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Department Stores Reposition for Today’s Consumer While Outlet Stores Proliferate, Business and Industry Trends Analysis

Department stores were particularly hard hit by the Coronavirus.  Lockdowns, a powerful recession and consumers reluctant to visit stores led to major layoffs and financial losses.  Firms taking bankruptcy in 2020 included J. C. Penney, Neiman Marcus, Stein Mart, Stage Stores and Lord & Taylor.  For the most part, such stores recapitalized their finances and quickly emerged from bankruptcy.
In order to better understand what is happening in the department store sector, a bit of history is in order.  Older consumers may remember Sears Roebuck’s “Sears has everything” line?  Others might recall going into Saks Fifth Avenue’s flagship store in Manhattan and finding everything from haute couture to a travel agency to a restaurant, plus a hair salon, a toy department and a fine jewelry department—all at full price?  Things are quite different today.
The department store industry has evolved and generally suffered in recent decades.  Originally, the department store was developed and enhanced by retail pioneers in France and America from the 1850s through the early 1900s.  The department store was envisioned as an antidote to shopping at endless blocks full of small, mom-and-pop specialty shops such as hat stores, furniture stores, hardware stores and shoe stores.  Marshall Field in Chicago (operating ever-larger downtown stores beginning in 1865), John Wannamaker in Philadelphia (using advanced advertising techniques to launch a giant department store by 1878) and Aristide Boucicaut in Paris (his Bon Marche became the first true department store by 1852) figured out that housewives would prefer to find everything under one roof—in “departments” that varied from hardware to books to housewares to food items to furniture to clothing.  These department stores were located in the heart of the downtown area within major cities.  Shopping at them was an all-day affair, eagerly looked forward to by many consumers.  A mid-day break for lunch or tea was often taken in the stores’ restaurants.  In 1902, R.H. Macy opened what was billed as “the largest store on Earth” in Manhattan.  The store featured nine stories, 33 elevators and several escalators.
Through the decades, tastes and consumer needs evolved.  Downtown shopping fell out of favor, starting in the 1960s.  The growing popularity of life in the suburbs, encouraging the creation of the enclosed mall, dictated a new role for department stores as “anchors” of malls.  Consumers became accustomed to shopping near where they lived, not at old-fashioned downtown stores.  While malls sprang up like wildflowers in suburban fields, big box stores, discount stores and power centers began competing for consumers’ dollars.
In America, Canada and many other markets today, most “department” stores are actually mall-based apparel, accessories and cosmetics stores, with a few also offering a reasonable depth of housewares.  If they offer any other types of merchandise, such as furniture or electronics, they are often in small, under-stocked sections that don’t compete well against big box specialty stores such as Best Buy.  The highest volume in the store on a per square foot basis is typically done in the cosmetics department, and cosmetics generally aren’t on sale.  That’s why the first thing you see when you walk in the door is cosmetics.  Other very high volume/high profit departments include fine jewelry along with ladies shoes and handbags.  Again, you will nearly always find these departments in very conspicuous locations on the ground floor.
The majority of the balance of the store is apparel—mostly women’s and children’s, along with relatively small men’s departments.  “Department store” is a misnomer at this point.  As they evolved in recent years, department stores dug themselves a financial hole by encouraging shoppers to buy during frequent “sale” events.  The newest merchandise and styles are priced at full amounts for a short time, and then prices decrease quickly through bigger and bigger markdowns.  (Apparel manufacturers may cover some of the cost of these markdowns.)  Shoppers have been trained to wait for items to go on sale.  Department store execs have tried to fight back by making more and more of their merchandise private-label “house brands” (with higher profit margins) instead of designer brands.  Regardless, consumers generally want things to be on sale.
Major American department store chains went broke by the score in the 1980s.  Surviving companies repositioned themselves and sought new financial resources in order to survive.  (Some had to overcome financial pressure caused by excessive leverage or overly aggressive expansion).  They needed to learn to utilize advanced information systems and inventory methods.  In addition, they had to learn to offer better value. 
Consumers complain that department stores are hard to access, since most are anchor tenants in large malls.  In many cases, it’s necessary for customers to park their cars in remote lots, walk a long way to enter the department store and then navigate even further to find the merchandise area they need.  Once there, salesclerks are often hard to find and registers are decentralized, which can make paying for merchandise more complicated than it should be.  Add to that the higher prices charged by department stores as opposed to discount stores, and the shopping experience becomes a chore instead of a pleasure.  Meanwhile, customer traffic at most malls in the U.S. is on a downward trend, as consumers migrate online.
Several chain operators are attempting to address these problems.  Nordstrom is perhaps the best example of a department store company that is stemming the retail tide of discount stores and membership clubs.  At about 150,000 square feet, newer Nordstrom stores are smaller than Nordstrom’s former average store of 190,000 square feet, and thus take smaller investments and reduced inventory risk.  The company has concentrated on locations with easy-to-use parking and access that does not force people to go through malls.  The smaller size should also make stores easier for consumers to navigate and less costly to operate.  Nordstrom went even smaller in 2017 when it opened Nordstrom Local in West Hollywood, California.  The 3,000 square-foot space offers services such as manicures and on-site tailoring in addition to a beverage bar.  However, this new type of store does not stock clothing.  Instead, the store is long on service and personal attention, but short on inventory.  Customers can try on clothes, by appointment, that Nordstrom stylists retrieve from nearby stores.  A total of eight dressing rooms are available.  The stylists can also put together outfits for customers using a “style board” app.  Nordstrom Local also serves as a pick-up location for online orders.  By 2023, there were seven Nordstrom Local stores in operation in New York City and Los Angeles, with a seasonal pop-up location in the Hamptons during summer months.
Macy’s is also embracing a smaller store concept, opening five Market by Macy’s stores since 2020 in Texas and Georgia.  The stores are between 22,000 and 58,000 square feet (about one-fifth the size of a full-scale Macy’s) and offer inventory that is updated regularly as well as a service desk for pickups and returns (making it convenient for online shoppers to interact with the stores).
Continuously successful department stores are those on the leading edge of modern retailing.  Nordstrom, for example, offers the utmost in personal service combined with unique and high-quality merchandise that offers high value (much of the merchandise is store brand).  Nordstrom sales personnel receive above-average commission rates, and top salespeople can earn $100,000 or more yearly.
Department stores are also losing customers in younger age groups, especially Millennials who tend to spend discretionary income on travel, dining out, gym memberships and smartphones, while spending less on clothes.  Often, budget-conscious consumers are buying what they need, when they need it, as opposed to making impulse purchases.  It’s a delicate balance for stores that are buying less inventory (to cut costs), but also need to have desired items in stock when necessary.  Stores are working with suppliers to shorten the gap between orders and delivery to make that balance a little easier.  
Many department store and apparel chains have created off-price outlet stores.  Outlet-only stock is priced about 30% to 70% below comparable goods in regular stores.  In-store markdowns at regular stores can erode profit margins and clutter elegant floor space with sale racks.  Outlets, on the other hand, can feature merchandise that was difficult to sell in regular stores, while operating at lower costs in less-desirable real estate.  Outlets also provide chains with the ability to stock lower-priced, outlet-only merchandise not normally available in regular stores.
Department stores continue to face intense competition from online retailers.  Macy’s revamped many stores, called “neighborhood stores,” with walled-off floor space to reduce overall square footage by approximately one-fifth.  Shoppers have self-service options (such as a shoe department where boxes of shoes in various sizes are stacked for self-service) and dedicated departments for online purchase pickup and returns.  

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