Department Stores
Description
Companies in this industry operate physical retail establishments that sell items such as clothing, cosmetics, footwear, and home furnishings, typically from registers within individual departments. Major companies include JCPenney, Macy's, and Sears (all based in the US), as well as Debenhams and Marks & Spencer (UK), El Corte Ingles (Spain), Galeria Kaufhof (Germany), Galeries Lafayette (France), and Isetan Mitsukoshi (Japan).
While department store sales historically have been strongest in Europe, Japan, and the US, growth in these markets is declining amid increasing sales in China, Latin America, and the Asia-Pacific region. The global department store sales are forecast to reach a market size of about $190 billion by 2032, according to Sky Quest.
The US department store industry includes about 4,500 stores with a combined annual revenue of about $70 billion.
Department stores differ from discount department stores, such as Walmart and Target, in that most department stores have checkout registers within individual merchandise departments instead of a central checkout area. A separate Discount Department Stores profile covers that industry.
COMPETITIVE LANDSCAPE
Technology and changing shopping preferences, particularly among younger consumers, are disrupting the retail industry. Amazon has surpassed Walmart as the biggest apparel retailer in the US, according to a ReportLinker. Department stores also face competition from other digital retail platforms, such as YouTube, that offer transactional functionality direct from video. New digital marketplaces also offer a social component and sense of community desired by the next generation of consumers.
Apart from online rivals, department stores compete with discount department stores and mass merchandisers, specialty stores, off-price and outlet stores, and mail-order retailers. Largely as a result of this competition, department store sales have declined since 2000, both in dollar terms and as a proportion of total retail sales. Major companies, including Macy's, the US's largest department store operator, have shut stores and cut thousands of jobs.
Consumer spending and fashion trends drive demand. The profitability of individual companies depends on effective merchandising and marketing and high customer traffic. Large companies have economies of scale in purchasing, distribution, and marketing. Small companies can compete effectively by offering unique merchandise, providing superior customer service, or delivering a distinctive store experience. The US industry is highly concentrated: the top four companies generate about 85% of industry revenue.
Competitive Advantages:
Compelling In-Store Experience - To draw customers to stores, retailers are focusing on creating experiences for shoppers that can't be matched online, including destination restaurants, trunk shows, in-store makeovers, and celebrity meet-and-greets.
Omni-Channel Business Model - As more consumers migrate online, retailers that successfully merge the in-store experience and their digital operations to offer quick home delivery and in-store pickup for items ordered online will come out ahead, especially among younger, tech-savvy consumers.
Supply Chain Efficiency - Rapidly changing consumer tastes and pressure to provide different delivery options to multiple destinations is pressuring retailers to optimize their supply chains. Retailers who can't deliver products to customers how and when they want it quickly will lose sales to those who can.
Smaller Footprint - Closing unproductive locations to focus on fewer, more productive stores and free up cash to invest in digital operations is a winning strategy for bloated department store chains that have too many unprofitable stores for today's retail environment.
Low Debt - To survive in the digital age, department stores must invest heavily in technology and facilities. Chains with lots of debt on the balance sheet, including Neiman Marcus, struggling Sears, and Bon-Ton (which recently liquidated), may lack the financial resources to invest in the store improvements and digital assets required to win over today's consumers.
Companies to Watch:
Macy's is America's largest department store chain and a bellwether for the industry with approximately 680 Macy's and Bloomingdale's locations. The company has closed some 100 of its main chain Macy's stores in recent years to focus on fewer, more productive and inviting stores, and to invest in its digital transformation. The company is under attack from Amazon -- which is poised to topple Macy's as the largest apparel seller in the US -- and discount retailers. Macy's is responding by investing in technology and experimenting with new concepts, including adding off-price Backstage departments to 45 locations and acquiring New York-based concept store Story. After three years of declining same-store sales, Macy's is growing again.
Canada's Hudson's Bay Company (HBC) operates department stores across North America and parts of Europe. The company owns upscale Lord & Taylor and Saks Fifth Avenue in the US, and Galeria Kaufhof in Germany, in addition to its namesake Hudson's Bay (aka The Bay) chain at home. While HBC is exploring the sale of Lord & Taylor, the company is investing in digital properties such as online flash sale site Gilt Groupe.
Like Macy's in the US, Marks & Spencer (M&S) could lose its status as the UK's top apparel seller to discounter Primark following plans to close 100 stores by 2022. Amid a prolonged sales slump, the iconic British department store is trying to shed its frumpy image by upgrading its stores and improving the customer experience. M&S has invested heavily in food and aims to improve its website to eventually get a third of its sales from online purchases.
More than any other department store chain, Nordstrom is embracing technology. The 118-year-old company is experimenting with ways to make upscale, high-touch retail relevant in today's e-commerce-driven market. Indeed, 30% of sales for Nordstrom's full-service store division come from online. The company's successful off-price format Nordstrom Rack (accounting for more than a third of US sales), reputation for stellar customer service, and early enthusiastic embrace of technology all have helped it weather the retail storm disrupting its competitors.
PRODUCTS, OPERATIONS & TECHNOLOGY
Major products include women's clothing (about 30%), which typically generates most sales for the industry, men's clothing (about 20%), cosmetics and fragrances (about 10%), footwear and footwear accessories (about 10%), and children's wear (about 10%). Apparel includes women's, men's, and children's clothing. Cosmetics include makeup, skin care, hair care, and fragrances. Appliances include refrigerators, stoves, washers, dryers, and dishwashers. Companies may also sell kitchenware, bedding, towels, and sheets. Services may include gift wrapping, gift registries, delivery, appliance installation, and personal shopping.
National and regional chains dominate the department store industry. Store format and merchandise selection depends on a company's target market. For example, Neiman Marcus targets affluent shoppers, sells high-end designer apparel, and offers an elegant shopping environment. Kohl's targets family-oriented shoppers, sells moderately priced merchandise, and offers a convenience-based store design. Some companies lease space to independent companies to sell products requiring sales expertise (furs, designer handbags, high-end cosmetics). Effective store layouts and eye-catching merchandise displays can generate complementary sales and impulse purchases. Companies may have outlets to help sell excess inventory.
Most department stores are anchor tenants in large malls, and a store's presence is used to drive traffic. Companies consider demographics, population density, and lifestyle when selecting locations. Stores vary in size between about 100,000 and 300,000 square feet. Sales per square foot is an important industry metric.
Because department stores deal with tens of thousands of stock keeping units (SKUs), effective supply chain management is critical to keeping costs low and supporting timely merchandise flow. Companies have extensive networks of warehouses and distribution centers to route products from suppliers to stores. Cross-docking facilities allow companies to unload and reallocate products in a single operation, minimizing storage costs. Dedicated distribution centers and call centers often support internet or catalog sales.
Department stores buy inventory from manufacturers, importers, and distributors, and may work with thousands of suppliers. While long-term supplier relationships are common, few companies have long-term contracts. Lead times can be long: buyers may place orders six to nine months in advance for apparel and shoes and three to six months for handbags and jewelry. Buyers make purchasing decisions based on trends and historical sales, and may take local preferences and climate into account. Companies may receive allowances from suppliers for markdowns and advertising.
Inventory changes seasonally, with apparel driven by fall and spring selling periods. Private-label brands allow companies to offer their own designs and help develop customer loyalty. Some department stores have exclusive rights to sell certain brands. "Soft goods" include clothing, bedding, and sheets. "Hard goods" include appliances, furniture, and tools. Most companies have either eliminated hard goods or reduced selling space for hard goods due to the proliferation of specialty retailers in those segments.
A large percentage of department store merchandise is imported. About 95% of apparel and footwear sold in the US comes from foreign countries, primarily China and Vietnam. Low-cost production has forced the majority of apparel and shoe manufacturing overseas.
While department store sales historically have been strongest in Europe, Japan, and the US, growth in these markets is declining amid increasing sales in China, Latin America, and the Asia-Pacific region. The global department store sales are forecast to reach a market size of about $190 billion by 2032, according to Sky Quest.
The US department store industry includes about 4,500 stores with a combined annual revenue of about $70 billion.
Department stores differ from discount department stores, such as Walmart and Target, in that most department stores have checkout registers within individual merchandise departments instead of a central checkout area. A separate Discount Department Stores profile covers that industry.
COMPETITIVE LANDSCAPE
Technology and changing shopping preferences, particularly among younger consumers, are disrupting the retail industry. Amazon has surpassed Walmart as the biggest apparel retailer in the US, according to a ReportLinker. Department stores also face competition from other digital retail platforms, such as YouTube, that offer transactional functionality direct from video. New digital marketplaces also offer a social component and sense of community desired by the next generation of consumers.
Apart from online rivals, department stores compete with discount department stores and mass merchandisers, specialty stores, off-price and outlet stores, and mail-order retailers. Largely as a result of this competition, department store sales have declined since 2000, both in dollar terms and as a proportion of total retail sales. Major companies, including Macy's, the US's largest department store operator, have shut stores and cut thousands of jobs.
Consumer spending and fashion trends drive demand. The profitability of individual companies depends on effective merchandising and marketing and high customer traffic. Large companies have economies of scale in purchasing, distribution, and marketing. Small companies can compete effectively by offering unique merchandise, providing superior customer service, or delivering a distinctive store experience. The US industry is highly concentrated: the top four companies generate about 85% of industry revenue.
Competitive Advantages:
Compelling In-Store Experience - To draw customers to stores, retailers are focusing on creating experiences for shoppers that can't be matched online, including destination restaurants, trunk shows, in-store makeovers, and celebrity meet-and-greets.
Omni-Channel Business Model - As more consumers migrate online, retailers that successfully merge the in-store experience and their digital operations to offer quick home delivery and in-store pickup for items ordered online will come out ahead, especially among younger, tech-savvy consumers.
Supply Chain Efficiency - Rapidly changing consumer tastes and pressure to provide different delivery options to multiple destinations is pressuring retailers to optimize their supply chains. Retailers who can't deliver products to customers how and when they want it quickly will lose sales to those who can.
Smaller Footprint - Closing unproductive locations to focus on fewer, more productive stores and free up cash to invest in digital operations is a winning strategy for bloated department store chains that have too many unprofitable stores for today's retail environment.
Low Debt - To survive in the digital age, department stores must invest heavily in technology and facilities. Chains with lots of debt on the balance sheet, including Neiman Marcus, struggling Sears, and Bon-Ton (which recently liquidated), may lack the financial resources to invest in the store improvements and digital assets required to win over today's consumers.
Companies to Watch:
Macy's is America's largest department store chain and a bellwether for the industry with approximately 680 Macy's and Bloomingdale's locations. The company has closed some 100 of its main chain Macy's stores in recent years to focus on fewer, more productive and inviting stores, and to invest in its digital transformation. The company is under attack from Amazon -- which is poised to topple Macy's as the largest apparel seller in the US -- and discount retailers. Macy's is responding by investing in technology and experimenting with new concepts, including adding off-price Backstage departments to 45 locations and acquiring New York-based concept store Story. After three years of declining same-store sales, Macy's is growing again.
Canada's Hudson's Bay Company (HBC) operates department stores across North America and parts of Europe. The company owns upscale Lord & Taylor and Saks Fifth Avenue in the US, and Galeria Kaufhof in Germany, in addition to its namesake Hudson's Bay (aka The Bay) chain at home. While HBC is exploring the sale of Lord & Taylor, the company is investing in digital properties such as online flash sale site Gilt Groupe.
Like Macy's in the US, Marks & Spencer (M&S) could lose its status as the UK's top apparel seller to discounter Primark following plans to close 100 stores by 2022. Amid a prolonged sales slump, the iconic British department store is trying to shed its frumpy image by upgrading its stores and improving the customer experience. M&S has invested heavily in food and aims to improve its website to eventually get a third of its sales from online purchases.
More than any other department store chain, Nordstrom is embracing technology. The 118-year-old company is experimenting with ways to make upscale, high-touch retail relevant in today's e-commerce-driven market. Indeed, 30% of sales for Nordstrom's full-service store division come from online. The company's successful off-price format Nordstrom Rack (accounting for more than a third of US sales), reputation for stellar customer service, and early enthusiastic embrace of technology all have helped it weather the retail storm disrupting its competitors.
PRODUCTS, OPERATIONS & TECHNOLOGY
Major products include women's clothing (about 30%), which typically generates most sales for the industry, men's clothing (about 20%), cosmetics and fragrances (about 10%), footwear and footwear accessories (about 10%), and children's wear (about 10%). Apparel includes women's, men's, and children's clothing. Cosmetics include makeup, skin care, hair care, and fragrances. Appliances include refrigerators, stoves, washers, dryers, and dishwashers. Companies may also sell kitchenware, bedding, towels, and sheets. Services may include gift wrapping, gift registries, delivery, appliance installation, and personal shopping.
National and regional chains dominate the department store industry. Store format and merchandise selection depends on a company's target market. For example, Neiman Marcus targets affluent shoppers, sells high-end designer apparel, and offers an elegant shopping environment. Kohl's targets family-oriented shoppers, sells moderately priced merchandise, and offers a convenience-based store design. Some companies lease space to independent companies to sell products requiring sales expertise (furs, designer handbags, high-end cosmetics). Effective store layouts and eye-catching merchandise displays can generate complementary sales and impulse purchases. Companies may have outlets to help sell excess inventory.
Most department stores are anchor tenants in large malls, and a store's presence is used to drive traffic. Companies consider demographics, population density, and lifestyle when selecting locations. Stores vary in size between about 100,000 and 300,000 square feet. Sales per square foot is an important industry metric.
Because department stores deal with tens of thousands of stock keeping units (SKUs), effective supply chain management is critical to keeping costs low and supporting timely merchandise flow. Companies have extensive networks of warehouses and distribution centers to route products from suppliers to stores. Cross-docking facilities allow companies to unload and reallocate products in a single operation, minimizing storage costs. Dedicated distribution centers and call centers often support internet or catalog sales.
Department stores buy inventory from manufacturers, importers, and distributors, and may work with thousands of suppliers. While long-term supplier relationships are common, few companies have long-term contracts. Lead times can be long: buyers may place orders six to nine months in advance for apparel and shoes and three to six months for handbags and jewelry. Buyers make purchasing decisions based on trends and historical sales, and may take local preferences and climate into account. Companies may receive allowances from suppliers for markdowns and advertising.
Inventory changes seasonally, with apparel driven by fall and spring selling periods. Private-label brands allow companies to offer their own designs and help develop customer loyalty. Some department stores have exclusive rights to sell certain brands. "Soft goods" include clothing, bedding, and sheets. "Hard goods" include appliances, furniture, and tools. Most companies have either eliminated hard goods or reduced selling space for hard goods due to the proliferation of specialty retailers in those segments.
A large percentage of department store merchandise is imported. About 95% of apparel and footwear sold in the US comes from foreign countries, primarily China and Vietnam. Low-cost production has forced the majority of apparel and shoe manufacturing overseas.
Table of Contents
- Industry Overview
- Quarterly Industry Update
- Business Challenges
- Business Trends
- Industry Opportunities
- Call Preparation Questions
- Financial Information
- Industry Forecast
- Web Links and Acronyms
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