Retailers   //   June 25, 2019

Despite digital investments, department stores are at a disadvantage

For the past two years, Kohl’s had managed to shake off the perception that the department store was dying. Same-store sales had risen for six straight quarters. It integrated a new and improved loyalty program into its mobile app, making price and savings clearer to customers. And rather than cede defeat to Amazon, Kohl’s decided to partner with the e-commerce giant, allowing customers to return some products purchased through Amazon at a select number of Kohl’s stores. The partnership had proven successful at bringing in customers who are younger than the typical Kohl’s customer, CEO Michelle Gass said during the company’s last earnings call, and the company announced in April that it would roll out the Amazon returns service to all of its stores by July.

But Kohl’s path to reinvention hit a bump during its first-quarter earnings in May, when it reported same-store sales had dropped 3.4%. Kohl’s blamed the slump on poor sales in home decor, underperforming promotional events and one of the most-oft cited culprits for poor retail performance, weather.

“The year has started off slower than we’d like,” CEO Michelle Gass said during an earnings call with investors. “It’s a highly competitive market and we’ve seen more aggressive pricing and promotions in categories like home.”

Kohl’s wasn’t alone. Nordstrom reported a net sales drop of 3.5% during its first-quarter earnings, after it reported a sales increase of 5.8% during the same period last year. Nordstrom attributed its sales decline to its decision to cut back the number of direct mailers it sent to loyalty program members, reduced digital marketing spend, and soft sales in its women’s apparel and beauty categories. One of the best performances from a department store came from Macy’s — but its same-store sales rose just 0.6%.

One bad quarter isn’t going to sink any of these retailers overnight, but it adds to the list of challenges they have to overcome. The department store sector has been under siege for a while, as evidenced by Sears filing for bankruptcy in October, after years of decline. But chains like Nordstrom, Kohl’s and Macy’s have, by all accounts, taken steps necessary to prove that it wasn’t too late for them to evolve.

They expanded the availability of services, like buy online, pick up in store, continually ensured that they had exclusive product in-stores through collaborations with designers or digitally native brands, and found unique ways to downsize. Nordstrom, Kohl’s and Macy’s are doing a lot of “new retail” right, but retooling the department store for modern customers involves more than just updates to store models, influencer collaborations or e-commerce initiatives — these stores are competing in a new retail landscape that has called the value proposition of a department store into question.

The first half of 2019 has underscored just how tough it is for department stores to consistently grow sales. Department stores’ biggest competitors continue to be Amazon and its influences, as well as off-price stores. TJX Companies, the parent brand of TJMaxx and Marshalls, reported a net sales increase of 7% last quarter. Meanwhile, Target and Walmart have surpassed the department stores in building out a delivery network that can support some next-day delivery.

“Just the fact that you can buy anything almost anywhere takes away from the original proposition of your department store: that it was a one-stop-shop for many different departments,” Tiffany Hogan, retail analyst at Kantar Consulting said.

The new department store
Department store’s efforts around reinvention have fallen into two main buckets: Convenience and curation.

In stores and online, modernizing operations. That’s included downsizing stores: Nordstrom started piloting a new services-only store called Nordstrom Local, while Macy’s has been opening smaller-format stores as part of its Growth 50 plan. They’re also bringing services that were previously only found in-store, like styling, online, and are looking at how they can use mobile and e-commerce to make the department store shopping experience easier. For example, Macy’s CEO Jeff Gennette said during the company’s last earnings call that Macy’s is looking at redesigning its mobile app to make it a tool that will help customers better navigate the Macy’s store, by alerting them to where certain products that are new or on-sale are located.

The connective tissue linking all of these initiatives is convenience. Department stores want to convince the modern shopper — who are not as keen as they used to be on shopping at huge stores that are difficult to navigate — that they’re still easy places to shop.

More and more often we recognize that time is a valuable commodity,” Shea Jensen, Nordstrom’s vp of customer experiences, previously told Modern Retail. “Our ambition is really to be available whenever, wherever and however customers want to shop.”

Competing on product
But department stores have to be both convenient and compelling places to shop. So, these retailers have sought out more exclusive products. For Nordstrom, that has meant clinching deals with DTC brands like Bonobos, Everlane, Reformation and Allbirds, and at times being willing to bend to individual brands’ needs. Meanwhile, Kohl’s has channeled its energy into collaborations with designers to launch exclusive collections at Kohl’s, particularly ones like Jason Wu and Elizabeth & James, which are popular among the younger customers they are trying to court. And Macy’s is relying on its acquisition of retail concept shop Story to make its stores more of a destination for new product discovery. Right now, Macy’s has 36 Story shops that live within its own stores that will change themes every few months. The hope is that Story will continue to draw repeat customers back, who want to see what’s new.

But, many of these initiatives are still too incremental to be considered a saving grace for these retailers.

“There are a lot of retailers that I think are basically delivering a slightly better version of mediocre — that in and of itself doesn’t give you significantly different results,” said Steve Dennis, the CEO of retail consultancy SageBerry and a former senior vice president at Neiman Marcus. Dennis added that he thinks recent initiatives like Macy’s acquisition of Story and Kohl’s Amazon returns partnerships are “good, but not game changers.”

Changing pains
As department stores make investments in new digital strategies, they risk misstepping.

In September, Nordstrom announced that it was rolling out a new loyalty program that would give customers more access to redeem points earned through the program in exchange for personalized services, like scheduling an at-home appointment with one of the company’s stylists. It’s a step that other retailers like Foot Locker and Ulta Beauty have taken, as they seek to not rely so heavily on discounts.

But, Nordstrom said during its most recent earnings call in May that its sales were hurt when it cut back on the number of direct mailers it sent to loyalty program members.

“With loyalty and marketing, our missteps were not motivated by cutting expenses,” Co-President Erik Nordstrom said during the earnings call. He said that the new experiences Nordstrom had added to the loyalty program were “still resonating well with the customers.” But, he said that Nordstrom had failed to account for how many of its loyalty program members still relied on direct mailers to be notified about new sales or promotions.

To regain their footing for the remainder of the year, Macy’s, Kohl’s and Nordstrom are accelerating the roll-out of some of their more forward-thinking partnerships. Gennette said that Macy’s will be opening 100 more of its Growth 50 stores this year, which he said are “outperforming” the rest of Macy’s brick-and-mortar fleet, as well as 50 more of its off-price Backstage stores. The Amazon returns service, which Gass called “the single most important initiative of the year” for Kohl’s, will roll out during the crucial back-to-school season. Meanwhile, Nordstrom continues to expand Nordstrom Local to new areas like New York City. It’s also adding those services to all of its stores in Los Angeles, its initial test market for Nordstrom Local.

But, all of these efforts may not be enough to grow sales in the face of changing consumer behavior. If consumers continue to do more of their shopping at off-price chains, specialty stores or Amazon, there’s only so much of that business that department stores will be able to grab. And, there’s less sales growth to be had from new store openings, given that many of them are coming in the form of smaller-format or off-price chains.

“To me, the only way that the last [department store] standing will have decent numbers will be [if] just enough of the competition has gone away that they’re not under so much margin pressure,” Dennis said.

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