Tough Sledding for the Department Store Industry

It’s not news that the retail industry has been, and still is, in a state of constant change. Some retailers with smaller format stores have been able to weather the changes and secure their spot in the new world of retail. However, for larger format stores, specifically department stores, it will be tough sledding. Recently, the focus has been on the demise of the department store industry, and by association, many of the regional shopping centers dependent on department store traffic. E-commerce advocates and naysayers repeat this message, while department store executives deny that their industry is in peril. Two recent announcements by Sears and Macy’s have caused us to sit up and take notice.

Announcements concerning Sears/Kmart store closures have hardly been a surprise over the past few years. The Sears bankruptcy filing in mid-October was accompanied by an announcement of 142 planned store closures – a significant drop in store count (~20%), but presumably representing one component of a comprehensive restructuring of the company.

However, Sears announced that they were closing an additional 40 stores in early November. Is their financial position so unstable that they couldn’t anticipate that these stores would need to be closed just one month earlier? This is obviously a very fluid discussion, with Sears’ CEO Eddie Lampert, attempting to acquire ~500 Sears stores as of late November. Read more about the downfall of Sears.

Macy’s Store Size Diet

Macy’s announced on November 14th that they were planning to shrink the size of selected stores. This followed a similar announcement by Kohl’s earlier this year, who declared that downsizing selected stores would enable them to sublease space to ALDI and other tenants. Macy’s has been quiet about their specific plans for the additional space that would be opened up as a result of – suffice it to say that this downsizing is predicated on reduced retail sales productivity, and not a means of launching an exciting new growth vehicle. Read more about Kohls and Aldi.

Macy’s Q3 2018 results were modestly hopeful – comp sales growth for existing stores, and a slight increase in their earnings guidance for the balance of the current fiscal year. However, it is important to bear in mind that: 1) we are currently in the 10th year of an economic recovery, and 2) consumers are benefiting from the current administration’s tax cuts that took effect at the beginning of the year (tax cuts that will not contribute to comp sales growth in CY 2019). Read more about Macy’s store strategy.

Final Thoughts

If this is the best news we can get during economic good times (arguably, great times), then hold on for the results during our next downturn. Department stores must address the issues facing their industry. As evidenced by Sear’s downfall, if retailers do not evolve and stay relevant in the minds of their shoppers, their competition will. Department stores cannot keep their head in the sand and hope the storm blows over.

Click here to read our latest article on how bricks and clicks can coexist and thrive and how retail store openings/closures impact brand awareness in a market.

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