands is that one of every two people walking down the street bought her outfit through the discount channel, either an outlet center or an off-price retailer. You can also be sure that the other person absolutely did not pay full-price for her outfit as well. This effort to race to the bottom cannot sustain itself. Other industries like the airlines and grocery stores have learned that racing to the bottom doesn’t work and have either taken capacity out of its industry, like United Airlines, or have found ways to draw premium prices to its products, like Whole Foods.”

Mary Epner, a principal at Mary Epner Retail Analysis: “I think based on the business model of [L Brands], they do not need department stores. The department store has been healthy in the past five years. The Macy’s of now versus six years ago are two vastly different operations. As for outlets, I disagree with Wexner. Outlet stores are now a new way to shop. They don’t represent just off-price merchandise. It’s become a tremendous opportunity for a lot of brands. If you’re using outlets as a way to liquidate old merchandise, that idea is passé.”

 

 

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