NEW YORK — As the key to real estate is location, the cornerstone to broadline retailing over the past half-dozen years has been value.
In her annual compendium of statistics covering a wide sample of broadline retailers over the last six years, J.P. Morgan analyst Shari Schwartzman Eberts revealed a host of data confirming empirically what has been apparent to industry observers and consumers for some time: Traditional department stores have been losing ground in the retail wars to their lower-priced competitors in both good and bad times.
“Share shifts favor off-the-mall formats,” wrote Eberts. “Discount stores and warehouse clubs continued to take share of total retail and food service sales in 2002, driven by their value positioning and convenience.”
In 2002, the last full year for which metrics are available, Eberts said department stores lost the greatest share of total retail revenues, as sales regressed 3.5 percent.
For her analysis, released last week, Eberts drew on sources including the U.S. Commerce Department and Census Bureau, J.M. Degen & Co. and company reports.
By comparison, discount stores, including traditional formats and supercenters such as those operated by Wal-Mart and Target, grew 8.6 percent, which easily eclipsed the 4.5 percent increase in total retail sales. Dollar stores were the second-fastest growing format, said Eberts, with sales up 14.7 percent, and warehouse clubs increased their take of the market, gaining 10.3 percent.
Breaking down the discounters further, Eberts points to an even more eye-popping feature of the supercenter landscape, as sales in that format jumped 21.1 percent in 2002 over the prior-year period. That compares with a 3.5 percent sales decline for conventional and national department stores year-over-year.
Over the last decade, supercenters produced a compound annual sales growth rate of 28.5 percent, while conventional and national department stores taken as a whole during that period managed to gain just 0.5 percent compounded annually.
As for the total retail pie in 2002, which includes all retail and food services sales, but excludes automotive and gas sales, discount stores and supercenters laid claim to 10.4 percent of the market, while department stores grabbed a comparatively modest 3.7 percent.
Looking at individual retailers in those respective formats, it’s easy to see the genesis of that widening gap. Major national moderate chains such as J.C. Penney and Sears full-line stores have seen their six-year compound annual sales growth rates recede 1 percent and 0.3 percent, respectively. Federated Department Stores inched ahead just 0.3 percent over that period, while May Co. eked out a 2.2 percent gain. Better departments stores fared best, as Neiman Marcus achieved a 4.8 percent sales increase compounded annually, while Nordstrom grew 4.3 percent.
In comparison, Wal-Mart produced a growth rate of 13.4 percent and Target posted a 12.3 percent increase. Dollar stores such as Dollar Tree and Dollar General did even better, gaining 22.4 percent and 18.4 percent, respectively.
More telling, the discounters used their store base, and store space, more efficiently, as well.
Breaking down compound average growth rates for the last six years, department stores in the sample saw average sales per store decline 0.8 percent and sales per gross square feet dip 0.7 percent. Conversely, the discounters in the sample registered healthy gains in both metrics of 6.5 percent and 3.2 percent, respectively. It is interesting to note that over that same period department stores have shrunk the average size of their stores in gross square feet by 0.1 percent, while discounters increased their own units by 3 percent.
Likewise, inventories tended to be better managed by the discounters, as their average inventories as a percentage of sales during the study’s time frame stood at 11.5 percent versus 19.4 percent for the department stores. The discounters also turned their inventory on average at almost twice the rate of the department stores, but the discounters’ number is inflated by the sale of fresh food and produce by supercenters.
That said, both retail channels on average have returned solid year-over-year earnings-per-share growth. After bottoming out with a 20.2 percent average EPS decline in 2001, department stores roared back in 2002 to post a 71.3 percent increase over the prior year. For the six years covered, that segment has averaged a more than solid year-over-year average of 15 percent growth in EPS before special items and the like. Of course, the discounters, in this case just Target and Wal-Mart since Eberts excludes the once bankrupt Kmart, were an even better investment, returning average year-over-year EPS growth before special items of 19.6 percent.
If there is any over-arching conclusion to be drawn from Eberts six-year compendium of data, it is that department stores more than ever need differentiated, must-have merchandise and superior customer service. When it comes down to the nitty-gritty data, it’s clear consumers are increasingly opting for value prices and one-stop shopping.