Department stores look to evolve as sales dip
Chicago – Less-than-stellar holiday sales – despite extra-long hours and extra-steep discounts – may be a wake-up call to department stores that they need a new approach.
“What shoppers are looking for from department stores today is an experience, services and brands they can’t get other places. There’s an opportunity, but they’re not totally taking advantage of it yet,” said Wendy Liebmann, CEO of WSL Strategic Retail, a retail consultancy in New York.
The holiday season at Sears was especially rough. Greg Melich, an Evercore ISI analyst covering Sears, warned in a report that the company is no longer “viable as a retailer in its current form.”
The department store chain announced this month it planned to accelerate store closings and said it expected to write down the value of its iconic brand name by up to $200 million.
Behind the scenes, Sears is working to “proactively transform” its business, said spokesman Chris Brathwaite. The retailer has aggressively invested in what it calls “integrated retail services” that combine the online and in-store shopping experience, where analysts said Sears is ahead of the curve. Customers can get free curbside pickup of items they’ve ordered online or reserve clothes online to try on in-store, and the company’s loyalty program allows more targeted and personalized marketing.
Liebmann and Howard Davidowitz, chairman of Davidowitz & Associates, another retail consultancy in New York, said Sears is in unusually dire straits.
“They just can’t compete,” Davidowitz said.
But it just isn’t a good time to be a department store, he said.
“Department stores are the worst segment in retailing. The sector is not a good sector,” Davidowitz said.
Sears Holdings this month said fourth-quarter sales at stores open at least a year fell 6.9 percent in Sears stores and 7.2 percent in Kmart stores, and fell 7.3 percent and 11.1 percent, respectively, for the full year. Macy’s reported a 4.7 percent drop in November and December sales at existing stores and has also announced plans to cut 40 stores. J.C. Penney Co. reported a 3.9 percent increase in sales over that period; analysts said their good performance came from fixing earlier mistakes.
Nordstrom lowered its forecasts for profit and sales after slower-than-expected third-quarter sales.
Retail sales were up by 0.2 percent in January, but department stores sales were down 0.8 percent, according to U.S. Commerce Department data released earlier this month.
Department stores are a “high-cost operator,” with lots of large stores in pricey mall real estate, Davidowitz said. That makes it tough to compete with stores like value-focused T.J. Maxx or fast fashion retailers and online sellers that offer similar items with a less-expensive business model.
“People are watching their pennies,” he said. “The customer is trading down, and people in the extreme value business are booming.”
E-commerce has been a challenge for all brick-and-mortar retailers, but some retail analysts said department stores may have been particularly hard-hit.
Online shoppers do less browsing than in-store customers, meaning retailers make less per sale, said Keith Jelinek, senior managing director with FTI Consulting. A customer hunting for a specific item online might not immediately think to look to a department store offering a wide range of items, said Neil Stern, senior partner at Chicago-based McMillanDoolittle.
Even wealthier customers who still like the department store experience just aren’t buying as many clothes, and both the department stores and the malls they’re often found in are still dependent on apparel sales, making both less of a draw, said Liebmann.
“Post-recession, a lot of people are saying, ‘How much more stuff do I need? There are other things I’d prefer to spend my money on,’ ” she said.
Higher-end department stores have been introducing off-price stores to compete with those offering a better deal, including Nordstrom Rack, Macy’s Backstage and Saks Fifth Avenue OFF 5th.
“Most are now saying this is where we can grow with price-conscious shoppers,” Liebmann said. “There’s a danger because it erodes who they are as a premium retailer, but it also brings in a whole new audience.”
Liebmann said that meant off-price stores were unlikely to cut into their namesakes’ sales but could mean more competition for department stores targeting more budget-conscious customers, such as J.C. Penney, Kohl’s and Sears.