The Department Store of the Future will look a lot like the Past

By guest author Justin Lahart from Wall Street Journal

The department store transformed America. Now some of the very forces that fueled its rise have been turned against it. The only way out may be for it to recapture something of its past.

In an era in which online stores such as are battling with giants like Walmart and Target to offer customers anything under the sun, shopping at a department store for many Americans is almost quaint. Retail sales figures from the Commerce Department this past week showed that overall U.S. department store sales were down 7.2% in November and December from a year earlier.

The holidays were especially unkind to struggling J.C. Penney, which earlier this month reported that sales at stores open for more than a year fell 7.5% in the nine weeks that ended Jan. 4 from a year earlier. When Macy’s reported that comparable store sales were down just 0.6% on the year in November and December on the year, it was taken as a win—analysts had expected a much sharper decline.

But department stores were once the cutting edge of retail. From their beginnings in the latter half of the 19th century, they reshaped U.S. commerce, changing the shopping experience: Before their advent, customers would have to ask a clerk to fetch what they wanted and often haggle over the price. By dividing what they sold into departments, they were able to offer customers all of their needs under one roof while allowing them to better track sales and inventory. As the buying power of the department stores increased, they were able to cut out the jobbers, or middlemen, upon whom they had once relied.

Caption courtesy by Wall Street Journal

Many merchants struggled to compete, and an anti-department store movement spread. “Department stores were reviled by small retailers that saw them as competing unfairly,” says University of Essex historian Vicki Howard, author of “From Main Street to Mall: The Rise and Fall of the American Department Store.” Small stores’ problems only became more acute with the advent of mail-order houses such as Sears, Roebuck and Company and Montgomery Ward, which both went on to become department stores themselves.

Department stores reshaped not only retail, but culture, providing common spaces where women, in particular, could meet — and work — outside of the home. Such was the power of the department stores that in the late 1930s they successfully spearheaded an effort to move Thanksgiving earlier in order to lengthen the holiday shopping period from Black Friday to Christmas.

But a century after department stores’ rise, massive outlets like Walmart’s supercenters introduced economies of scale and deep discounts that department stores struggled to match. Their market share began to sharply deteriorate in the 1990s. Starting in the 2000s internet retailers created a fresh competitive threat, just as the mail-order houses had at the turn of the previous century.

In 1992, department stores captured 14.3 % of overall retail sales, excluding gasoline station and motor vehicle dealer sales, according to the Commerce Department. The list of department stores that have failed since then is long, including Alexanders, Caldor, Bradlees and Montgomery Ward. Last year Bon Ton and Sears Holding both filed for bankruptcy. Then there are the dozens of regional stores, such as Detroit’s J.L. Hudson Company, and scores of stand-alone stores, that have been felled. Last year, department stores’ retail sales share came to just 3.7 %.

But, department stores’ flagging fortunes may not stem simply from their inability to match supercenters and internet retailers on price and convenience. One other thing that set department stores of yore apart from their competition is that they were destinations in themselves. They turned shopping into something people actually enjoyed doing. Customers would spend hours lingering in the aisles.

“Were major department stores to focus on what makes the store magical from the windows to the upper floors, they could get the business back,” argues Burt Flickinger, managing director of consulting firm Strategic Resource Group.

Cowen & Co. analyst Oliver Chen believes that in addition to creating the types of experiences that draw customers in, department stores need to put more effort into curating what they sell in order to differentiate themselves. In an era when shoppers can easily check their phones to see what your competitors have on offer, looking the same as everyone else doesn’t work. “The underlying issue is, how does the store function in a world where everything is available online,” says Mr. Chen.

To varying degrees, department stores have been working to recapture their old magic. Nordstrom has invested heavily in the look of its stores and offers products that are often hard to find elsewhere. It has also introduced services to encourage customers to linger, like the two bars (one in the women’s shoe department) it has in the flagship store it opened in New York last year. Macy’s has been closing underperforming stores, remodelling the ones that are doing well, and introducing concepts such as Story, a store within the store that changes its merchandising theme ever few months . Despite its limited resources—it is saddled with about USD 4 billion in debt—J.C. Penney is experimenting with new ideas in a remodelled store in Hurst, Texas.

In an era where a simple click can whisk all manner of things to customers ‘doors, there is no telling whether such efforts to remake the department store into a destination will work. But the alternative—doing nothing—will only hasten department stores’ demise.