Department stores, once brimming with discovery, a full range of merchandise and amenities like tailoring, food and child care, are struggling in a challenged retail environment. This type of retail is something of an endangered species today, but there are two merchants well positioned to weather the sea change, say analysts: Macy's and Nordstrom.
Years ago the mall planted the seeds of department stores’ demise, as they replaced 19th and 20th century architecture downtown with low-slung anchors in the suburbs and populated their developments with new competition. Department stores increasingly became a misnomer as smaller retailers specializing in cosmetics, jewelry, home goods, furniture, toys and even auto parts and service challenged those formerly reliable department store sales.
"The department store emporiums, filled with endless wonderment and tremendous assortments, were supplanted by the growth of the retail shopping mall, which put these stores as anchors but surrounded them with specialty stores," retail studies professor Mark Cohen of Columbia University’s business school has told Retail Dive.
As specialty retailers challenged those areas and decimated, one by one, departments like home goods, appliances, electronics, toys and auto services, the retailers capitulated. And they filled the emptying spaces with apparel as those departments dissolved, contributing to a glut that has led to heavy discounting and challenging sales everywhere except at off-price stores, according to retail analyst Nick Egelanian, president of retail development consultants SiteWorks International. Specialty retailers, online and off, are now coming for yet another category — beauty.
"Cosmetics are the last bastion of the department stores, and Ulta is accelerating its store growth," he told Retail Dive. "This is the 30-year transfer of departments out of department stores. Department stores are under full scale assault, and this is just the beginning."
It’s fairly easy to paint the sector with one brush. Moody’s Investors Service started the year declaring it the loser in an otherwise relatively healthy retail forecast. But Nordstrom, though it’s facing many of the same headwinds, stands out as a department store apparently able to weather the trying times. Macy’s, meanwhile, is in the midst of a massive correction of its early 21st century expansion spree, closing 100 stores or more and vanishing sales in the process.
There remain dozens of local, regional and national department store chains, all in various stages of capitulation to, or strategizing against, the challenges in the market. Here, Retail Dive looks at just two. One has two headquarters, in New York City and Cincinnati, Ohio and is a holiday icon thanks to cultural fixtures like its Thanksgiving Day parade and appearances in cinema and song. The other is centered in Seattle and known mostly for its customer service and anniversary sale. Last week, they posted divergent second-quarter results, with Macy's absorbing plummeting sales as it wrangles with its oversized brick and mortar, and Nordstrom beating expectations and mostly adding stores.
"Both anchor shopping malls, and they’re both substantially built around apparel and accessories," Cohen told Retail Dive. "They both hold their brand in high esteem, and they’ve both embarked on off-price. Where they differ is Macy’s occupies 700 plus stores in A, B and C malls. That has always been a trap and now is hurting them. The Nordstrom department store resides in locations that are likely to be highly viable."
As of July 29, Macy’s in the U.S. is operating 855 physical stores, including 593 full-line Macy’s stores, 34 Bloomingdale’s stores, seven off-price Backstage stores and 127 Bluemercury spas. (The company also runs 17 Bloomingdales outlet stores and a number of stand-alone home stores and clearance stores.) As of the same date, Nordstrom runs 117 full-line stores in the U.S. and 221 off-price Rack stores, plus a few locations in Canada.
Macy’s has a much larger footprint despite an ongoing re-set that will mean the closure of at least 100 stores (some predict more) and the letting go of some 10,000 employees. But before Macy’s bought The May Company in 2005, they weren’t so far apart, according to Howard Davidowitz, chairman of New York City-based retail consulting and investment banking firm Davidowitz & Associates.
"These are two very different companies," he told Retail Dive. "Macy’s made a gigantic mistake, where they doubled their size in one gulp and got a lot of cats and dogs for stores when they bought the May Company. I was quoted in every newspaper then, to the point where [former CEO] Terry Lundgren called me and wanted to meet with me. I thought it was a tragedy, and it was — that really hurt them and it’s really hurting them now."
The consequences of that have been wide-ranging. To begin with, it added hundreds of what would become Macy's stores in sub-optimal locations. "The May Company was in a lot of mid-level malls in the Midwest," noted Davidowitz. "Macy’s was always the number one or number two store, and the May Company was never the number one or number two store. That doubled the size of Macy’s and was a critical strategic error that Nordstrom never made."
The over-expansion of Macy’s also led to tactical changes that have are contributing to its downfall, including substituting local buying talent with a national merchandising approach that eroded loyalty in many markets, according to Lee Peterson, executive vice president of brand, strategy and design at customer experience consultancy WD Partners. More recently, it also led to activist pressure to unlock the value in all that land. Although Macy’s ultimately fended that off, it spent time and resources on the distraction, last year putting a real estate expert on its board and hiring a specialist to help decide what to do with its vast holdings.
Nordstrom, meanwhile, has been able to focus on its strategy more fully, cutting costs, rationalizing its e-commerce merchandising and pricing, and refining (as opposing to shredding) its brick-and-mortar footprint. Macy’s does have lucrative property to monetize — it’s reportedly poised to sell its Chicago Loop location for as much as $130 million and recently sold the Minneapolis store for $59 million in cash—but the expansion and ensuing correction have entailed a sacrifice of other perhaps less tangible assets.
"Sure, Nordstrom has less [property], but I would much rather be Nordstrom, strongly positioned in off-price, strongly positioned online, but, most importantly, strongly positioned with a younger customer and good service," Davidowitz said.
The off-price apparel retail sector has become a shining city on the hill for retailers looking to cash in. The market, which includes TJX Cos’ stable, is among the sub-sectors boosting retail’s overall outlook, according to Moody’s Investors Service analysts.
Nordstrom is way ahead in the game, having opened its first Nordstrom Rack store in Seattle in 1975, and accelerating its growth strategy of late. The retailer is "absolutely by far the best at outlet," according to Shelley E. Kohan, VP of retail consulting at store analytics firm RetailNext.
Kohan credits the merchandise mix in Rack stores, the store set-up and Nordstrom's signature customer service, even if it’s not quite as personalized as in its flagships. "Many of the existing outlet formats struggle with merchandise assortment, and a lot of players in the outlet market today actually do cannibalize their full-line stores," Kohan said in an interview. "But for Nordstrom there’s a definite Rack customer, a definite full-line customer, and some do both. I’m not talking about T.J. Maxx — those are two different formats. But as far as the outlet, [most department stores] can't figure it out, but Nordstrom Rack kills it.”
GlobalData Retail analysts have found increasing leakage of full-line sales to Rack, though they credit the unit for Nordstrom’s ability to keep customers loyal, and spending. "[T]he company has, for a long time, invested in its retail proposition and has taken sound strategic decisions like the diversification into off-price and the development of an omnichannel plan," GlobalData Managing Director Neil Saunders said in an email to Retail Dive.
Cohen, however, reckons that Nordstrom hasn't fully come to terms with the cannabilization. "Nordstrom is expecting that customers will eventually trade up to full-line stores, but I don’t think the millennials think that way," he said. "They don’t want to pay full price when they have an alternative."
But while Rack may be siphoning sales from full-line stores, it's also taking share from Macy's (and Backstage may prove to do the same to its own flagship host). "Look at the growth rate of TJX and Nordstrom Rack," Egelanian said. "That’s where Macy's market share is going."
Backstage may be an answer to that, but, while Nordstrom has had 42 years to figure it out, Macy’s has had closer to two. "They have many more Rack stores than they have Nordstrom stores,” Davidowitz said. "Unlike Macy’s, who was in bed on sleeping pills when this whole off-price retail took off, Nordstrom did it and is producing superb results."
Besides their unalike tenures, there other differences in the two retailers’ off-price strategies. Macy’s is incorporating its nascent Backstage unit into its stores, while Nordstrom’s Racks are distinct from the full-line Nordstrom stores, in structure and type of location.
It’s not clear whether Macy's experiment has legs, though Davidowitz contends new Macy’s CEO Jeff Gennette deserves some space and time to prove Backstage’s mettle. "They’re a decade behind in getting into off price — a decade — they just started," he told Retail Dive. "They’re also going about it differently, they’re going to make it part of their stores. That may work, that may not work. The new guy is very muddled, but he wouldn’t be in this job if he wasn’t talented. I say give him time."
The very name "Nordstrom" has been synonymous with good customer service. Its greatest customer-friendly myth— that they have taken back snow tires they've never sold —is actually true. (Close enough: In the 1970s, the company bought a store in Alaska that once included a tire retailer. When a customer brought back tires, Nordstrom figured he'd bought them there, so allowed the return.)
Kohan believes customer service is embedded in Nordstrom's culture. "They put the customer in the center, and they think, "How does this impact the customer?'" she says. "I think they constantly say, ‘How do we remove pain points?’ A good example is when they recently announced that they’ll take back returns from full-line stores at their Rack stores."
Lately though, the department store hasn't been living up to its stellar reputation, according to Cohen, who nevertheless believes its "customer service is still substantial, while Macy’s is still in the dark. The service they claim they provide is almost nonexistent."
The superior state of Nordstrom stores adds to the sense of care, he said. "I’ve never visited a disheveled Nordstrom store," he said, noting that's another way that Macy’s over-expansion has hurt, as stores marked for possible closure get neglected. Davidowitz concurs.
"Good service is not talked about much these days, and I believe service is important and gives Nordstrom a big advantage," he said. "Also they have newer stores than Macy’s."
The short answer? Nordstrom, by a nose, maybe. It's a long game, and Macy's is brimming with talent and resources and is hardly going away. Egelanian expects the company to eventually settle on a string of strong stores, concentrated on the coasts. And Nordstrom, he says, hasn't suffered as much because it was always mostly an apparel and shoe store, so hasn't had to give up a dizzying series of departments or unbalance its assortment.
"Macy’s has a big target painted on its back — Nordstrom less so," Cohen says. "But Macy’s is not going to disappear. They’re not losing money, they don't have a broken balance sheet."
Davidowitz sees strength in, of all things, both retailers' history and operations as department stores, saying they have a better chance of retooling and surviving than do teen apparel retailers. "Here are two department stores facing challenges. These companies are survivors and they will be here strongly on the scene," he said. "Macy's makes careful choices in their talent, and there’s a lot of talent there. They grow good people — these are all important things that you don’t see on the balance sheet. I'd rank Nordstrom one and Macy's two, but they will survive and make the adjustments necessary. They might have a couple of tough years ahead of them. I think everybody recognizes we’re in a time of historic change. You’ve got to make all kinds of changes to your business, and you need to do it at the right pace."