What do department stores do now?

2020/04/01 Innoverview Read

Every department store in America, from the low end to the high, has tried some way to drag the retail concept into the 21st century. It's a monumental task, considering the model was born in the 1800s, and enjoyed its last heyday in the 1950s. The effort has had mixed results. Now COVID-19 has introduced new urgency, and possibly new goals.

J.C. Penney partnered with Sephora, and later added, then dumped, appliance sales. Macy's and Nordstrom have each invested in retail's cutting edge, with varying degrees of success. Nordstrom and Neiman Marcus both saw potential in New York City, the turf of Saks Fifth Avenue, whose flagship has had a multi-million dollar renovation with a gleaming new escalator. Lord & Taylor agreed to ownership by an apparel rental company. Kohl's decided to take Amazon's returns to get new customers through the door. Several have embarked on turnarounds and even rebooted turnarounds (sometimes multiple times).

Little of that has stuck. Department stores in recent years have consistently lost customers and sales to off-price retailers like TJX and mass merchants like Target. 

Then came COVID-19, a pandemic that has swept the globe, forcing people apart and out of the public sphere. By and large, only stores selling essential goods remain open, as all elements of society do their part to flatten the trajectory of the disease.

Dillard's effort to keep its doors unlocked aside, the current environment is no place for department stores.

The 'worst positioned' in retail

It's been a blow. With physical locations contributing zero sales and e-commerce too feeble to make up for it, Nordstrom, Macy's, J.C. Penney and Kohl's have all taken desperate measures, pulling financial levers like draw-downs of their credit revolvers, hitting the brakes on growth plans, furloughing most of their workforces and even potentially skipping on rent. Neiman Marcus and Southern department store Belk have joined the others in furloughing workers and temporarily cutting pay.

It's not clear how much any of that will help. In comments emailed Monday, Credit Suisse analysts deemed department stores the "worst positioned" in retail, "due to high debt levels, and low mixes of discretionary costs to cut (most have already had several rounds of cost cuts)." Even their relatively low rents in many areas will work against them now, because with rent at only about 1.5% of sales, any relief won't make much of a dent, those analysts said.

"They brought it to themselves ... They can't blame either the economy or the virus for it."

Thomai Serdari

Professor, New York University's Stern School of Business

But the main problem for the sector is that there wasn't much of a place for department stores before COVID-19. As devastating as it has been to retail as a whole and this segment specifically, the outbreak is only partly to blame for department stores' current woes or for the predicament that awaits them once it subsides, analysts say. Most of these chains, for example, have been running too many locations, without regard for local culture or the basic merchandising practices that makes any store a pleasant place to be, according to Thomai Serdari, a professor of luxury marketing and branding at New York University's Stern School of Business.

"They brought it to themselves," she told Retail Dive in an interview. "They can't blame either the economy or the virus for it."

The likely scenario

Few retailers will come out of this unprecedented moment unscathed, but department stores are at a point of no return. None can go back to business as usual. Some may not come back at all.

Some players potentially face declines of 30% to 50% or even more, "for many months if not a year or more," with some of that gone for good, according to retail analyst Nick Egelanian, president of retail real estate firm SiteWorks. That makes their current cash crunch, in some ways, the least of their problems, and trimming their fleets a top concern. "Look for all department stores to use this virus as a catalyst to close, right size and/or reposition (with retention agreements with landlords becoming even more prevalent)," he told Retail Dive in an email. "This includes everything from JC Penney to Saks Fifth Avenue."

"Look for all department stores to use this virus as a catalyst to close, right size and/or reposition."

Nick Egelanian

President, SiteWorks

Saks Fifth Avenue's flagship in particular, in the post-COVID era, will face what Serdari called "an added, unwritten responsibility, which is what it means to define New York City retail on Fifth Avenue, luxury stores, across from Rockefeller Center. Even if times are tough for that parent company [HBC], that's worth exploring."

There's little room for exploration at J.C. Penney, however; the experts interviewed for this article all predict doom for the struggling retailer. "I can’t see J.C. Penney being in business 18 months from now — that just seems implausible," retail consultant Sanford Stein, author of "Retail Schmetail," told Retail Dive in an interview.

Egelanian predicts at least a major debt restructuring there, but said that "its creditors and shareholders will have to decide whether to throw good money after bad to keep it operating, knowing the debt gets closer to maturity every day."

Stein sees Kohl's being acquired, possibly by Amazon itself. Nordstrom, meanwhile, our experts agreed, is a likely survivor, but will have to close stores. And Stein believes the Nordstrom family will yet again attempt to take it private. "Nordstrom is going to have to do some recalibrating, too, but they have always stayed true to themselves," he said. "Their formula of quality and service is one of the few in that segment that is still viable. But to the extent that luxury retail survives, we won't know what that looks like for three to 12 months."

And then there's Macy's

Although its recently announced "Polaris" transformation is now on ice, Macy's likely knows it won't escape major change in the post-COVID-19 era. But the initiatives described in Polaris may no longer cut it.

The company, which expanded exponentially early this century by gobbling up local and regional department store chains nationwide, is destined to shed as many as 500 stores, far more than its current plans, according to Egelanian. Or, as Serdari sees it, "folding up in locations where inventory just sits and collects dust for the season." Wherever it does remain, Macy's must return to some of the idiosyncrasies of those original locales, she said.

"No more capitalizing on scale in inventory. Do original marketing and be more authentic for each of the markets that you want to be in," she said. "Each region has a different culture — going to the prom in the South and going to prom in New York City are different things. Great scale doesn’t work. For Macy's, it may be a blessing in disguise, to finally understand that their business model is their problem. The sign of a healthy business is how you anticipate change in culture and therefore the need to change your business model."

"This is the time to look internally, for these companies to really take a look at who they are, what they stand for — and does it have any correlation to what we’re going to care about after this."

Sanford Stein

Retail Consultant and Author of "Retail Schmetail"

The question, as the closures forced by the coronavirus outbreak take their toll, is whether that comes too late, according to Stein, who said that should have been undertaken a decade ago. Morever, Macy's go-to customer bait, promotions, may lose some of their draw, despite the financial pressures looming for many consumers, he warned.

"This is the time to look internally, for these companies to really take a look at who they are, what they stand for — and does it have any correlation to what we’re going to care about after this," he said. "The whole aspect of what a retailer means is going to become far more important than it ever was before. Price will always be a factor at some level, but value is going to mean so much more than price going forward. Things that have more meaning to people, things like how these retailers treated their people, are going to ring true."

(Source: Retail Dive https://www.retaildive.com/news/what-do-department-stores-do-now/575227/