Department stores used to be a one-stop shop for consumers to get all the goods they needed in one place. Now, with the proliferation of online shopping, home deliveries and digital-native retailers, consumers have more choices and purchasing options than ever before…
Prior to the 1990s, department stores used to be the dominant channel in the west for fashion and lifestyle
products retail. The turning point for department stores came at the dawn of the 21st century. In 1999, sales of department store in United States reached their peak at $96.7 billion and have been on the decline ever since. With the dawn of internet and later supercharged by the mobile phones, online retailers like Amazon, eBay and others entered the retail landscape and deeply changed the consumer buying behaviour as well as the channel dynamics. As time progressed, the foundations on which department stores were built witnessed tectonic shifts, leading to the fall of some of the largest and marquee names, during the peak period.
Department stores used to be the one-stop shop for consumers to get all the goods they needed in one place. Now, with the proliferation of online shopping, home deliveries and digital-native retailers, consumers have more choices and purchasing options than ever before. The onslaught of internet and creation of a digitally connected world changed the consumer’s purchase decision journey and the idea of “shopping” became different from the act of “buying”. With the online channel emerging, shopping in department stores has become a choice and not a necessity and the fall of the department stores is testimony to the fact that consumer preference is swinging away from them. The ultimate demise of some of the large department stores in the west is only a matter of time, but department stores in newer and emerging markets like India can take their learning and reinvent themselves, by not falling in the same trap as some of their western counterparts did.
What Went Wrong?
Traditionally, department stores have been built around the idea of experience, with key pillars being stimulation, selection, satisfaction, contact and consumer connect. Over the years, while department stores were unable to move beyond or raise the bar on these parameters, new age digital entities have successfully penetrated into the forte of department stores, by faring quite well on the above parameters and thus severely challenging the core proposition of department stores.
As a result of this, old school retail has been hit very hard lately. For instance, revenues of department store in United States have declined a whopping 32.4 percent, dropping from $76.9 billion to $52 billion from FY 2007 to FY 2018 respectively, even as the market grew slowly but steadily. Earnings of some popular department stores in United States like Macy’s, J.C Penny and Sears, all came in negative, while other general merchandisers, including warehouse clubs and superstores, rose 53.1 percent and electronic shopping increased 167 percent in the same period.
Sears Holdings filed for Chapter 11 bankruptcy in October, 2018. A series of store closures and deals in frantic attempts to stay afloat failed to save Sears, which listed $6.9 billion in assets and $11.3 billion in liabilities at the time of the ling. In the last one-year period, post-bankruptcy, store count has come down from 700 to under 450 and thousands of jobs have been cut.
Macy’s, one of the most iconic retailers, has also been struggling for the past many years. After initiating a turnaround plan that entailed closing down about 100 stores nationwide, changing the business
model and offering massive discounts of 40-50 percent, that’s dramatically different than how Macy’s operated 20 years ago, things are not looking very positive.
Even other established markets for department stores like United Kingdom are seeing this trend of declining department store revenues and their going bankrupt.
House of Frasers went under administration in August 2018, before being purchased by Mike Ashley’s Sports Direct, within a short time frame.
Debenhams has been recently taken over by its lenders after the department store fell into administration, wiping out shareholder value and paving the way for store closures that will put thousands of jobs at risk. For years, Debenhams struggled to adapt to the consumer migration to online channel while it tried improving its operating efficiencies. The company’s large stores were on longterm leases, making it difficult to resize, reduce rents or to close stores and move to better locations. Finally, after spending millions of pounds on servicing its heavy debts, the company went under administration.
The John Lewis Partnership, which operates John Lewis stores and Waitrose, has also been under pressure. The company announced a 45 percent drop in annual profit for 2018. Further, it made a pre-tax loss of £25.9m in the first six months to 27 July 2019 after making a profit of £800,000 in the same period a year before.
Inability to adapt to a nimbler online channel led to the downfall of these iconic department stores. As consumers migrated to the online channel, brands that traditionally relied on department stores to promote their goods, also increasingly went directly to shoppers, by selling online or using social media to promote their own stores.
According to consumers, department stores have no point of differentiation anymore and their utility as a means to acquire product has gone down with the rise of other channels. Baby Boomers, who account for a third of the total population in the west, are more convenience driven and this has been their main loyalty driver. Many reputed department stores have failed to acknowledge this set of customers and tried focussing on millennials only. However, without taking into much consideration to improve store appearance, experience and creating a smoother shopping journey, their strategy has failed here as well.
Today, department store retailing has become a “people” and not a “product” business. What department stores sell is much less important than how they sell it. But most department stores have been grotesquely slow in recognizing and adapting to this shift. Therefore, the overall concept of department stores has lost its sheen and share in the market.
The Outliers
There are plenty of department stores like Neiman Marcus Group (Neiman Marcus & Bergdorf Goodman),
Harvey Nichols, Selfridges etc. that haven’t been left behind the way others have, but the market has also
not been very easy for them. While looking at their performance over the years it can be assumed that super premium to luxury department stores have been more successful as compared to the more mass retailers. A key part of their ability to grow in a difficult market is their ability to adapt to the changing market conditions and recalibrate their offering and differentiation. Having a smaller store footprint has made this a little easier for the super premium to luxury department stores. Selfridges for instance, stands apart for its strong performance amidst fierce competition from online players and a drop in local consumer confidence. The way Selfrigdes has been able to combine product and experience is truly amazing. Selfridges’ Body Studio is a good example of this. The concept wraps together lingerie, activewear, loungewear, swimwear and beachwear in a way that is more aligned with how the modern women contemplate about their bodies than a typical lingerie store. Selfridges created a studio with a health café, a hair salon, yoga and a whole conversation about women’s body, rather than just creating a place to buy good lingerie. And that makes all the difference.
Selfridges draws customers through various entertainments including a Christmas cabaret, confetti cannons, visits from Father Christmas and choirs. Selfridges also offers plenty of novel services like FaceGym, which delivers 30-minute “non-invasive facial workouts” that lift and sculpt the face.
One of the most important elements of Selfridges’ strategy is its focus on experience through its food and
beverage section. Having a drink or meal at any one of its bars and restaurants lengthens the time customers spend in its stores, improves the connect with the customers and their propensity to spend at Selfridges.
Hence, not all is lost and while there is an environment of gloom and doom in the market, department stores that have been able to reinvent themselves have been able to defy the market conditions and grow.
Even Department Stores In India Are Not Immune To These Trends
The Indian story for department stores has also been bumpier than smooth. However, owing to the stage of retail growth and market maturity that we are in, the channel continues to grow, even though at a slower pace than the overall organized retail growth. Stagnant same store sales growth, high rentals and other operating costs, emerging competitive threat from online players and increasing EBO footprint have been some of the key problems affecting this segment. The result of which, growth for some key department stores like Shoppers Stop, Westside, Pantaloon etc. at best matches the growth of overall organised retail in India, while it could be much higher given that the format was an early favorite. Where these department stores have CAGR of 9.7 percent, 16 percent and 17 percent respectively between FY 2013-FY 2018, the overall organised retail in India has been growing with a CAGR of ~20 percent in the same period.
Many of these department stores have also tried their hands on online business and other digital tools and wish to change with the times. However, their massive infrastructure and in many cases debt, have hampered them from making the kind of long-term decisions and aggressive investments in forward-looking innovations that are needed to achieve success today and tomorrow.
While online retail has been a key catalyst in this constrained growth, it is not the only factor that is responsible. It is also the changing shopper behaviour, especially in metros or tier 1 cities. Over the last decade, consumers have become more mature, with brand and product choices becoming more de ned. Having tried out different brands, these customers now have a preferred set of brands, which they are
looking to buy from and are aware of the fits and sizes as well. They do not have any desire to browse through hundreds of brands and try on multiple products, as offered by the department stores. Department
stores thus have to fight it out with the rampantly proliferating EBO’s and the super convenient online channel to get their share of sales, and in absence of any significant point of differentiation, this is a tall
order.
Another reason why department stores (and many distributions driven brands) are struggling for their survival is that they are now in direct competition with youth focussed single brand retailers like Zara, H&M,
M&S, Max etc. many of whom are extremely aggressive in terms of their retail footprint and sales growth. With their wide assortment, these retailers have challenged the need for large multi-brand department
stores.
Lastly, because of the high cost of retail space, department stores are continuously juggling their brand portfolio and product assortment to maximize efficiencies. In this endeavour, many department stores have
really become more real estate driven than product or merchandising driven. Thereby sometimes even the core offering of brand and merchandise assortment is compromised. On the other hand, for online
marketplaces retail space does not matter. Thus, marketplaces tend to have much wider and deeper assortment of brands and products as compared to department stores. Based on AI these marketplaces can change the assortment presented to each customer, so that decision making is assisted.
Thus, as in other countries, miniscule enhancement in customer experience and engagement along with the other factors listed above has culminated to a point where the differentiation offered by the department stores in India is much diluted, if not non-existent.
The Way Forward
Going forward, if department stores wish to remain relevant to the consumers and grow, they are required to transition to become an experience and service driven format. Department stores need to rethink and reinvent on the following lines:
• Stimulation: It is imperative to find the right balance between the entertainment and shopping, along with enabling customers to purchase products and services. Department stores will have to amalgamate unique experiences and entertainment into the act of shopping, thereby creating a seamless and curated customer journey. Creating a fun filled shopping experience will differentiate them from online offerings and pull customers to spend time in the store.
• Selection: Opening stores in right markets and locations, understanding consumer demand patterns and merchandising as per the same will be an extremely important factor that department stores need to focus on in order to stay relevant.
Repositioning themselves as super premium with luxury, and focusing on metros and tier 1 cities could be a good strategy for a few. Demand for these products is increasing but presence of EBO’s for super premium and luxury brands is still limited. Department stores can cater to this new set of customers wanting to buy super premium and luxury product and create a differentiation for themselves.
For other department stores selling affordable to premium brands, a strategic focus on tier 2,3 & 4 markets will make more sense, as the EBO footprint is still low in these towns and there is a good demand for branded fashion and lifestyle products. Department stores will also need to work with the brands to create
a curated line, relevant for their core consumers, instead of letting the brands do their concession merchandising independently. Department Stores will also have to blend brand’s concessions with their own product selections, regularly featuring new, exciting and unexpected brands. This will create a sense of discovery, building on their stimulation quotient as well and will create product differentiation.
Satisfaction: This will include enhancement of in-store personalized services, while offering compelling and complementary services such as curation, product modifications, customizations etc. Stores might even embrace on-account sales for regular customers or home delivery and cash on delivery options, like what online retailers offer.
Department stores also need to use customer data more strategically. Artificial intelligence has the ability to help store operators understand their customers’ buying behaviour in more depth. By analysing data from customers’ previous and repeat purchases and online transactions, store operators can create hyper-personalized buying experiences in store. Armed with this knowledge, shop assistants could for example provide customers with tailored buying suggestions, creating a VIP experience for them. Digital signage, smartphone apps to help customers navigate and quickly find solutions to their queries, quick and easy checkouts are some of the other ways in which retailers can provide quick and digitally led experience.
Creating a truly omni channel experience will also be a great leap in creating customer satisfaction.
•Contact: Stores will need to offer services beyond touch and feel. This could include personal fashion curators and stylists, virtual fit rooms so that customers can try on more products etc.
•Connect: Department stores will have to think beyond their four walls, contemplating the neighbourhoods around their outlets and creating connections with local communities. They will have to engage with consumers in a culturally relevant conversation and recreate the bond with the consumers that have been lost.
In short, modern department store will have to again become destinations for consumers – inviting, entertaining, socio culturally relevant and having a personal connect. The pride in walking out with a shopping bag and merchandise purchased has to be recreated for consumers to return to department stores.
