Recent news that Sears, Macy’s and JC Penney intend to close many more department stores throughout the US may lead some to the conclusion that department stores are a dying breed. However, on the Urbis International Retail Study Tour to North America we witnessed a divergent trend…
Department stores – a dying breed?
Sears has been an iconic brand in the United States for decades. But judging by the appearance of their stores, one could be forgiven for thinking they are disinterested and past their ‘use by’ date. Sales are in rapid decline and gross margins are trending in the wrong direction. Macy’s and JC Penney have also just announced the closure of many stores.
That’s one end of the spectrum – the value end appears to be in difficulty, at least for the traditional, ‘old style’ department store model.
Two sides to the story
The 2016 Urbis International Retail Study Tour to North America witnessed a divergent trend, at least in A grade centres and the department stores usually associated with the middle-upper end customer (ie Nordstom, Bloomingdale’s and Neiman Marcus).
Nationally, in contrast to the likes of Sears which declined by 7%-8%, Nordstrom’s total sales increased by 7.5% last year. There’s nothing like first hand observation to see why.
Nordstrom is an interesting case study and arguably the benchmark for several reasons:
Nordstrom's total sales increased by 7.5% last year. There's nothing like first hand observation to see why.
1. Great presentation and fitout
Firstly, the newest store at the Eaton Centre in Toronto is a great example of what department stores are capable of implementing. This three level Nordstrom replaced a lacklustre Sears.
It appears to be trading very well, and having a positive impact on the centre as a whole. Great presentation and fitout (see photo). Great news for Cadillac Fairview Corporation too as the change should produce considerable value uplift.
This is particularly relevant to shopping centre landlords now, given the likelihood of many other department stores giving back space over the next few years. Sears, for example, has 47% of its full-line stores on leases expiring in the next five years.
Nordstrom, Eaton Centre, Toronto
2. Store refits
Nordstrom continues to invest in store refits as well as new stores – 24% of their capex over the next five years is expected to be directed to ‘remodels and maintenance’, with a further 14% to ‘new stores and relocations’. That’s 38% of capex, and a substantial 1.5% of total sales.
3. Service levels
Not only is Nordstrom investing in new fitouts and great visual merchandising, but service levels and product knowledge among staff are exemplary.
They are clearly demonstrating the importance of providing a great customer experience – relevant, convenient and personalised. Yes, incentivising sales staff clearly helps, but what about training? They do it well in North America. The Australian operators clearly need to improve. There is hope!
Nordstrom have been very successful because of their multi-channel approach
4. Multi-channel approach
Their customer strategy is interesting. We’ve heard a lot about omni-channel strategies, and the fact that Australia’s retailers, large and small, are lagging.
Nordstrom have been very successful because of their multi-channel approach – they have continued to improve their physical presence, whilst also building an ecommerce business that now accounts for 20% of total sales, and which, coincidentally grew by 20% last year. They also have a substantial off-price offer that has been a growth engine for the business and a further source of sales growth.
Nordstrom Rack is an ‘off-price store’ concept which enables customers to purchase branded merchandise, special buys and production overruns, as well as slow moving and end of season stock at discounted prices. The rack concept is performing very well, with growth of 13.7% last year.
Overall, approximately two thirds of the growth in Nordstrom’s retail business in the USA was due to Nordstrom Rack, or the off-price segment. This included substantial growth in the Nordstrom Rack on-line channel.
Nordstrom can be flexible and fit for market in many more locations than would be viable under a traditional department store location model.
There are now approximately 200 Nordstrom Rack stores across North America and 120 Nordstrom Full Line/Full Price stores. Yes, the Rack stores outnumber the main stores.
The average store size is around 3,300 sqm for the Rack stores and 16,400 sqm for the Full-Line stores, so 75% of total space is in the main stores even though they are only 37% of store numbers.
Nordstrom can be flexible and fit for market in many locations that would not be be viable under a traditional department store location model. Their stores are designed to be relevant to the market, clearly differentiated between full price and ‘on sale’, and offering a unique experience tailored to the market.
For example, the new Rack store in Westfield Culver City is a relevant anchor for that centre and fits well with the leasing strategy for the centre as a whole. Westfield Culver City has done a great job penetrating areas and segments that were previously under-represented in the centre; and now consumers from both sides of the 405 Freeway also have convenient access to the Nordstrom brand.
6. Instructive approach and strategy
Finally, Nordstrom’s multi-channel approach and network strategy is instructive. They have physical and digital covered; and they have a great ability to introduce new customers to the brand earlier in a customer’s life cycle stage than would typically be the case. All without compromising their brand by constantly discounting merchandise in their full-price stores.
This strategy also means that full line/full price stores are constantly refreshed with the latest product range – another reason to visit.
Lessons for Australia
Australian department stores have been on a journey of recovery for many years, and we are only just starting to see some green shoots. Myer and David Jones have both reported sales growth, and are demonstrating some of the Nordstrom type thinking. In our view they have simply stopped the rot. There is a lot of work to do to re-establish the relevance of department stores in Australia.
There has been a lot of discussion in Australia about service levels, or at least the difference between the experience in Australia and overseas. It is undeniable that we need our department store operators to reimagine their service culture. That used to be an important point of difference for department stores, along with range and price. What is it now?
Moreover, given that Outlet Centres in Australia, and indeed around the world, are booming, perhaps it is time to think about re-purposing some low productivity stores as genuine ‘off-price’ stores, and perhaps also re-purposing some of our discount department stores as well.
By genuine, we don’t mean the old Myer Good Buy Warehouse or the David Jones Warehouse concepts that were poorly conceived and executed. We mean a genuine distribution channel suited to specific markets, with store designs, ranging and visual merchandising that offer a proper store experience.
Nordstrom is showing the way in North America and John Lewis is the leader in the UK. There’s a lot to be said for first hand overseas experience and knowledge of the winning strategies of the best global operators.
Global Retail Trends Series
In September Urbis embarked on its latest International Retail Study Tour. Along with a group of our clients, we visited six cities in the USA and Canada and experienced more than 40 shopping centres through the eyes of people operating in different disciplines within the retail industry.
We’ll be showcasing some of our findings through the Global Retail Trends series.
See the earlier installments here: