Retailers Look to the Department Store for Salvation

Department Stores May Have Ceded Power to Specialty Shops and Web, But Retailers of All Stripes Are Embracing Power of Bricks And Mortar

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Whatever happened to the department store?

When they emerged in the late 1800s, department stores had everything from tea rooms to art galleries to live music, all housed in architectural splendor. For most of the 20th-century, department stores reigned as the epicenter of commerce and a hub of social activity. They were where people shopped for everything from electronics and home goods to clothes and appliances.

A rendering of a Liz Claiborne shop, which will be one of the 100 shops in JC Penney's newly unveiled Main Street concept.
A rendering of a Liz Claiborne shop, which will be one of the 100 shops in JC Penney's newly unveiled Main Street concept.

Then shoppers' focus shifted from downtown areas to the suburbs. Teenagers emerged as a new, powerful purchasing force. Department stores slowly relinquished their dominance to specialty stores that catered to niche consumers with specific tastes. The final insult was the internet. The web gave shoppers the ability to easily compare prices, igniting a price war that put department stores at a further disadvantage.

Today, department stores are a shadow of their former selves and have shed many specialized services, such as gift wrapping and tailoring, while winnowing their product selection. Each is now known for just one or two merchandise categories, if it's lucky: Sears is synonymous with tools and appliances, while Macy's and Kohl's dominate in fashion and home goods.

Department stores accounted for 10% of total retail sales in the mid-1980s, 8% in 1990, 5% in 2000 and 2.4% in 2009, according to Craig Johnson, president at Customer Growth Partners, a consulting and research firm. As of 2011, department-store spending accounted for just 2.6% of total retail.

"Department stores gave up space without a fight to specialty retailers and the web," said Rahul Sharma, retail analyst and managing director at Neev Capital.

But it looks like some of the fight is coming back as department stores dust off old concepts and realize the power of their physical locations.

JC Penney, which has been one of the most pressured in the space, is undertaking a massive initiative to revamp its stores. By 2015 all locations will include more than 100 shop in shops, and a "town center" will replace old-fashioned jewelry counters.

"If we want to transform the department store we have to understand what happened. These stores were [a] pillar of the community. When we want a great product today, we go to a specialty store -- we might go to J. Crew, we might go to H&M, Uniqlo," said JC Penney's new CEO, Ron Johnson, at the unveiling of the retailer's strategic shakeup.

The 110-year-old department store has already seen success with shop in shops. Its Sephora mini-shops average sales of $600 per square foot, compared with $200 per square foot for the rest of the store.

"In the golden age of department stores, America's families came for more than just to shop," Mr. Johnson said. "They were able to have fun experiences and were offered a range of useful services. We are going to revive that excitement and convenience at JC Penney."

Target, often labeled a discount department store, is embracing a similar strategy. In May, it will unveil "The Shops," which will feature products from a rotation of independent boutiques in stores. "The Shops" will extend to the company's website and social-media outlets where consumers can learn more about the boutique owners via videos.

"Many retailers are coming to the realization that there's not much square-footage growth left. They can't continue to grow earnings or improve same-store-sales just by opening new stores," said Paul Lejuez, retail analyst at Nomura. "One way to [grow] is to revamp stores to drive traffic. Retailers have cash preservation from the recession. Store remodels were put on hold and now retailers are playing catch up."

Retailers have spent the past several years investing in e-commerce, mobile shopping and social outreach, but by incorporating all those elements into a compelling store environment, they may have finally found a way to reclaim shoppers forfeited to Amazon.

"Stores have a ploy they haven't really been taking advantage of -- customers can actually touch and feel the product and purchase it right away," Mr. Sharma said. "There's the ability for shoppers to buy something online and pick it up in the store. Retailers never made that big a deal about this or emphasized it enough. Department stores in particular have been remiss."

Macy's is now touting seamless integration of its "omni-channel" initiatives, bringing online shopping offline. One example is "Beauty Spots," now in test phase. The concept, located in the cosmetics department, allows shoppers to access information about a range of products without having to jump between brand counters. A sales associate is on-hand to deliver the products for purchase.

"By doing this, shoppers can actually see the product in person, but the process of finding that product is much like how you would shop online," explained Jim Sluzewski, a Macy's spokesman.

The idea of combining the ease of online shopping with the brick-and-mortar experience isn't lost on pure internet players. Giants such as Amazon, eBay, Google and LivingSocial are all looking into the potential of physical stores.

Google is reportedly opening a store at its European headquarters, in Dublin. Amazon may be looking into its first physical location in Seattle. During the holiday season, eBay rolled out pop-ups in New York, San Francisco and London. And LivingSocial recently opened a 28,000-square-foot store that includes a test kitchen for classes, space for dance studios and craft workshops, and a bar suitable for mixology classes or tastings.

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