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NEW YORK — In an age of Wal-Mart dominance, price deflation and declining mall traffic, almost no one preaches the gospel of department stores, unless, perhaps, they are Terry Lundgren or Allen Questrom.

So even the always provocative Carl Steidtmann sounded a little loopy in November when he told 500 executives at a Fashion Group luncheon: “Younger consumers between ages 18 and 24 have defined the department store as their store of choice.”

This story first appeared in the March 10, 2004 issue of WWD. Subscribe Today.

Could it be that department stores — for decades maligned as retail dinosaurs slowly headed to extinction — have seen the light?

“There’s a ‘9/11 generation’ that is culturally more conservative than their parents and like department stores more,” Steidtmann, the chief economist of Deloitte Research, would later tell WWD.

It’s not exactly a revival in the works, but Steidtmann said department stores have an opportunity to attract younger shoppers, and the old dinosaur argument doesn’t fly. “People have been talking about the demise of department stores forever. Every 10 years you hear the same story. But they have come out of this most recent recession stronger than the past recession, which was about debt and leveraged buyouts, though some other department stores went out of business because they lost their franchise and had no reason for being,” he said.

“It reflected excess capacity. There still is excess capacity, but not as much. Department stores really have focused on productivity on inventories, sales and labor costs. They’ve closed stores that were under-performing, streamlined merchandising operations and managed their inventories better. The real challenge is to grow the top line. What makes it so difficult is price deflation, because of the impact of China,” though China is expected to revalue its currency in coming months. Casualization also reduces the average ticket size, Steidtmann noted. “The other big challenge is real estate. New malls aren’t being built. How do you take the department store concept outside the mall?”

That’s an issue, but perhaps more for the future. Malls are still magnets for young people — as evidenced by the crowds of teens hanging out at any mall nationwide on any given Saturday afternoon. “Malls are very attractive to young people, more so than strip centers where the older customer tends to shop because of the convenience,” said Questrom, the chairman and chief executive officer of J.C. Penney. “Kids go to malls to socialize and like shopping malls. We do a huge juniors business and a huge young men’s business.”

“I never thought department stores were dead. I just thought their products were stale,” said Hal Kahn, the former ceo of Macy’s East. “Our problem wasn’t getting the core customer. There were just too many of the same looks in too many channels of distribution. But in the last couple of years, through the development and expansion of limited-distributed resources, like urban and private label brands, Macy’s has been offering a lot of newness. The fastest- growing businesses cater to the young. And when the economy improves, there will be a return to dressier apparel.”

And there are other signs that Steidtmann’s bullishness on the sector might not be misplaced. Fourth-quarter results were strong and most retail executives have offered an improved outlook for this year. Meanwhile, stores are pushing ahead with proprietary merchandise programs, such as Federated’s INC and American Rag brands and May Co.’s Hotel Suite collection of better textiles, china, crystal and furniture. As a result, analysts are taking the view that the department store model can be reinvented once again, albeit with a lot of work.

“They are still getting squeezed by wholesale clubs on one end and specialties on the other, but department stores are much more aware of their issues and ready to address them,” said Carrie Shea, global leader of retail practice, Archstone Consulting. “For the last six years, there was some denial, some unwillingness to change merchandising strategies. The 2002 holiday season was a wake-up call, and for the past year, they’ve become much smarter about merchandising, inventory management, and making returns easier through the holiday season, partly by providing a better integration between Web sites and stores. They are also starting to invest more in loyalty marketing, providing differentiated service to most valued customers and understanding who their customers are.”

“There are fundamental needs that department stores satisfy,” noted Arnold Aronson, director of retail marketing strategies for Kurt Salmon Associates. “While they are surrounded by competing channels, they provide one-stop shopping. They put their reputations behind the products they sell, offer return privileges, and they reward loyalty with perks. Department stores have reached a point of some reenergizing and renewed enlightenment among select department store management. They haven’t turned a corner. They are turning a corner.”

“All of a sudden, management has finally accepted the fact that they have a problem,” added Walter Levy, retail consultant. “Appreciating you have a problem is the first step, and Federated is further down the road addressing it, but I don’t think anyone has stepped up with a new conceptual breakthrough, like Home Depot Expo, which takes a holistic approach,” with new products and related services to create home environments.

For department stores to survive, analysts advise them to:

  • Reduce the dependency on apparel and designer brands that have overshadowed the store’s personality.
  • Emphasize food and restaurants, home goods, gifts, wellness and weight-loss products and revisit categories like electronics that got dropped.
  • Develop off-the-mall formats, since malls have saturated the country and few are getting built.
  • Clean up pricing strategies. Markdowns often lack credibility and coupons confuse the issue.
  • Differentiate merchandise by lifestyle, rather than merchandising by brand. Discard the matrix.
  • Breed merchants with a feel for products and customers.

They also warn department stores to protect their market share in cosmetics with urban brands like Sean John and Phat Farm and increase share in contemporary and junior apparel. However, the recently announced Kohl’s/Estée Lauder and Boots/Target deals, and Sean John’s decision to open stores, suggest their hold on such categories may be weakening.

Still, the department store sector continues to consolidate and lose share and suffers from merchandise sameness and slim comp-store gains. Total retail sales of department stores, including national chains such as Sears, Roebuck & Co. and J. C. Penney fell 5 percent to $319.3 billion last year, from $336.1 billion in 2000, according to the U.S. Census Bureau.

According to NPD Fashionworld consumer data estimates, in 2003, department stores alone posted $31 billion in apparel sales, against $35.5 billion in 2000, and lost apparel sale dollars at about twice the rate as the retail industry overall.

“It’s an antiquated business model that worked for a consumer of another era,” said Robin Lewis, president of the consulting and publishing firm bearing his name. “They try to be all things to all people and it’s not working. They should focus on one consumer target, like Kohl’s focuses on the working mom. The real cracks in the model are structural. It’s a maze of departments that defy quick and easy shopping, and the location of the stores defy accessibility. These issues are not easily resolved. I think Selfridges is a good model, with entertaining lifestyle departments and brands that fit the lifestyle. Also, Selfridges allows the brands to run their own businesses in the store. That kind of change for these U.S. department store behemoths requires a magnitude of shock and awe.”

“Department stores have long been aware of the need to change. Now, at least, they are reconciled to it,” said Walter Salmon, the Stanley Roth Sr. professor of retailing emeritus at the Harvard Business School. The problem is twofold. “How do they become more attractive to consumers? That requires a lot, including moving from inventories with immense duplication to being thoughtfully edited and getting very good at private label. Secondly, they have to immensely reduce, if not eliminate, high-low pricing, and lower their initial prices,” which he says are usually too high. He rated service in the stores as somewhere between “poor and a travesty” and said divisional buyers are outmoded and lack clout with vendors. “Seismic” changes are required. Long term, Salmon sees few department store survivors. “Four or five would be a high number.”

Most analysts see Penney’s as a survivor, along with Federated, particularly with Bloomingdale’s on a roll with its renewed emphasis on contemporary and less widely distributed merchandise, as well as May, Saks Inc. and Neiman Marcus. “We are really moving the dial, whether it’s reducing the clutter and raising the standards of our stores with 70 to 75 percent less signing, our Hot At campaigns, which push newness, or with our bridge business, which is exploding,” said Michael Gould, Bloomingdale’s chairman and ceo.

However, the debate continues on Sears, as well as regionals such as Dillard’s, Belks, Mervyn’s, Gottschalks, Bon-Ton, and Marshall Field’s, the subsidiary of Target, which are endangered because they don’t have the buying clout of the nationals. “Some department stores are showing signs of life. Others you have to wonder about,” said Walter Loeb, president of Loeb Associates. “It really depends on who you are talking about. Stores are still thinking too traditionally. They have to reinvent and that’s very difficult.”

Department stores and national chains such as Sears, Roebuck
and Dillard’s are losing share to Wal-Mart and Target.
2000 Sales
2003 Sales
% Change
General merchandisers
Warehouse clubs/superstores
Department stores
National chains
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