LETTERS TO KAREN: THE DEPARTMENT STORE CHALLENGE
Are department stores finished, along with the iconic brands they sell?
Traditional department stores are struggling, more so than other retail outlets. Despite declining traffic in the malls, especially B and C malls, some mall stores (Victoria’s Secret, American Eagle) did well this holiday. The hope was that on-line sales would save department stores but combined figures proved a disappointment. Which begs the question: Are department stores finished, along with the iconic brands they feature? Many believe that labels like Polo, Tommy Hilfiger, Tommy Bahama, Nautica, Izod, Calvin Klein, Michael Kors, Coach, etc are yesterday’s news. Millennial customers want their own labels: Vineyard Vines, Under Armour, Lululemon, even Nike. But not even younger brands could save the department stores that featured them this season..
I contend the problem is RISK AVERSION. Roughly 40-50 percent of department store business is basic private label, with built-in margins so huge that even major problems work out okay. So while the power vendors (Ralph Lauren, VF, Michael Kors, Coach, PVH, etc), mostly public companies, complain about high inventory levels in department stores, they’re the ones that stuff these stores with product. Department stores are more than happy to go along since they’re protected by agreements guaranteeing margins and inventory levels. They are avoiding risks.
Unfortunately, this arrangement comes at a cost: the transfer of merchant responsibilities to these vendors. Polo’s Denim and Supply has never been particularly successful but Macy’s has devoted huge space and inventory to fulfill Ralph’s strategic plan. This holiday, Polo was priced at $59.99 and $69.99, hardly luxury tickets. Macy’s even carries American Living, JCPenney’s former fiasco. Izod is in moderate department stores as well as in mid-tier and budget stores. The vendor pays, so what’s the problem?
While transferring merchandising responsibility to the vendors results in little short-term downside for department stores, there is a cost: selling floors that are boring and less relevant. The labels and looks desired by younger shoppers are not the power brands; these labels cannot protect the department stores so they are simply not carried or not maximized, which is why department store selling floors look outdated. A related problem: department stores are too dependent on uber-systems that dramatically slow the process. Since it takes a big company to do business with a big department store, the operations side often overtakes the merchandising.
So while department stores watch their traffic and sales decline, fast fashion stores like H&M, Forever 21, and Zara continue to gain share. Off-price is also stealing some of their business: TJX, Ross Stores, Burlington and Stein-Mart are incredibly successful, as are the off-price divisions of Saks, Neiman’s and Nordstrom. Macy’s, Kohl’s and even Lord &Taylor are jumping into the pool, but it remains to be seen how successful they will be.
So are department stores doomed to be dinosaurs? I think not. The survivors are chameleons, adapting to the times, enhancing the power of the store nameplate. But they must take back the merchant responsibility, accepting risk as a challenge, not a plague. They must seek out exciting new brands, not just the ones that cover their margins. The alternative is to end up a Chrysler K car.
Fred Rosenfeld is an industry consultant. He can be reached at frosenfeld@comcast.net.
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