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WHAT AILS THEM?

They once dominated the retail scene so completely that their founders became legendary: J.C. Penney, Marshall Field, R.H. Macy. Today department stores appear stuck in perpetual doldrums, with comparable-store sales and profitability declining in the face of newer, more vibrant competitors. What happened?

Just about everything, say most observers. From merchandise to presentation to back-room technology, department stores have cheapened their image and lost exclusivity to discount and specialty stores. Fixing these problems means rethinking attitudes in each category, analysts say.

Consolidating different stores under such corporate banners as Federated and May to achieve efficiencies in buying and administration would seem to make sense, but the result has been that the same goods are sold everywhere.

Bored by the sameness of offerings, shoppers now seek differentiation and their own point of view at such boutiques as Chico’s or Hot Topic. And when it comes to the increasing propensity for casual clothing, customers have learned that they can get better value at Kohl’s and Target.

“Department stores must change their mind-set,” said Walter Levy, managing director at New York City-based consulting firm Kurt Salmon Associates. “They are not an assembler of brands, but a purchasing agent for consumers.”

The first key to sales growth is to simplify the shopping experience for the customer, said Terry Lundgren, CEO of Federated Department Stores, Cincinnati, speaking at the National Retail Federation Annual Conference & Expo in New York City in January.

“We can win with fashion rightness,” he said. “But coupled with that is limited distribution of our products. Private brands are an important part of that.” He added that customers who can find the same product in several stores will select simply on price.

Shoppers of yesterday were conditioned by department stores to wait for sales; in the 1980s paying full price for designer clothes was considered prestigious. But the industry’s financial crisis late in the decade led the stores to slash prices regularly to maintain cash flow, a process they’ve been forced to continue; shoppers are no longer prepared to pay full price, when they shop at all.

Apparel is not the only category that department stores have lost or are losing to other stores. To eliminate competition from category killers, most department stores dropped hard lines from their mix. But while a May could never sell a television as cheaply as, say, Best Buy, this move has helped create the perception that a department store is just a large, harder-to-navigate fashion boutique with less customer service and is therefore impractical to time-pressed consumers.

Even cosmetics, normally a department store mainstay, have gone out the door. Estée Lauder divisions Aveda, MAC and Origins have opened their own boutique locations in malls in recent years, and Sephora routinely sells many of the high-end lines once available only in Bloomingdale’s, Neiman Marcus or Saks.

Presentation
Despite millions of dollars spent on renovating stores, most shoppers will say that department stores have too much merchandise in too little space, making for an uncomfortable shopping experience. And still more needs to be spent on sprucing up individual units, said Stephen D. Lebovitz, president of developer CBL & Associates Properties, Chattanooga, Tenn.

“We renovate once every 10 years, so the malls are current and fresh,” he noted. As a result, the malls sometimes look better than their department store anchors.

Stores need to be more entertaining, as well, observers say. At the National Retail Federation conference one manufacturer recommended that retailers return to some elements of the past, including fashion shows and cooking demonstrations.

“I miss the entertainment in the stores,” said Leonard Lauder, chairman of the New York City-based Estée Lauder Cos.

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Technology
Perhaps the most critical element is one the shopper never sees: the point-of-sale and inventory-control hardware and software that has been behind the success of some chains and the failure of others. Megadiscounter Wal-Mart Stores invested millions of dollars in systems that would squeeze every penny of profit from its cash flow; Kmart Corp., which didn’t invest as heavily, is shuttering hundreds of stores in an effort to emerge from Chapter 11. Many department stores also neglected to make these same investments, reducing profitability and even keeping management in the dark about inventory.

“Department stores need to speed up with their supply systems,” said Todd Slater, a retail analyst at New York City-based Lazard.

Only in that way will the department stores that helped create chain retailing be able to compete, particularly with the ever-growing Wal-Mart. Given the breadth of its merchandise mix, Wal-Mart could even be perceived as a competitor for the mall as a whole, particularly as the chain has announced plans to explore somewhat higher-end merchandise, Lebovitz noted.

Others say the key to competing with Wal-Mart is not to compete with it at all, but to focus on Kohl’s and the improving J.C. Penney and Sears.

“Wal-Mart sells a lot more Fruit Loops than department stores,” Slater cracked.

To survive and return to profitability, stores must study the competition — and learn from it, observers say.

“Until department stores start to think like specialty retailers,” said Robert Michaels, president of General Growth Properties, Chicago, “things will stay the way they are.”
— D.H.

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