Since the start of the COVID-19 pandemic, fashion stores have not passing a bright time – with strict closure rules, fears of new lockdowns all around the world, compulsory social distancing in enclosed spaces. after more than year gone and vaccines on the loose have not given a great joy for the physical fashion stores. As shoppers are increasingly turning towards online shopping, the growth of the resale market and the impossibility of foreign travel, stores seem to be still seriously under threat.
In the US, numerous analysts are foreseeing their complete departure. According to real estate specialist Green Street Advisors, 50% of the department store branches operating in shopping malls are expected to shut down.
According to consulting firm Cowen, 44% of US consumers foresee spending less in department stores in the next 5 years, as opposed to only 9% who are prepared to stay loyal them. Equally, second-hand and sustainable fashion products, as well as Amazon Fashion lines, are highly fashionable.
In spite of the shocking impact the COVID-19 pandemic has had in 2020, it accelerated the already existing difficulties faced by department stores.
A study by Morgan Stanley has projected that, on the US market, department stores accounted for 24% of apparel sales in 2016, but will account just 8% in 2022. In the USA, department stores started to struggle commercially in the 2010s, and chains like JC Penney and Sears defaulted well before the COVID-19 outbreak.
In Japan, in the 20 years between 1998 and 2018, the revenues of department stores (numbering no more than 200 branches in the country today) fell by over JPY9 trillion, down to JPY5.9 trillion, a shortfall of over one third.
“The pandemic did not trigger the crisis, but caused it to worsen more quickly,” said Selvane Mohandas du Ménil, Managing Director of the International Association of Department Stores, with dozens of members in Latin America, Asia and Europe.
Mohandas emphasized that “In English-speaking markets, there has been a drive towards gigantism, fake growth raised by extensions in retail area, carried out by groups often supported by pension and investment funds. South-East Asia instead was the arena of Japanese operators. This drive also led to [department store] openings in shopping malls that weren’t mainly successful, hiding dropping margins and the fact that no real advance had been made on the e-tail front.”
Lagging behind on e-tail
E-commerce is triggering more difficulties for department stores. Some of them started going down the e-tail road only very 0lately, having long regarded the channel as unprofitable. Crucially, the web continues to siphon away department store customers, especially now that consumers cannot travel.
In addition to the competition by ubiquitous online giants like Amazon, Zalando and Tmall, and by brands that now have their own e-shops, department stores have had to deal with an increasing number of outlet stores, and have been sucked into the discount race, launching a spate of commercial initiatives. Rail stations and airports too have turned into retailers, snatching from department stores the status of primary contact point between labels and customers.
With consumers increasingly inclined to shop for second-hand items and to curb their expenditure, is a retail apocalypse inevitable? Will COVID-19 deal the final blow to department store chains and their long-established flagship stores in the world’s capitals?
“At [French department store] Le Bon Marché, in the 1990s, they were already wondering about the future of the channel,” said Christophe Anjolras, President and Founder of the Volcan Design agency, a consultant to brands and retailers on store-concept evolution.
“I fully believe department stores have a future. In the USA, Nordstrom is arranging some interesting new formats, and in China, SKP Beijing is clearly getting over new customers. But worldwide, like every other distribution channel, [department stores] must undergo an in-depth transformation. The shopping mall-based model is clearly losing traction,” Anjolras added.
In cities like Paris and London, the strength of department stores stemmed from the international appeal of their flagships, featuring exceptional products and a shopping experience in lavish buildings. A reputation that benefited all their national and international branches, but which gradually led to a business model in which profitability was dependent on tourists’ expenditure in the chains’ flagship stores.
“Their main asset, which has become a weakness, was that a brand that entered a department store flagship was visible to tourists coming from all over the world,” said Mohandas du Ménil. He added that “this has generated a dichotomy between the reality in Paris and that in branches outside the capital. Tourists are not expected to return in numbers before 2023-24. This is forcing department stores to re-think how they target local customers. Nowadays, flagships are so large they play a disproportionate role in the groups’ overall results. But if you look closely at the trends and revenues generated in provincial branches, the latter are holding on.”
An issue that union representatives are bitterly emphasising nowadays, having for many years sounded warning bells about the risk of jettisoning the stores’ local clientèle. Indeed, the local clientèle’s resilience means flagship stores can still remain optimistic about their future.
Lesser sales the future
“We will probably end up selling less,” said Anne Pitcher, Managing Director of the Selfridges Group, cited in the McKinsey survey on the fashion industry’s outlook in 2021.
“The throwaway [purchase] is definitely slowing down. Department stores are lucky, because they are by necessity big, open spaces. There’s still so much art, food, culture, conversation, relevance. There’s a lot more that people can do in a space than just buy stuff. For anyone to go out, there needs to be a purpose, and that’s how we need to think about the way we do business,” said Pitcher.
The challenge for department stores is reinventing themselves. And not just in digital terms. “Digital tools aren’t a panacea, not if the overall concept isn’t attractive,” said Anjolras.
“Macy’s announced a closures plan, without indicating if [the chain] would end up with 300 or 200 branches – when it used to operate 800 – but what format does it propose to adopt? Including other chains, integrating them with existing ones, redesigning a curated product range and the customer experience, are ways of optimizing the retail area available while boosting credibility. What is extremely difficult for these players is that they need to handle simultaneously a downsizing process, a store and customer experience transformation, and an expansion of their digital capabilities. Each of them must find the right balance, with unique features and a distinctive retail element,” added Anjolras.
The notion of a curated product range seems essential. Reliance on a locally relevant range appears to be a driving factor, as do a selection of second-hand items and showcasing brands that are available exclusively on the web. In the US, the Neighborhood Goods concept, introduced in 2018 in Texas and based on a regular rotation of lifestyle, fashion and beauty labels culled from Instagram, seems to be a success.
“We are all aware that now is the time to invest,” said Mohandas du Ménil, adding that “digital capabilities aren’t an object in themselves, but a rallying cry. After the first lockdown period, Switzerland’s Manor group started a radical transformation program, Thai operator The Mall stepped up the pace of its store renovation/opening plans while digitalizing its operations, and El Corte Inglés recently opened the Castellana luxury hub in Madrid, while investing in a new app and taking direct control of its marketplace logistics. Digital tools are means to better sales. If your returns rate is 70%, it will play havoc with profitability. If you can’t reach the desired level of profitability via the [online] channel itself, tapping digital tools will allow you to optimize your operational set-up in order to reach it.”