Department stores have been a window to the world and the undisputed leader of retail, but after centuries of reign, the king has fallen. The crisis revealed some structural problems of a hyper-debt sector.
“If you go back to when I was a kid, in every town, the guy that owned the big department store in town was king.” With these words Warren Buffet remembered the times when Macy’s, Hudson’s Bay or Dillard’s dominated the streets and commerce of the United States without competition.
This channel, which was then followed by shopping centers and chains, is intrinsic to the American model and was for centuries an icon in the culture of the United States. Department stores were an institution, the place “where people escaped from provincialism, “said Stanley Marcus, son of the founder of Neiman Marcus.
A window to the world and the undisputed leader of retail. But after centuries of reign, in the last decade the king has fallen. The crisis revealed some structural problems of a hyper-debt sector that had failed to adapt to the new context of distribution, dominated by chains and, above all, by the Internet. In the Amazon era, having the entire offer in one place has ceased to be a differential value, and services that once were disruptive, such as returns, have become normal in retail.
Department stores face the greatest transformation in their history with little space to change, a lot of debt and a huge store network in the United States that is not easy to adapt. The result has been a wave of closures and layoffs that has transformed the landscape of commerce into the US.
Traffic and a lot of supply. These were the weapons with which department stores competed and attract customers in any city in the world. The problem? They are the same weapons that Amazon plays with. A decade of restructuring has completely disrupted the global map of department stores. Sears, which was number one in the sector ten years ago, filed for liquidation in 2018 and was rescued by its president and chief executive officer, Edward S. Lampert. JC Penney, who was in third position, has come out of the ranking, and Kohl’s, which closed the top five ten years ago, has climbed to second place due to the crisis of its rivals.
The war is hard, and the race is not amongst the fastest, but those who have managed to adapt. Today, Macy’s is the leader of global department stores, followed by Kohl’s, El Corte Inglés, Nordstrom and Sears. But none has escaped restructuring.
What happened? How have the department stores gone from being the kings of retail to fighting for their survival? The answer is a sum of factors, a perfect storm that US press has called apocalypse retail. The starting point was the crisis of 2008 and that of the fashion sector itself, one of the main drivers of department stores. The fall in purchasing power during the recession and the progressive transformation of consumption habits began to impact sales of the giants already at the beginning of the decade.
Macy’s, for example, ended 2009 with losses of 88 million and a drop in sales of 9.5%, which led the group to implement an adjustment plan that led to the dismissal of 7,000 employees, almost 4 % of its employees, reduction of investment and the closure of eleven stores. That same year, Sears closed 62 points of sale.
Macy’s is the leader of global department stores
The vast store network of department stores was, in fact, another of the triggers of the apocalypse. The crisis hit a saturated channel, especially in the United States. The country has the highest commercial surface area per capita in the world, with 7.3 square feet (0.68 square meters) per person, compared to 1.7 square feet (0.16 square meters) in France and Japan.
A large part of these stores where in shopping malls, another channel with oversupply. Between 1970 and 2015, the pace of openings of new shopping centers in the United States exceeded population growth, and many of these centers have shuttered in recent years, dragging with them department stores.
Since 2009, Sears, Macy’s and JC Penney have shut down 3,463 stores. Only Sears has gone from adding 3,921 stores in 2009 to just 866 at the end of 2017. Kohl’s, on the other hand, has been the only company that has continued to increase its network, with 101 stores more than ten years ago.
At the same time, the fashion distribution map, a key sector for department stores, has been radically transformed, with chains and, later, the Internet, gaining more and more weight. At the same time, another rival has appeared on the scenario: Amazon. The ecommerce giant first slipped into the world’s top ten retailers in 2017, according to the Global Powers of Retailing report, by Deloitte. And, while Amazon and its Chinese counterparts Alibaba and JD.com scale positions, Macy’s, loses them, although it remains at number ten on the list.
The debt: the trigger
To these factors is added a third party that has limited the maneuver of the giants: debt. While, during the crisis, retailers refinanced their liabilities thanks to interest rates that touched zero, now the scenario has changed. With the recovery, the Federal Reserve raised interest rates again and borrowing stopped going cheap.
According to the Fitch rating agency, most US retailer bonds will skyrocket up to 1.8 billion dollars in 2018. The scenario is even worse in the following years, with 5 billion dollars a year between 2019 and 2025. The estimation excludes the debt of the eight listed department stores: Macy’s, Kohl’s, Dillard's, Nordstrom, Stage Stores, JC Penney, Sears and Bon-Ton, which amounts to 24 billion dollars.
The culmination of this crisis came in January 2017, when Macy’s announced more than 10,000 layoffs, about 7% of its employees, which was the biggest cut since the Great Depression, and the closure of one hundred stores. That same year, JC Penney closed 139 stores, Marks&Spencer laid off 500 workers and retreated abroad and Kohl’s closed half a hundred of its strores and began evaluating a new, smaller store format to adapt to the new scenario.
However, all these was not enough. According to the real estate consultant Green Street Partners, to recover the previous levels of profitability JC Penney should close a third of its stores, Nordstrom, a quarter, and Macy’s, 9%.
In Europe Apocalypse retail has been more moderate, although it has been higher in United Kingdom. While the leader in the country, Marks&Spencer, is immersed in a deep transformation plan, other players have followed the trend. This is the case of BHS, which finally closed in 2016, in what the British newspaper The Guardian described as the worst news in British retail since the disappearance of Woolworths in 2008. Debenhams, meanwhile, entered into bankruptcy proceedings in 2019 after rejecting a rescue of Mike Ashley, owner of Sports Direct and first shareholder of the group.
In Europe apocalypse retail apocalypse has been more moderate
The transformation has not only impacted stores and employees, but has also reached the senior leadership teams of the companies. None of the ten largest department stores in the world today has the same first executive as ten years ago.
The transformation challenge
In this apocalyptic context, with less access to money, less traffic, less sales and Amazon prepared to conquer the sector, the dilemma is to adapt or die. Sears is one of those who saw the fall. In 2018, the company filed for Chapter 11 bankruptcy, due to the group’s inability to meet a debt of 134 million dollars that expired. The company’s total liabilities amounted 5.6 billion dollars. The company was finally rescued by Edward S. Lampert, its former chief executive officer, who reached a deal with its creditors to buy the group for 5.2 billion dollars.
Meanwhile, the rest struggle to survive by exploring new ways to save their stores and allying with pure players to accelerate digitalization. Macy’s, for example, whose real estate is valued at about 21 billion dollars, began studying in 2015 to introduce business models, such as food, and reorganize its model to gain profitability.
Kohl’s, meanwhile, sealed an alliance with Amazon to sell its technology offer. Amazon’s spaces in Kohl’s have online platform staff and, since 2019, they also operate as a point of collection and return of orders.
Others like Neiman Marcus have chosen to take over pure players to accelerate their digitalization. The company acquired MyTheresa online platform in 2014, although at the beginning of 2019 it put it on sale. The company explained that its intention to get rid of the company aims to reduce its debt and focus on its main businesses, which are Neiman Marcus, Bergdorf Goodman, Last Call and Horchow.
Liverpool bid for Ripley in 2016 but after a year of negotiations, the operation did not take place
Nordstrom has followed the same path, acquiring online fashion operators such as Haute Look and Trunk Club, an online tailoring start-up. “Although I don’t know how it affects us right now, Amazon is an operator that must be taken very seriously,” said Peter Nordstrom, president of Nordstrom, during a presentation of results in 2016.
In Europe, alliances of this kind also took place. At the end of 2018, El Corte Inglés sealed an agreement with the Chinese giant Alibaba that promotes companies’ strategies to accelerate digitalization. The French Galleries Lafayette, meanwhile, has acquired three online operators: Instantluxe, specialized in secondhand luxury items, Bazarchic, which operates with flash sales and also has physical stores, and the historic sales group, La Redoute.
In Latin America, the titans of department stores have also undertaken their transformation process. For the time being, to the retail Apocalypse. Liverpool bid for Ripley in 2016 but, after a year of negotiations, the operation did not take place.
Liverpool did sign, however, the acquisition of Suburbia, owned until then by the Mexican subsidiary of Walmart. Its rival Falabella, meanwhile, acquired in 2018 Linio, an ecommerce platform to strengthen its digitalization. Like other operators in the same segment in Europe, such as Harrods, El Palacio de Hierro has undertaken in the last decade a process of renovating its network betting on more services.
Department stores have nothing to do today with those lavish shops that brought fashion to the provinces and passed from generation to generation. In the biggest crisis in its history, the sector plays everything to be, if not what Buffet remembers from his childhood, but a relevant actor in the new era of retail.