The Department Store Isn’t Dead
Once upon a time, Americans who lived in cities turned to multi-story retail palaces — department stores — to shop for Christmas presents. The rest of the year, they looked to those same stores to find the latest things in fashion, international imports, home improvement supplies or just about any other goods they could think of.
Few think of department stores that way anymore. Yet even in an age when department stores are rarely someone's first choice for shopping, the concept has some life left to it, as the more successful brands (and there are such) adapt to the times.
"I'm optimistic about the future of the department store sector," said New Retail Ethos founder and CEO Jeffrey McNulty, whose firm helps retailers increase profitability. "Repurposing and reallocating that space is the wave of the future.”
Consumers largely have an idea of what a department store is, but the definition depends largely on tradition. Many larger retailers — including Walmart and Target — organize their goods in departments, but aren't generally thought of as department stores, and those big-box retailers are outperforming the department store segment.
Classifications used by the Census Bureau aren't much help. General merchandise stores (NAICS 452) are "unique in that they have the equipment and staff capable of retailing a large variety of goods from a single location." In that category, there are "department stores" (NAICS 4521) and "other general merchandise stores" (NAICS 45219), without much distinction between the two.
For the purpose of its reports, Placer.ai lists six department stores: Kohl's, Macy's, JCPenney, Nordstrom, Bloomingdale's and Neiman Marcus, which range from discounters to carriage-trade merchants.
The 21st century hasn't been kind to U.S. department stores — the multi-story, mall-anchoring traditional ones, that is — and the coronavirus pandemic seemed to have been the cherry on top of the failure sundae of bankruptcy and closures.
There were more than 8,600 department stores nationwide in 2011, according to IBISWorld, which relied on Census Bureau data. Last year, there were fewer than 6,300, and the company estimates there will be fewer than 4,600 by 2025.
The winnowing of legacy department stores has been regarded as a harbinger of the death of the concept. In the early days of the pandemic, The New York Times reported that "the genre is toast."
Not everyone is so sure anymore. Some brands look poised to fail altogether — Sears just closed its last store in Illinois in November after 50 years at the Woodfield Mall, as the brand circles the drain — but the leaner survivors will be in a better position to experiment with their physical stores, luxury retail consultant Pamela Danziger said.
The stats are starting to turn rosier for the sector. In February and March 2021, the six top department store chains saw visits down 34.5% and 25.9%, respectively, compared to the same months in 2019, according to Placer.ai. At the same time, by comparison, Target continuously gained foot traffic, up every month this year except February, some months by nearly 16% compared with 2019.
Yet, by October 2021 the average decline for department stores was only 2.4%, the best it has been since the start of the pandemic. Some brands were seeing increases in visits compared with 2019, such as Bloomingdales and Nordstrom, which were up 5.8% and 3.5%, respectively.
Placer.ai cites a number of factors in the resurgence: pent-up demand for the holiday retail season, declining Covid-19 cases and limitations on international travel. The hunger to go to malls again might be the most important reason as shoppers want the experience of the season they missed last year.
Some department store brands are turning in stronger-than-expected sales numbers, even ahead of the holiday season.
Luxury department store chain Dillard's, for instance, reported in November that its third-quarter net income soared to $197.3M or $9.81 per share from $31.9M or $1.43 per share during the same quarter last year.
Net Q2 2021 sales for the brand grew 72% to $1.48B from $1.02B in the same quarter last year. Comparable store retail sales for the quarter increased 48%.
How has a retailer like Target succeeded while many legacy department stores have not? After all, Target started in the 1960s as a discount department store, a version of the much larger Dayton Co.'s flagship stores.
As it evolved, Target got away from calling itself a department store, while at the same time adopting practices its predecessors might recognize: clever marketing, strategic positioning of products in stores, and a treasure hunt-like shopping experience, Insider reports.
Various transformations are underway in the department store sector to try to mirror Target's success story.
Earlier this year, Saks Fifth Avenue did something unusual: it divided itself into Saks.com, an e-commerce merchant, and SFA, a chain of 40 brick-and-mortar stores.
The new entities are still in close coordination with each other, and as far as an ordinary customer is concerned, there is no change.
"There's lots of integration and the customer clearly doesn't want to or need to know, and needs to have a seamless experience," Cowen & Co. Managing Director Oliver Chen, whose specialty includes retail and department stores, told Retail Dive.
The value for Saks in the split? A capital infusion. Private equity firm Insight Partners paid a reported $500M to take a minority stake in the new Saks.com, which stands to rake in even more ($6B) when it goes public.
Amazon is reportedly mulling a new class of stores, larger than its Amazon Go and Amazon Fresh brands. The new Amazon spaces won't exactly be classic department stores. For one thing, at 30K SF, they will be closer in size to the Bloomie's experiment.
Still, The Wall Street Journal reports, they will offer top consumer brands that will better engage customers, especially those looking to buy apparel. Amazon is also expanding into brick-and-mortar — even small department stores — to obtain useful customer data and provide new shopping experiences.
Continued improvement in the sector will depend on innovation, Danziger said. One example she pointed to is Bloomie’s, Bloomingdale’s smaller footprint store.
"In recent years, millennials have felt completely alienated by department stores, and I believe Bloomingdales is looking to change that by honing in on their younger customers, and what they valued about Bloomingdales," Danziger said.
The first of these stores opened in August in Fairfax, Virginia. Compared with a typical 150K to 250K SF standard store, Bloomie's is 22K SF, with a mix of top designers and new brands, along with on-site alterations and appointments with stylists and an on-site restaurant. Items not available at the small store can be ordered instantly from existing standard Bloomingdales, at a customer’s request.
Another department store experiment in progress is at Macy's. This summer, Macy’s, trading on a much-loved retailer name from the past, announced a partnership with the Toys R Us toy brand to open up 400 shop-in-shops starting in 2022.
"Macy’s is an example of a department store listening and reacting to consumer preferences," McNulty said.
Though the latest efforts to reinvent the department store are still fairly new, they are turning in some positive results.
In the case of Macy's, since bringing Toys R Us into the fold, the department stores' toy sales have more than doubled in both physical stores and online compared with 2019. A similar brand partnership with sporting goods purveyor Fanatics has likewise upped sales of sports apparel and headgear for Macy's compared with 2019.
The moves by Bloomingdales and Macy's are part of a larger strategy among surviving department stores to up their game in experiential retail, McNulty said — a hint of their glory days a century ago.
"Experiential retail is a concept that has its roots firmly planted in coaxing shoppers back into stores to facilitate increased store visits that will encourage customer loyalty, maximize top-line revenue and establish brand awareness," he said.
The adaptation goes even deeper than that, Danziger said.
"Reinventing department stores isn't just tearing down stores and rebuilding them, or changing the inside of stores," Danziger said. "It's building on an existing brand to go into smaller spaces, hipper locations and become part of a community."