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September 13, 2024
Are Department Stores Becoming Obsolete in the US?
The department store has been struggling to survive in the aftermath of its once-dominant heyday.
Many developments have been clueing to what might eventually signal the end. Nordstrom has recently decided to once again become privately owned, while Saks Fifth Avenue acquired Neiman Marcus. However, as reported by Glossy, Saks is allegedly “far behind on payment to many of its vendors.” Additionally, in February, Macy’s announced plans to close at least 150 stores by 2026.
Macy’s shared mostly disappointing financial results for the second quarter of 2024, revealing a decline in net sales and comparable sales despite achieving positive earnings per share (EPS) and gross margin performance. The retailer reported a 3.8% drop in net sales, totaling $4.9 billion, and a 4% decrease in comparable sales on an owned basis. These declines reflect ongoing struggles within the consumer market and a significant challenge to Macy’s profitability.
The company’s net sales fell across several segments, with Macy’s nameplate experiencing a 4.4% decline in net sales and a 4.5% drop in comparable sales. Bloomingdale’s and Bluemercury also faced setbacks, with Bloomingdale’s sales decreasing by 0.2% and comparable sales down by 1.1%. Although the gross margin rate improved to 40.5% due to lower discounting and cost control measures, these gains were not enough to counterbalance the overall revenue losses.
Looking ahead, Macy’s has revised its annual guidance downward, reflecting a more cautious outlook in light of a tougher consumer environment and heightened promotional activity. The updated forecast predicts a decrease in net sales to between $22.1 billion and $22.4 billion, down from the previous range of $22.3 billion to $22.9 billion.
As for other department stores, Von Maur Department Store has been recognized as America’s Best Department Store for the third year in a row by Newsweek. The accolade follows an independent survey conducted with over 7,000 U.S. shoppers, assessing retailers on criteria such as product quality, service, and store layout. Von Maur was ranked first in the department store category and placed 10th overall among the top 200 retailers.
But what does this mean for the department store sector if the winning company is not a household name, with many consumers not even aware of its existence? Von Maur currently operates 37 stores across 15 states and plans to open new locations in Pennsylvania and North Dakota. According to Chain Store Age, the retailer was founded in 1872, and it’s “known for its superior customer service, including an interest-free charge card, flexible return policy, free gift wrapping and shipping services.”
Other department stores that made Newsweek’s list included Bloomingdale’s, Boscov’s, Nordstrom, and Saks Fifth Avenue.
Compared to the struggles that many department stores are facing, off-price retailers are growing and thriving, even though their store layouts are not always as expansive or grand as a traditional department store — they make up for it with variety and discounted products.
According to Burlington’s recent financial report, total sales grew by 13% in the second quarter of fiscal 2024, reaching $2.461 billion, while comparable store sales rose by 5% compared to the same period in fiscal 2023.
Ross’ financial report was also positive, with a net income of $527 million, up 15.4% year-over-year. Additionally, it reported total revenue of $5.29 billion, a 7.2% year-over-year increase compared to Q2 2023.
TJX shows no signs of slowing down, either. Per CNBC, the retailer “beat Wall Street’s expectations on the top and bottom lines as it raised its full-year guidance.” The outlet also noted that TJX has “become a haven for price-sensitive consumers” and has been taking market share from Macy’s, Target, and other competitors.
As reported by CNN in February, the “gradual demise of the American department store” can be attributed to several factors, including competition from big-box retailers, the rise of e-commerce, and activist shareholders vying for control of company boards.
Department stores are also faltering as inflation and changing consumer preferences divide the retail market between discount and luxury segments. Retail analyst and fellow BrainTrust member Neil Saunders of GlobalData shared data at the time pointing to losses, with department stores’ share of U.S. retail sales dropping from 14.1% in 1993 to 9.8% a decade later, 5.7% in 2013, and just 2.6% last year.
Saunders stated that “decline [is] inevitable. But I don’t think extinction is inevitable.”
He explained that over the years, struggling department stores like Macy’s have not successfully updated their offerings to contend with newer rivals. “Quite frankly, a lot of them stopped caring. They stopped listening to customers,” he said. “Sure online has taken its share, sure big box has taken its share. But most of all, it’s a failure to evolve.”
On a hopeful note, Retail & Leisure International shared a different perspective, noting that many international department stores are reinventing themselves to survive in the digital age by adopting experiential retail and adaptive spaces. To stay relevant, they are enhancing in-store experiences with technology, flexible layouts, and unique offerings.
For example, WOW Concept Madrid features dynamic, engaging shopping environments with pop-up shops and temporary installations. Selfridges in London invests heavily in unique in-store experiences, including pop-up shops and art installations, while Galeries Lafayette in Paris has launched a sustainable fashion initiative, Le Nouveau Cool, emphasizing circular fashion and environmental responsibility. These strategies transform shopping into a memorable experience, helping the department stores remain competitive and appealing in a rapidly changing market.
Discussion Questions
Do you think all department stores will eventually become obsolete, or can strategic changes keep them relevant?
What factors could lead to the failure of department stores, and are there strategies that might prevent this?
Given the rise of off-price retailers and e-commerce, is it inevitable that department stores will fail, or can they adapt to survive?
Poll
Loading …BrainTrust
Bob Amster
Principal, Retail Technology Group
David Biernbaum
Founder & President, David Biernbaum & Associates LLC
Shannon Flanagan
VP|GM Retail & Consumer Goods at Talkdesk
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Department stores had combined revenue of $132 billion last year. So, to say they are obsolete is over-egging the pudding. They have, however, become far less relevant. In 1992, department stores accounted for 14.5% of all retail sales. This year, that figure will be around 2.4%. That’s a huge fall from grace. Do they fall further from here? Yes, they do – especially as chains like Macy’s are pruning their store estates. Do department stores disappear entirely? No, not in the medium term. The new floor they reach, however, will depend on the strength of the reinventions currently in progress. And on that front, a lot more effort is now being made to hold on to sales and custom.
Where’s the $132 billion from? Seems hard to get to given the big 4 combined sales.
No, what a ridiculous clickbait question. Despite some who keep complaining about the, “death of the middle,“ they still sell a lot of merchandise. And what do you think Walmart and target are than versions of a department store. I have great faith in the department store model. it’s just up to somebody to realize it has to be more than a warehouse for stores within a store. It has to have a branded customer experience, not based on AI or coupons.
With all due respect, Walmart and Target are not department stores.
In order to survive in the long run, department stores will need to reinvent and re-imagine themselves.
As more than half of all indoor regional malls are closing throughout the country, and many urban downtowns are losing department stores because of crime, blight, and flight, where will department stores exist in the future?
The construction of new three- and four-story buildings along busy streets seems unlikely. Retail and residential space might be combined in mixed-use developments, integrating department stores with entertainment venues. Small, boutique-style locations are already popping up in suburbs.
While it is impossible to rule out the end of traditional department stores, even with Amazon, and with the dominance of Walmart, Target, Costco, and Sam’s Club, it is also hard to envision the end of traditional department stores.
Its also possible that new types of less traditional department stores might evolve. The market always tends to adjust to demand. Db
I started in retail at Famous-Barr, a division of May Company, way back in the 90s. We were secret shopped every week, because service mattered. Of course, there are lots of factors, as mentioned, but I believe if they invested in people/service the situation would be different.
We have discussed that Macy’s is still trying to decide what they want to be when it grows up. They are a “me too” right now, and there is no differentiating element for them. I wish it was a more people-centric organization, I think it would make a difference.
My own personal observation is that department stores are never as crowded as they used to be, even around Christmas. they are not a destination, almost theme park anymore. Paco Underhill made a big deal out of surprising department store executives by telling them that only 25% of those in their stores actually buy something. He meant it like it’s a bad thing but maybe building that excitement of being in a department store (like being in an Apple store) is a good thing, even if nothing is purchased. Department stores need to recapture the magic. It’s called brand building.
In his novel Sister Carrie, Theodore Dreiser, after offering up a brief (and inaccurate) history of department stores, mused “if they should ever disappear”. Reading that comment forty years ago I scoffed at the thought; yet here we are today, and it seems almost prescient. I’m not sure all department stores will go away, but it’s hard to argue with decades and decades of data that show them almost doing so. To the casual oberver, it’s hard to reconcile this demise with the rise of Amazon, which might be seen as the ultimate department store… only virtual.
I hate this headline. Do I think department stores in the U.S. are becoming obsolete? No, I do not. Do I think some took their eye off the ball? Yep. Do I consider Ross or Burlington Coat Factory or TJ Maxx to be department stores as the article states? That’s a no for me, too. They are stores with departments, but they aren’t in the same league as Macy’s, Bloomie’s, Saks or Nordstrom. And isn’t it interesting that Van Maur was named America’s Best Department Store for the third year in a row by Newsweek? Van Maur, a privately held, beautifully run company, has remained under the leadership of the Von Maur family since 1872. Chalk up another win for independent retailers!
Agreed. Off-price players are not department stores!
Exactly, Having departments does not make you a department store.
Perfectly stated.
Yes, they still sell and generate enough revenue to be an interesting retail sector. But that’s only because enough people my age still shop at these stores. Twenty years from now, I doubt this will be the case. They aren’t recruiting new shoppers, and for the population segment that matters, 20-30, department stores just aren’t on the radar.
“No, hold on. This isn’t some species that was obliterated by deforestation, or the building of a dam. Dinosaurs had their shot, and nature selected them for extinction.”
Dr. Ian Malcom, Jurassic Park (1993)
Retailing, like nature, requires the survival of the fittest. The consumer selects some retailers and some retail formats for extinction. We clearly don’t need as many department stores as we once did. The question now is…will any of them survive? They certainly could if they provided products, services, or other value that competing retail formats do not. Mid-price department stores such as Belk’s and Kohls seem to have a good approach to that. The ability to provide personalized service and custom fitting seems like elements that department stores excel in. The key is that as new generations of shoppers come into their peak spending years and do not have the memories of department store shopping experiences past, what will draw them to the format? No one in that part of our industry appears to have broken the code on that question.
Department stores (especially traditional ones like Macy’s, Dillard’s and so forth) still represent plenty of retail sales in healthy locations where they can be profitable. But their market share has been shrinking for decades, not just during the current heyday of off-pricers.
First it was mass merchants and discounters (Target, Kohl’s and so forth), then it was big box specialty stores. (Remember long ago when you used to buy your TV’s and major appliances at your hometown department store?) Next came specialty apparel stores, which have issues of their own, followed by e-commerce giants and orr-pricers.
Pruning unproductive locations is a necessary step, following overexpansion and overbuilding of malls years ago. The next step may be to recognize that localization has its merits, and Macy’s removing beloved nameplates like Dayton’s and Marshall Field’s turned out to be an irreversible error.
The United States is not a homogenous market – climate, culture, media habits, ages, education are different everywhere – and the conceit of consolidation was that we were all the same so only one buying location was necessary and you could bring containerloads of the same stuff over from the cheapest possible source. Well, Minnesota will always be different from Georgia no matter what Macy*s says (or Kroger for that matter.) Economy of scale works only up to a point (each retail sector has a different threshold to be sure), and then “big for the sake of being big” only enriches the dealmakers.
As micro-mills and robotics start to make weaving and small-batch / sew-on-demand production onshore more competitive, especially looking at the lifetime cost of a garment, then the retailer in each city who can best tap into the web of local tastemakers, designers, and producers can spark a renaissance of the department store. Inventory on the rack replaced by seasonal base models tailored to each individual customer.
We can look at the $132 Billion in combined revenue and say “obsolete” is hyperbole. We can also look at revenue vs profit and say “Houston, we have a problem:
Macy’s – Macy’s swung to a loss of $71 billion, or 26 cents per share, from net income of $508 million, or $1.83 per share, a year earlier. The losses included $1 billion of impairment and restructuring costs related to Macy’s plans to close about 150 locations, which are part of its turnaround strategy
JC Penney – Losses of $63mm in June vs $17mm previous year
Kohl’s reported a net loss of $27 million, or a loss of 24 cents per share, for the first quarter compared to a year-ago profit of $14 million, or 13 cents per share. Net sales decreased 5.3% to $3.18 billion compared to the year prior.May 3
That’s a $71 Million loss in 4Q23 from the $1b charge. For FY23, they still had net income of $105M after that charge. Profits are up in the 1H24…but this isn’t sustainable given the top-line issues.
Only the excess number of department store locations is obsolete. Department stores, by definition, are not like hardware stores. Every city does not merit one. Consolidation of only the most profitable locations (not brands) might save the concept. The model of a department store is not opening stores ubiquitously like Walmart locations, which have a wider popular appeal, but rather, is based on more exclusivity. Whether or not department store organizations can handle the retrenching is a separate question. Nordstrom going private is a good beginning for the industry. Public companies are under constant pressure from the financial markets to grow. Most of the department stores we know have grown too much.
Department store leadership treated ‘digital commerce’ as an annoying side thing that they begrudgingly had to do for a long time. Now it’s showing. They haven’t invested. Haven’t created new experiences. Haven’t looked at what’s attracting younger shoppers. In short, they haven’t kept up. They need to find new ways to add value. Make it easier to find the perfect items online without having to order multiple and return most (tracking and exposing more product attributes could help). And provide more compelling in-store experiences. For example, most people don’t have the patience to wait 20 minutes for a store associate to retrieve their shoe size on a busy Saturday of shopping. The experience has to change.
Nobody who understands the dynamics of the traditional department store model believes they will become obsolete–at least anytime soon. And while it’s true that department store still sell a lot of merchandise, that conveniently ignores the staggering lost of volume (and market valuation) since the late 1990’s But utlimately what matters, for consumers, for investors, and for vendors, is whether they will reverse their more than two decades of monumental decline. And the answer to this almost certainly is they will not. Some of this is driven by the continuing (and in many ways accelerating) bifurcation of retail and the on-going collapse of the middle. Some of this has to do with the dynamics of mall-based real estate and the inability to fund the radical change needed.
Department stores won’t completely disappear, but most are in serious trouble. The biggest problem is that they haven’t evolved fast enough to meet changing customer expectations. Stores like Macy’s just feel outdated compared to off-price retailers and e-commerce.
If they don’t adapt with better in-store experiences, competitive pricing, and seamless online integration, they’re likely to fail. But some, like Von Maur, prove that strong customer service and a focus on unique offerings can still work. It’s all about staying relevant and finding new ways to engage shoppers — without that, their decline is inevitable.
Department stores in some form are here to stay. Strategic changes are happening. Some good examples – the Bloomie’s concept – smaller formats, going to suburbs and in lifestyle centers. It reduces “rent’ -fixed costs (not the large anchors they once were, inventory (select and hopefully with local appeal) and seems to be working. Nordstrom trying to take themselves private again – probably a good move. From my lens. Landlords are asking for mixed use stores and consumers are too. I’m constantly asked where I shop by other women who would like to have a place with choices under on roof. There also several smaller models who are trying to do a better job with the wholesale department store model where designers get paid and also solve for many of the other issues including Wolf & Badger and ESSX.
Lots of layers and moving parts here. Department stores are akin to the frog in the kettle. The water has been boiling for a couple of decades and they seem not to notice. The closing of so many Macy’s branches has been the very public wake-up call everybody needed to hear. Even in the stores remaining open, the old math doesn’t work anymore. They need less inventory in less space. The challenge is no longer how many fixtures can be jammed onto the floor. It’s how few can we use and not look empty? It’s a big opportunity for a whole new level storytelling by department stores. Visual merchandising has a newly elevated role.
And while they are at it, department stores might want to revisit their demand forecasting skills. They’ve never learned how not to overbuy. They overbuy season after season, resulting in crazy end of season discounting and then liquidation of inventory to the discounters. They are basically saying to the customer that they are crazy for buying early in the season. Just wait a little and the discounts will get deeper and deeper. And offloading to the discounters has created breathtaking growth for that sector. Department stores are feeding the beast that is eating their very soul. Spock would have a hard time finding the logic in this behavior.
Obsolete…???…no. Obese might have been a better description. Overweight from too many years of bad diet (store count and inventory management). They need to slim down to a healthier size given the existing and evolving market dynamics. Wall Street tends not to reward shrinking businesses, so that becomes a very painful part of this equation. But profitability is the long term oxygen required to sustain businesses. And profitability on top of the investments required to evolve is doubly difficult. But that’s exactly what Target and Walmart have done in the last several years. It’s harder for department stores as they shrink, but that’s the core dilemma they face.
Obsolete is a bit strong. Irrelevant, yes. Obsolete, well, that has been happening for a while now. Not dead yet, however.