ARCHIVES :: MAY 2002 :: COVER STORY

Are Department
Stores Dying?

By JEFFREY A. TRACHTENGERG
And ANN ZIMMERMAN
Staff Reporters of The Wall Street Journal

In past decades, department stores attracted consumers by offering them atmosphere, attentive service and a wide variety of merchandise under one roof. And they still account for much of retailing’s romance—its parades and pageants, its Santa Lands and window dressing. Department stores were where ambitious retail executives wanted to work, and where fashion-minded customers wanted to shop.

But for a growing number of consumers, department stores aren’t romantic or convenient anymore. They are time-consuming and difficult—difficult to get to, difficult to navigate, difficult to get help in and difficult to get out of. And, for all that inconvenience, they typically charge higher prices than Target or Wal-Mart—discounters that are increasingly challenging them in selection and convenience—or even Kohl’s.

“Department stores are just overwhelming and dull,” says Mary Jane Van de Castle, a 42-year-old beauty-salon owner in Shawnee Mission, Kan. “I like to go to a store where I’m interested in most of the merchandise.”

That explains why department stores have fallen on such hard times. As a group, they have been losing market share for years, and those losses appear to be accelerating. Sales at established department-store outlets are declining, even as discount retailers rack up gains. Traditional chains such as J.C. Penney and Dillard’s are planning few, if any, new stores, while their nemesis, Kohl’s, a hybrid discount department-store company, plans to open 70 stores this year alone.

Department-store executives know they need to turn those trends around, lest the industry go the way of five-and-dime stores. Largely unable to devise new ways of boosting sales, much of the industry remains fixated on a years-old cost-cutting strategy: consolidation. Recently, executives of Federated Stores and May Co. talked about a possible merger, though the talks didn’t go anywhere.

The industry’s past reliance on consolidation, however, has contributed to many of its current woes. The mergers transformed a legion of regional merchants, all focused on their specific customers, into a handful of nearly identical national department-store chains focused on pleasing shareholders. In the quest for fatter profits, department stores cut sales staff, allowed stores to deteriorate and introduced goods designed to appeal to the masses.

“They cut what made them attractive,” says Arnold Aronson, a retail consultant. “Great assortment, presentation, better-than-average service, the exclusivity they tried to achieve—all has declined over the past decade.”

Hard Times

 Department stores, which now account for 10.9% of the nation’s retail sales, still have some distinct advantages over their discount- and specialty-store rivals. Most notably, they offer designer brands, such as Polo and Tommy Hilfiger, found almost nowhere else (Related article on Page 10).

And some of their present difficulties are attributable to the economic slowdown. Excluding automobiles, overall retail sales in 2001 increased only 2.4% from a year earlier to $855.6 billion—barely keeping pace with inflation.

But even amid the recession, other types of retailers are thriving. Specialty retailers Chico’s FAS and Bed, Bath & Beyond had 2001 same-store sales increases of 17.1% and 4.5%, respectively. (Same-store sales exclude stores that have been open less than a year.) At Target and Kohl’s, same-store sales rose a respective 4.1% and 6.8% last year.

Much of those gains have come at the expense of department stores, as discounters and specialty retailers begin to offer shoppers more alternatives than ever. Department stores’ share of the apparel market has fallen to 40% from 70% two decades ago, says market researcher Chris Ohlinger. Over the same period, their share has fallen to about 5% of the home-electronics market from 25%, and to less than 5% of the furniture market from 40%.

Turnaround Strategies

 Can the traditional department store reverse its decline? Each of the big chains thinks so, and each also has its own strategy. To combat discounters, Nordstrom is trimming some prices. For example, it recently lowered its price on a pair of men’s khaki pants to $39.50 from $47.50 and found that the decision boosted unit volume by 43%. Neiman Marcus, by contrast, is holding the line on prices. “Luxury is not dead,” says Burt Tansky, Neiman’s chief executive officer. Saks, meanwhile, says it is cutting prices mainly on brands that discounters also carry, such as Levi’s. Otherwise, it is moving to re-emphasize both private-label and designer brands not found at discounters.

May Co., whose stable includes Lord & Taylor and several other regional chains, is aiming its growth strategy specifically at brides as a way of attracting younger shoppers. Federated, which owns Macy’s and Bloomingdale’s, plans to exploit its strong suit—selling clothing for young women—by jazzing up its young women’s departments with music and placing the young men’s department nearby, to create some buzz between the sexes. Federated also plans to move its young women’s departments to the front of its stores, where possible. “One thing we’ve learned about younger customers is that they don’t want to walk past their mother’s hosiery department,” says Terry Lundgren, Federated’s president.

Indeed, a serious challenge for department stores is that fewer and fewer customers want to walk past departments irrelevant to their mission. That’s why shoppers are visiting specialty stores that offer exactly what they want—toys, electronics, teen girls’ wear and so on. It also is why freestanding stores are displacing malls as the hottest retail real estate. Shoppers want to drive up, run in and run out. Within malls, department stores—long courted as “anchor tenants”—now receive less traffic than some specialty stores.

“I don’t shop at department stores, because I don’t do malls. I don’t have the time,” says Robin Kessler, a North Dallas working mother with three active teenagers. “I like stores in strip centers, because I just want to drive up to a store, get what I need and get the hell out.”

Considering that department stores began as one-stop shopping centers in the pre-automotive era, it is ironic that inconvenience is the largest factor in their decline. But early in their history, department stores evolved into social and entertainment centers for women with money and time to spare, who would drift from floor to floor, pausing for lunch in the store restaurant. In fact, department stores typically offered minimal signage, hoping that lost shoppers would stumble upon items they hadn’t intended to buy. But today, few shoppers have any patience for getting lost.

The Meaning of Service

 Some department stores are trying to address these problems. Saks last year tested central cash registers in 100 stores, and the experiment worked so well that it is replicating it across all of its 243 traditional department stores. A similar strategy is under way at a 73-store chain called Bon-Ton. “The customer wants to come in, find what she wants, and get out,” says Mary Kerr, spokeswoman. “That’s the meaning of customer service these days.”

Few chains are moving to redefine themselves more aggressively than Sears, once seen as the quintessential department store. After an ultimately ill-fated emphasis on fashion, Sears has decided to exploit its merchandising strengths, particularly its store-brand hard goods, such as Craftsman tools and Kenmore appliances. Sears also is introducing centralized checkout counters and simplified floor plans designed to make merchandise more visible from a distance.