Is a Department Store Future an Oxymoron? The Tsunami is now!

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\"\"The department store future will be an oxymoron unless the current model and the actual words “department store” are not transformed to become uber-compelling destinations for tomorrow’s consumers. If not, they will be history.

In fact, the future is NOW, which means the transformation has to be made NOW. Time is the enemy. The tsunami is breaking, likely to drown the retailers who haven’t reached higher ground.

To explain the need for “now,” a picture is worth a thousand words. And there are six immutable illustrations charted in this article. I know many of my colleagues and readers believe me to be a hopeless cynic. I prefer to be called a hopeless realist. And please believe me when I say I have not in the past, and am not now, attacking department stores. I respect their leaders and believe these executives to be very intelligent, as I have often written about. Okay, there are a few exceptions.

And as I\’ve said, these retail leaders all saw the enormous tsunami of technology building up and rolling toward them. It just so happens that almost all of them are still on the beach admiring the view as the giant wave is beginning to crash onto them.

So however well they anticipated the tsunami, and however quickly they have been responding, adapting, adopting and investing billions, it has not been fast enough. And it has been too focused solely on technology and perfecting omnichannel. They missed the bigger picture.

There are four reasons why traditional department stores are caving.

Number 1: It’s Not JUST e-Commerce

The biggest and most prescient message here that too many retailers and brands have missed is that their sales, traffic and market share declines are not just being stolen by the double-digit growth rates of e-commerce, led by Amazon (now owning almost half of total online retail sales).

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That’s just the obvious situation threatening the demise of the traditional department store model. In fact, I would argue it is not even the most threatening of the four because it is relatively easier to fix than the other three. Today, all major department stores are well into their own e-commerce models even though they are far from achieving profitable growth against their enormous investment. They are still working on perfecting the promising synergy of the store as both shopping and shipping point, as well as achieving a major lift in sales through their “BOPIS” (buy online, pick up in store) strategy.

But hey! Urgency is the operative word for department stores as Amazon continues to steal share in almost every category. And while nine out of 10 e-tail startups are not making any money and will ultimately disappear, the one out of thousands of “tens” that succeeds, in the aggregate, will also steal share from the department stores. Historically, in the mid-1960s, department store share of market began to be chipped away by the launches of both the retail specialty chain model (Gap, Esprit, etc.), and the big box, category-killer models (Toys R Us; Bed, Bath and Beyond, Best Buy, Walmart, Target, and more).

So yes, once again department stores are under siege, losing traffic, sales, and share of market to another new retail model: e-commerce. There’s also another headache. As retailers race to develop and perfect the omnichannel model, they are still trying to figure out when, and at what percentage of total sales, these e-sales will be online so they can plan how much of their physical space they should close down or shrink. Most retail leaders view it as a crap shoot. But those millennial analytics geniuses are on the case to sort the data a thousand ways from Sunday. The point is, the physical footprint is going to be smaller.

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Number 2: Over-Capacity

The second wave of the tsunami, which is out of the control of any one retailer (horrendous for all of them and an additional threat to their survival) is over-capacity. Put bluntly, my sick-of- hearing-myself mantra is: we are over-stored, over-stuffed and over-websited. And this obsession with more and more just continues to grow. It’s a wave unto itself.

As demand and traffic are falling off, what does a retailer do to sell all that stuff, just to squeeze out a smidgeon of growth? They take the path of least resistance, which is insane price promoting and discounting. This has also led to the proliferation of outlet stores, which are overtaking full-line stores in numbers. Why not? It’s an easier path to short-term growth instead of finding a longer-term, sustainable and differentiated value proposition. So that’s why everybody is doing it. However, while it provides some growth, it also accelerates more price deflation and, over time, devalues the full-line brands. It’s a dance with the devil, swirling around in the tsunami undertow.

Furthermore, this race to the bottom is suicidal in another way, because guess who owns the “bottom?”

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Number 3: Off-Price

Yes, the off-price model owns the bottom, so to speak, namely TJX, Ross Stores, Burlington. And the “bottom” is just a turn of phrase. The off-price model is strategically and structurally unique, beyond just discounted prices. In fact, if department stores opt to compete in this space, in my opinion, they would be well advised to acquire one of the existing brands that have successfully honed the model for decades. To adopt the exact model internally would require an enormous investment in time, capital and people, which would further detract from their more urgent tsunami-escaping strategies.

Number 4: Big Buildings Full of Deflating Value

And if the previous three dynamics are not enough to deal with, the fourth is the worst and most destructive. These big buildings filled with so much stuff falling out of the windows are irrelevant. The emerging youth culture, the next biggest consumer segment, does not want to go to big buildings stuffed with stuff. It’s stale and so not-cool, as they describe it. So, they are going to places that are cool, places where they can be entertained, discover something new, be personally engaged, have fun hanging out with others, and on and on. And while e-commerce may not provide the social experience of a cool “hang out” place, the experience they get online is convenience, value, speed and personalization, exemplified by Amazon at scale, the master of personal and predictive analytics.

Furthermore, the boomer generation is downscaling into retirement, and what disposable income they have is being spent more on travel, leisure, entertainment, health and wellbeing—not stuff. Ironically, the Millennial and Gen Z generations replacing boomers as the former number-one consumer segment are interested in the same experiences that boomers are opting for, but for different reasons. For the next gen, products that are lifestyle-enhancing (as opposed to making a status statement) have real value. For the boomers, many have made their statements and are downsizing. According to an Eventbrite study, 78 percent of Millennials say that they would prefer to spend their money “on a desirable experience or event over buying something desirable.”

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Pictures and Panic

So what is it about all these charts that the old-world retailers and brands don’t get? The concept of the tsunami of the seismic shift represented in these five charts clarifies where retail is today, now…at this moment. Another nightmare metric is that department store sales in the U.S., as a percentage of total retail sales, has declined from 10 percent in the mid-1980s to 2.4 percent in 2011. MESSAGE: get the hell off the beach, and fast!!

Most major retailers and brands did see the tsunami coming and invested billions of dollars in the omnichannel model and new technologies (introduced almost daily) because they had to. They are beginning to understand big data and master how to use it to personalize each consumer’s shopping journey. They’re testing augmented reality, interactive touchscreen devices, virtual fashion mirrors, digital pay, and beacon technologies to connect with shoppers outside and inside the store.

They are tweaking the stores to create a more contemporary, compelling shopping environment. They are bringing in differentiated and exclusive brands and new categories. Some are trying the concession model, leasing space to brands.

So CapEx is going up like a rocket ship, while prices and margins are plummeting at the same pace downward. With traffic leaving these bloated buildings, prices are being driven further downward in the hope that customers will just walk through the door. I describe this as the accelerating vortex that becomes impossible to escape.

This vortex is driving the inevitable industry-wide cost-cutting efforts. Massive store closings, layoffs, budget cuts and every other of a “thousand cuts” to save profitability is rampant. Is all of this working fast enough to save the department store model? Take another look at these charts as the wave breaks over your business. Speed being the operative word.

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Not Enough, Not Fast Enough

Since the tsunami is here and now, in my opinion, the old-world retailers are not doing enough, fast enough. I hate to say it, but incremental evolution is too late. It’s going to take a fundamental revolution to beat the thousands of little speedboats (startup innovators) circling the legacy brands and aggregating into a new retail landscape. Their models were built on sleek, flexible technology powered by innovative retail concepts. Privately funded, they do not have to show a profit. Add to this rapidly growing startup sector, there is the return of the “mom and pops,” independent shops of all kinds that young people are favoring. The department store headache is turning into a migraine.

By the way, I have the same ominous prediction for 80 percent of the malls and shopping centers that are also stuck in the old-world paradigm. They must be repurposed or they will be shuttered. There are some good examples of those that have been transformed or are transforming, into mixed-use community lifestyle centers in Eric Hertz’s article, “The Future Face of Shopping Centers”. They are destinations “where retail takes its place alongside trendy, upscale eateries, sprawling green spaces, compelling entertainment and recreational facilities, and even spiritual hideaways,” as he describes them. He calls it the “neighborhood-ization” of shopping centers.

The department stores must recreate their spaces in the same way to create similar community lifestyle “mini-malls” within their buildings.

Just Do It

In the January edition of The Robin Report, I wrote an article titled “Macy’s, Imagining What Could Be There.” I quoted CEO Terry Lundgren referring to Macy’s “out of the box” strategy to address 50 owned and ground-leased stores and associated real estate and property in malls not owned by major mall owners. His vision is to essentially imagine how that space might be turned into mixed lifestyle villages. As he said, “We’ll look at the land first and imagine what could be there.”

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As Jeff Gennette is now CEO, I would urge him not only to continue that out-of-the-box thinking but also expand upon it to include reimagining all of Macy’s real estate and space in every city and every location. Call it “neighborhood-ization,” localization, communalization, or personalization. The point is that the brand, its persona and its products must match the distinctive lifestyles of the consumers in each of those locales.

I’ve way too often referred to Vittorio Radice’s strategic reimagining of Selfridge’s department store in London when he became its CEO in the early 90s. But I will use the example again because, in my opinion, it is exactly the strategic process that I believe our department store leaders must adopt to successfully transform their models.
Radice basically blew up the department store model. It was a revolution, not an evolution. He called his staff together and said something along the lines, “from this day forward we are not a department store. We are not a store that stores and sells stuff. Selfridge’s is a brand that we are going to recreate into the coolest place in London for young people to want to come to.” Yes, they had to continue to sell stuff until the “coolest destination” was created, but the priority was clearly to imagine and build a cool community for socializing, with theater, events, restaurants and other local artisanal activities and products.

The parallel strategy was to seek out branded merchandise that was compatible with the new, cool Selfridge’s brand, and to invite these brands to lease and operate their own spaces.

This is not meant to be a precise cookie-cutter template for all department stores. But the strategic thinking, the re-imagining in a revolutionary way, and the process should definitely be a playbook for transformation.

By the way, as I’ve said before, we know from research that most consumers, even among millennials, still prefer shopping in the physical world. However, these customers love more intimate, personalized, educational, exclusive-feeling and experiential places to go. And when these consumers have a co-created experience where they proactively participate with the host of the experience—a sales associate (a human being)—it drives customer addiction and the desire to keep coming back more often, to spend more time and money.

So again, it is not just about losing traffic to the internet that’s taking traditional retailers down, it’s also the lack of compelling experiences.

Imagine

One more time, please. Department stores have an advantage with their physical real estate which they can use to create magical, high-tech, high-touch experiences. This is a huge competitive advantage and a big head start over Amazon and all the little Amazon wannabes who know they must eventually open physical stores.

At the same time, the equally huge disadvantage is department stores’ enormous legacy structures, organizations, supply chains, etc. that must be removed and replaced, while at the same time keeping the old model afloat to fund the replacement. The human and financial capital, as well as the short amount of time to achieve the transformation, has to be so daunting as to give any CEO big doubts about being able to pull it off.

But this brings us back full circle to my humble opinion. I don’t see a future for department stores unless they declare a revolution with a timeline of NOW!

The wave is coming.

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