Department Store Parley Focuses on Adaptation

Are department stores on their way to becoming "dinostores"?

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WISMAR, Germany — Are department stores on their way to becoming “dinostores”?

The format faces perils of almost seismic proportions in today’s changing marketplace, according to retail executives addressing the first international department store congress here last week. The congress was organized by The Management Forum, Textil Wirtschaft and Karstadt Department Stores, which also celebrated the opening of the first Karstadt department store 125 years ago in this former East German town on the Baltic Sea.

While all of the executives pointed to the dangers at hand, the merchants’ main message was that there is a lot of life — and promise — still left in the species, but only if stores are prepared and willing to adapt.

Differentiation is the name of the game, merchants and analysts from the U.S., France, Thailand, Germany, Switzerland and England said. Stores must be more clearly delineated as brands that are recognizable to consumers, and the customer experience enhanced. This can be accomplished through more individual assortments and presentation, by staging memorable events, improving and/or expanding services, investing in personnel and by expressing uniqueness rather than standardization on every possible level, executives suggested.

“It is painfully clear that we are in the midst of a retail revolution that is powerful, relentless and, in many ways, poses the greatest threat to the future of the traditional department store,” said Andrew Jennings, president and chief operating officer of Saks Fifth Avenue.

The American market is being “turned on its ear,” he said, by escalating consolidation. “Big names are changing hands. Wholesalers are buying retailers. Private equity firms are on a shopping spree. Private label is growing. Online shopping is exploding. And specialty retailers are looking to expand their presence in new geographies,” he told the audience, which had representatives from the fields of retail, marketing, manufacturing, real estate and market research.

However, Jennings was far from pessimistic. He noted Saks Fifth Avenue is well into the first phase of a multiyear program to revitalize the brand, and has made strides in connecting with target customers through differentiated designer product ranges and major events. E-commerce, far from being a threat, has developed into a bonus. Five years ago, saks.com was in its infancy. Two years ago, it ranked as Saks’ 15th-largest store. Currently, it is the third-largest store in the Saks network, he said, and is on its way to becoming number two after the New York flagship.

This story first appeared in the May 22, 2006 issue of WWD.  Subscribe Today.

Outside his organization, he noted department stores such as Bloomingdale’s and Nordstrom “have gotten the religion on differentiation” and are winning back more demanding customers “by focusing on their assortments, better defining the shopping experience and taking a more definitive marketing position.”

Jennings was particularly enthusiastic about the in-store alliance between J.C. Penney and Sephora that brought Penney’s back into the contemporary beauty business “in one bold stroke…and boosted its brand with some much-needed buzz.” He said the message for retailers on all levels is clear: “Stand out — and stand apart from the competition — or you will fall away.”

For Paul Delaoutre, director general of Galeries Lafayette, Paris, the greatest challenge in today’s increasingly uniform retail landscape is consumer boredom. One way to prevent this is to recognize that fashion is everywhere — “not just in apparel, but in food, home equipment, culture. It’s a big opportunity and one can, no — must — feature fashion in all segments,” he stressed. “It can give us new ideas, and we need new ideas all the time.”

Another growth opportunity for department stores is in luxury goods. Many consumers are a little afraid to enter luxury flagships such as Louis Vuitton’s Champs-Elysées, he pointed out. “So, if you play it well, you will attract a different category of customers to luxury goods.” Galeries Lafayette is trying to make luxury jewelry brands more accessible, for example, by presenting them at counters versus shop-in-shops. And the response has been positive, he reported.

Beyond the allure of designer brands, however, Galeries Lafayette places great emphasis on its own vision of fashion, both in the store’s advertising and in-store presentation, Delaoutre remarked. “We are not just a hanging place for brands, and we dedicate a lot of space to multibrand areas where we make our own selection.” This has born fruit. The new mixed environment for designer fashion (versus shop-in-shops) has pushed up sales in this sector (based on the same square footage) by 55 percent in the last six months.

The group is actively expanding in France, “not to create a huge density of stores, because we believe Galeries Lafayette should be rare,” he said, and is experimenting with smaller formats as part of its domestic strategy. While analysts pointed to the difficulties department store retailers face in foreign markets, Delaoutre said despite earlier stumbles, Galeries Lafayette is “convinced we can become a global brand” with its unique and very French genetic code. “We’re talking to some partners and look to open a few exceptional stores in central, important cities.” Nanjing Road in Shanghai is up next, and there are contacts in Dubai, he said. (Saks Fifth Avenue also plans to open franchised stores in those markets.)

While the middle ground is generally “no man’s land” in today’s department store landscape, the 19 Robinson’s stores in Thailand are successfully targeting the young, aspirational customer who doesn’t want to shop in hypermarkets and can’t afford the parent Central Retail Group’s more upscale Central stores. “We don’t want Robinson’s to be in a middle place that’s nowhere, and grew 19 percent in the golden middle last year,” Central Retail Corp.’s chief operating officer, Joseph Lobbato, said.

The group, which has sales of almost $4 billion, runs 35 department stores, plus food, electronics, sports, book, home improvement and office product stores, in Thailand and South East Asia. Food and services rank high in Central department stores, where eateries such as The Little Kitchen or the newly introduced Food Loft offer a popular break from shopping.

Securing the future is not always a question of new strategies, said Charlie Mayfield, managing director of John Lewis Department Stores, London, “but sometimes of rediscovering old strategies.” Mayfield reiterated the importance of a store’s employees.

“Your staff are your most precious asset, something that’s hard to copy and can drive huge commercial success,” he declared. “If you treat your staff well and trust them, they begin to embody the values [of the company] and look after [your] customers well. It’s not just being nice to people, but has real commercial value,” he argued.

John Lewis generates about 60 percent of its sales in items for the home and 40 percent in fashion and accessories. The group operates 26 stores, which are moving from “a lot under one roof to what the consumer wants.” John Lewis has identified three customer groups: shopping enthusiasts, service seekers and solution demanders. “Any one customer can be any one of these three in one time. As a department store, you have to be all things to all people, but you also have to be exactly what one person wants at one time.”

John Lewis reconfigured its assortment, moving from classic to contemporary lines and trading up from mid price ranges to more premium price ranges. “Six months ago, when we reviewed the assortment, we saw sales accelerate. And where we’d successfully migrated, we generated a plus. This simple strategy of really focusing on giving customers what they want leads to success. We’re running about 10 percent ahead year-on-year,” Mayfield stated.

Germany’s department store groups, Galeria Kaufhof and Karstadt, also are trading up to get back on track. Kaufhof, a unit of the Metro Group, will open a flagship prototype in Berlin on Wednesday designed by the recently deceased star architect Josef P. Kleihues. The store, at about 375,000 square feet, will be almost double the size of the former store on the site, and represents an investment of about $128 million on the part of Metro Group Asset Management, Metro’s real estate arm. Kaufhof itself sunk about $34.5 million into interior design and technology.

Karstadt recently established a Premium Group among its 90 department stores, with Patrice Wagner, director of KaDeWe, the group’s Berlin flagship, named to oversee the new enterprise. KaDeWe has been undergoing a face-lift floor by floor, and is the model for the Premium project. The Hamburg store Alsterhaus already has been given the premium treatment, with doors in Dresden, Munich and Frankfurt slated for an upgrade in the near future, and seven other Karstadt stores in major German cities thereafter.

“It’s important for Karstadt to build destination stores,” commented Tom Herndon, ceo and partner of RYA Design Consultancy, Dallas, whose company gave a presentation on contemporary store design at the conference. “The buzz exists and it’s a great start.”

He said “sameness in America is just killing department stores in the U.S. There are great emporiums [in the world] that are tourist attractions — must-sees. They all have different and unique qualities. It’s about building the name brand of the store first, and of brands in the store second,” he concluded.

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