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ON THE REBOUND

Department stores back on their game, experts say

BY STEVE MCLINDEN

So the lights are dimming and the crowds thinning in the great American mall department store, are they?

Look again, retailers and analysts say. True, department stores have been slow to react to fashion trends and the whims of young shoppers, these observers acknowledge. And yes, they lost focus and brand strength when they tried to compete with big-box discounters on price points. But now the stores are getting in touch with their roots, re-creating niches and recovering core shoppers, they say.

“They have finally got the message that they are not in the discount business and that they have to create something truly different to attract shoppers,” said consultant Wendy Liebmann, president of New York City-based WSL Strategic Retail.

One department store is showing $3.24 billion worth of confidence in the sector. That’s how much the St. Louis-based May Department Stores Co., which owns such middle-market department stores as Famous-Barr and Lord & Taylor, says it will pay to acquire the more upscale Marshall Field’s chain from Minneapolis-based Target Corp., along with a handful of Mervyn’s stores.

The purchase (see story), which thwarted a rival bid from Federated Department Stores, will broaden May’s brand presence and footprint, fill in geographic gaps and help keep competitors at bay, according to the company.

But May’s timing is significant in a big-picture sense too, says Philip Zahn, a fixed-income analyst at Fitch Ratings. Mergers in the sector have dried up over the past five years because of the weak economy and shaky sales. Now the chains are showing more confidence. Not only are they attracting more customers, they are charging those customers full price, Zahn observes. “Target probably felt that the momentum made it a good time to turn Marshall Field’s,” he said.

Some long-overdue introspection is helping recast the industry, says Liebmann. “It’s taken a long time — about 15 years — before department stores have finally hit the wall and recognized that a business strategy that is wrapped around another sale … is not going to work.”

Department stores say sales of full-price merchandise made for a solid spring season; in the month of May, chains including Federated, J.C. Penney, Nordstrom and Saks soundly beat Wall Street’s same-store projections. (Nordstrom and Saks both rose 9.4 percent that month, according to ICSC Research.) Only Sears and May lagged. In June seven of the 10 department stores tracked by Thomson First Call were still beating Wall Street forecasts, according to First Call retail analyst Ken Perkins. “The mid and lower tiers are still struggling to generate sizable revenue gains,” Perkins said. “But there does appear to be a return in mall traffic that is benefiting department stores.”

The right stuff
Stores are simply refocusing on specialty mixes and abandoning the everything-under-one-roof mentality, Liebmann says.

“Being the largest store in the world is not really what people are picturing when they think about department stores,” Liebmann said. “That’s not Bloomingdale’s or Macy’s. That’s Wal-Mart. For example, Saks has in effect said, ‘We have to go back to our prestige and get rid of things that don’t suit our customer and add things she likes, such as personal services … and a more inviting store environment.’ ”

Department stores are abandoning fashion lines that are readily available in other mall stores to focus on proprietary and private-label brands. This strategy allows them to go for target customers rather than trying to cater to every consumer profile at the mall. Many are abandoning the neutral look for innovative and eye-catching in-store designs, consultants say. Federated is among those introducing new store prototypes that place check-out areas at the front of the store so that shoppers need not run in circles merely to pay for a purchase.

Department stores are “busy trying to recapture customers who have defected to specialty stores,” said Kurt Barnard, president of Barnard’s Retail Consulting Group. “They are trying very creatively to come back and taking steps to make the store more consumer-attractive, with better assortment, better displays … and far more of what the customer really wants.”

The department store companies themselves are also concentrating more on core markets. In 2003 May closed 32 Lord & Taylor stores, mostly in the South, to focus on locales deemed more lucrative in the Midwest and Northeast.

Even the pop culture is taking a fresh look at department stores this year. Bloomingdale’s appears in the movie 13 Going on 30, Saks Fifth Avenue is featured in Shopgirl, and Sears fashions are mentioned — though somewhat unflatteringly — in Mean Girls and Welcome to Mooseport. (Sears recently hired a Los Angeles firm to help polish its image in TV and films.)

Beyond the mall
Developers plan to build only three malls in the United States this year, according to ICSC research. By contrast, 47 large malls opened between 1990 and 1992 during the industry’s heyday. For future growth, therefore, department stores are returning to their roots: off-mall locations. Bloomingdale’s, Penney, Sears and others appear to be positioning themselves for power centers and open-air centers in those future-high-growth markets that aren’t building malls.

Of the handful of malls being developed, only about half will be appropriate to Penney, says spokesman Quinton Crenshaw. “But there is a lot of population shifting,” he said. “And off-the-mall locations offer more flexibility to react to this shift.”

The off-mall Penney stores are 92,000-square-foot “edited” versions of mall stores that average about 160,000 square feet and are generally located in power or open-air centers where other retailers are clustered. Penney’s new freestanding store in the Dallas suburb of Cedar Hill, for example, sits less than a block from Kohl’s, Target and Wal-Mart stores, says Crenshaw. A Penney now under construction will anchor the Burleson (Texas) Town Center, near Fort Worth, in fast-growing Tarrant County. The chain plans to build about 100 such in-fill stores over the next three years.

In contrast to Penney, the new Sears Grand concept is an even bigger box than the average Sears mall store. At about 210,000 square feet, the one-stop, nonmall Sears stores combine best-sellers with groceries and other everyday items. The first opened last fall in Utah, in the Salt Lake City suburb of West Jordan. Sears said recently that it will pay $620 million for about 50 Kmart sites that will help it compete with such stand-alones as Kohl’s and Target; some will become Sears Grand stores, the company says.

Department store spin-offs are nothing new, of course. Saks has its Saks Off 5th, Nordstrom has Nordstrom Rack, Federated has Bloomingdale’s Home + Furniture Store, and Sears has several nonmall appliance and hardware stores.

Most of the new off-mall offerings are in open-air centers and outparcels near power centers and malls, say analysts and retailers. One notable exception is the new Bloomingdale’s in New York City’s SoHo district. That store, shaped from two old warehouses, has about one-fifth of the space of its venerable East 59th Street sibling. While its black-and-white marble floors are Bloomies-familiar, the natural lighting from hundreds of on-site windows is combined with a more avant-garde apparel mix and some quirky, fun items to set a different tone. Federated says it will look for other urban-niche locales for added flexibility. “But our format is very much committed to the department store,” said Carol Sanger, a Federated spokeswoman.

Most nonmall department stores gravitate predominantly to suburban growth areas with high disposable income, says David Birnbrey, chairman of Atlanta-based Shopping Center Group, a real estate services firm with 16 offices in the Southeast. “Retailers are finding they can be just as profitable outside of the mall,” said Birnbrey. “They can save significant [overhead] and can be at an intersection where several power centers equal the trade area and the draw of a regional mall.”

Living with Wal-Mart
And even Wal-Mart need not scare them, says Richard Hastings, a retail analyst at New York City-based Bernard Sands, a credit advisory firm. Fashion department stores with exclusive brands are not going to go head-to-head with the offerings of a local Wal-Mart, he says.

Liebmann says she believes that nonmall shops “are certainly much more convenient for consumers who don’t want to trek through the mall to get to department stores that weren’t compelling enough in the first place.”

Retail consultant Margaret A. Gilliam, president of New York City-based Gilliam & Co., says the economics of such projects don’t always make sense, however. “When you are an anchor in a mall, you tend to get rent concessions … and are probably on a land lease with token payments,” Gilliam said. “But when you’re freestanding, there’s usually no such deal.” On the other hand, she adds, nonmall stores in single-floor locations don’t need elevators or escalators and are a little more efficient to operate and access.

New lifestyle centers in recent years have not included department store chains, though more landlords are realizing that these are still everyday-traffic generators that also advertise frequently, says Gilliam.

The ongoing makeover at department stores combined with a recovering economy and America’s expanding sense of fashion are lifting an industry that never fully fell out of favor with the shopping public, says Hastings. Traditional department stores “voluntarily contracted from their old models and gave up certain merchandise to the discount stores as discount supercenters expanded,” Hastings said. “They got out of TVs, bicycles and furniture, for the most part — things that weren’t competitive.” He adds that with the exception of Sears, the new department store model “is much closer to Bloomingdale’s and Nordstrom than the old model and [is] centered around fashion and home-decor lines.”

Gilliam says large department store chains still have much to learn about microtuning merchandise assortments to match surrounding demographics. “They overbuy and then have to mark down everything,” she said. Shoppers frequently find the same lines in totally contrasting submarkets within the same metropolitan area, she notes. “In Los Angeles, what works at Baldwin Hills [Mall] won’t work in Beverly Hills.”

Chains must also fight the urge to relapse into a discount-war mentality, Barnard says. “They all carried the same thing,” he said. “The only way to tell them apart was by the name on the door. So shoppers just said to heck with it and took their trade to lower-price stores and specialty trades.” He adds that many younger people still consider the department store “a place where mommy and pop shopped, and they wouldn’t be caught dead in them. That will have to change.”

But according to Federated’s Sanger, the “dying store” argument is largely hyperbole. “The department store was never dying, and department stores are not going to take over the world,” she said. “There is a niche in our economy that department stores fill very well, and what we’ve gone through in the past several years is a cyclical economic downswing. When the economy is down, the discounters are up, and when the economy is up, so are department stores and the higher-end segment.”

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