Department Stores Struggle to Prove They Still Matter

Declining traffic remains a big challenge

Author: Andria Cheng

November 10, 2017

Several major department stores posted better-than-expected Q3 comparable sales this week, but the results don’t change the fact that the whole sector is still in an existential fight to draw consumers back to stores.

Take JC Penney. The company on Friday reported a better-than-expected 1.7% gain in same-store sales, its best quarterly performance since the second quarter of 2016. But the improvement was in large part thanks to “Our biggest sale of them all” that far topped the company’s own expectations. In fact, traffic, measured by transaction counts, declined, a common theme heard across chains from Penney’s off-mall rival Kohl’s to Macy’s, which on Thursday posted a 7.3% drop in transactions.

“Driving traffic is a No. 1 priority we have as a company,” said Kohl’s CEO Kevin Mansell on a conference call Thursday, in response to a question about the company’s recent partnership with Amazon to take customer returns in some stores and feature “Amazon Smart Home Experience” in 10 select stores in Los Angeles and Chicago.

Other retailers are also trying different tricks of their own. Penney, for instance, is counting on expanding its Sephora in-store beauty boutiques and adding appliances and mattress showrooms. Nordstrom features a Tesla showroom within its men’s department in a Los Angeles store and is currently hosting a pop-up boutique featuring ethically sourced fashion label Everlane at some of its stores. Lord & Taylor has inked deals with co-working space provider WeWork in hope of driving WeWork’s millennial tenants into its stores. Saks this year turned a floor into a Wellery concept offering experiences including dry-salt therapy.

But these traffic-driving gimmicks haven't moved the needle much yet. For this holiday season, for instance, a National Retail Federation survey of about 7,350 shoppers conducted by Prosper Insights & Analytics found that the percentage of shoppers who plan to shop for holiday gifts online this year for the first time topped the percentage citing department stores.

In total, the department store sector has posted either flat or negative same-store sales since the beginning of 2012 and has lagged the entire retail sector in virtually all of the past 11 years despite its moves to close hundreds of underperforming stores in recent years, Retail Metrics data showed.

“Department stores are doing a far better job managing inventories and cutting operating expenses,” Retail Metrics President Ken Perkins told eMarketer Retail. “They are closing underperforming stores. (But) when it comes to generating both meaningful revenue and profit increases the picture is much bleaker. In the face of declining foot traffic, increased capital expenditures on ecommerce/logistics, and intensifying competition from Amazon I really don’t see a way forward to long term growth for the department store group.”

This week, Penney posted its 19th quarterly loss in the last 23 quarters. Kohl’s has posted profit declines in 18 of the past 24 quarters; Macy’s, 12 of the past 13; and Nordstrom, 12 of the past 16, according to Retail Metrics. Sears, whose very survival is on the line, hasn’t turned a profit in more than four years.

As consumers are expected to shop more online this year, Perkins said he’s “skeptical” department stores can convert lost store traffic to their online sales given that consumers get “far superior value and selection" via Amazon Prime.

And it’s not just Amazon that department stores are trying to fight against. On the brick and mortar front, while Macy’s has opened its own Backstage off-price concept within its stores, the sector itself has lost sales and market share to off-price retailers like TJX's TJ Maxx and Marshalls. 

External challenges aside, there are also internal battles to rethink outmoded business processes. Penney CEO Marvin Ellison on Friday said that until very recently the company’s product pricing was driven by individual merchants and individual buying teams and there was “no overarching price strategy’ before the company finally centralized it. Penney also has got rid of its chief merchant role, once one of the industry’s most revered titles.

“We're competing against e-commerce companies that don't have Chief Merchants and don't have even category merchants,” Ellison said on Friday. “Just looking internally at JC Penney and not looking externally at others, we just came to a decision that we had to move faster. We have to be more agile and we have to be more nimble…. The most important thing is make quick decisions, move faster and don't be so deliberate, so that we can understand the needs of the customers faster.”  

Ellison’s counterparts likely are nodding in agreement.