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Two significant US department store groups, Macy’s and Nordstrom, acquired small innovative formats, respectively Story and Jeffrey, and abandoned them in 2020, perhaps not entirely because of the Covid pandemic. What explains their failure to use these opportunities, and what lessons can be learnt by department stores searching for a new lease of life?

Even before the pandemic,

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involving substantial cost savings, the closing of over 125 stores and the cutting of up to 4000 jobs. CEO Jeff Genette said: “We know we will be a smaller company in the foreseeable future”. These measures went hand in hand with a new strategy called “new North Star” meant to turn around the country’s largest department store group. Among those leaving the company since the pandemic is

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, who arrived when

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in 2018 and created a post just for her called “brand experience officer”. At the time the move seemed to usher in an era of reinvention for the department store group, together with the investment in start-up b8ta.

The same year 2020 saw

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, which Nordstrom had acquired in 2005. Jeffrey’s success, particularly in the Meatpacking District which contributed in no small part to the gentrification of that area of Manhattan, was seen at the time as an effort on the part of the upscale department store to renew itself and help modernise its fashion appeal. After the Nordstrom acquisition, Kalinsky worked in a variety of executive roles at the department store company while still running Jeffrey in New York, Atlanta and Palo Alto. It has now been announced that the stand-alone stores would also close (as well as 16 full-line department stores).

Two examples of well-established department stores acquiring successful and innovative concepts, as well as acquiring the founders’ expertise, in an avowed effort to rejuvenate the department store concept, then abandoning the project (admittedly in a covid year) with little to show for it. Why does it appear to be so difficult for a traditional department store to learn from a radically different but very successful retail format?

Who is Jeffrey?

The Nordstrom connection with Jeffrey is perhaps the least surprising of the two: indeed, department stores, especially higher-end ones, are expected to offer curated assortments, the latest in new fashion brands. This was exactly what Jeffrey Kalinsky had built his reputation on for many years before Nordstrom got interested. In a similar vein, the Maria Luisa space in the Printemps department store in Paris was intended to offer customers the same fashion know-how and selection that the boutique founded in the 1980s became known for. If viewed as a shop-in-shop offering a specific assortment, then Jeffrey and Maria Luisa could conceivably exist simply as another outlet for the concept alongside the boutiques. An example of such a strategy would be that of 10 Corso Como which was looking for expansion possibilities and trialled openings in department stores such as SKP or Lotte and is able to retain independence and flexibility.

However, this was clearly not the case with Jeffrey at Nordstrom since he joined the company and served in several roles, ostensibly to train or influence existing buyers to up the game of the company as a whole in terms of brands and assortment at the very least. He maintained his credibility not by opening a concept in the store but by continuing to operate the Jeffrey stores separately.

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. For several years, this category has been underperforming in department stores. It was perhaps to strengthen this category that the store took on the Jeffrey fashion icon. It should be remembered also that Nordstrom had been planning to open in New York for some time, where Jeffrey had made such a splash among the fashionistas. The Jeffrey image could do no harm to the Nordstrom brand. It was the apparel offer in the full-line stores which needed attention, since the Nordstrom Rack outlets have been performing better.

A good Story

The Story connection with Macy’s is more recent since it was acquired in 2018. Story was a single store operation which attracted much media attention since its launch in 2011. The founder was frequently invited to explain the concept, a constantly changing store and offer according to the “story” of the moment like a gallery whose aim is just as much to sell experience as it is to sell products. The narrative-driven retail concept shop is intended to bring to life an editorial approach around themes such as colour, for example.

Here again, the image advantage derived from this acquisition by Macy’s placed the latter firmly in the camp of department stores seeking to “reinvent” themselves. It also invited founder Rachel Shechtman to join Macy’s as “brand experience officer” signalling its commitment to bringing a fresh perspective to the department store and to retail. Macy’s had been in need of a fresh approach for some time since its uniqueness had been diluted and indeed drowned by its size and standardised model. The promise of Story was expertise in experience; collaboration with a number of other brands; working with small businesses and authentic products with special stories; and running a dynamic event schedule. All more like a magazine editorial role than a classic retailer. Once again, this was touted not as a shop-in-shop, but as a starting point for a major overhaul.

Goodbye Jeffrey, it’s the end of the Story

Whether the formats in question were appropriate to carry the future hopes of large department store groups is, of course, debatable. What is clear is that both department stores were probably seduced by the dynamic impact Jeffrey and Story were having on customers, the media and indeed consultants and retail commentators. Small concepts, linked to strong personalities will behave in certain ways: they will be agile and flexible, they will have minimal organisation structure, they will be subject to the whim and creativity of the founders, they will test and make mistakes, and sometimes they will be totally unsuitable for growth.

Acquiring the founder with the concept does not solve the problem. In fact, the chance of a new concept founder fitting into a large classic organisation structure is arguably quite low. Start-up founders hired by department stores have often left, frustrated at the immobility and slowness of the department stores’ structure as well as their incapacity to cut across the internal siloes.

Scaling is also a significant obstacle to success. In both cases (Story operated one store, Jeffrey three) the shift from operating on a small scale, selecting the assortment or the theme, signing collaborations and managing marketing, to making a difference in very large structures, is an almost insurmountable challenge, unless the expected impact is very clearly articulated and organised. The influence of

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was diffuse, and

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in large classical department stores.

To buy or not to buy…

As was discussed in the IADS Exclusive: Dealing with Disruption, a radical innovation in any business requires commitment and investment, sometimes at the expense of the established business. The onboarding of Jeffrey resulted apparently in no more than a star consultant let loose in the buying department; the ideals of Story were transformed into rather inadequate and sad gift shops. According to Doug Stephens who apparently had advised Macy’s to acquire Story, “Macy's squandered a golden opportunity to reinvent — not just the Macy's experience but the entire revenue model of department stores generally… but instead of taking a whole Macy's store and moving it over to the Story business model ... they chose instead to treat it as a bauble, a fanciful little concept inside the same horribly boring Macy's store”. Strong words indeed. It is certainly the case that

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with these acquisitions but as one commentator has written, was it perhaps “

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”.

These two cases raise an important question: how should department stores think about their revival and innovation in general? Acquisitions of small concepts or start-ups may help with the importing of skills and know-how. There is no doubt for example that the acquisition of the UK arm of buy.com helped John Lewis develop its own online business. But this was approached as a tool for the job and within a year, buy.com had been disbanded and totally absorbed into the mainstream business. Almost the same thing happened at Walmart when it acquired jet.com in 2016 for over $3bn and folded it into walmart.com to help it compete with Amazon. Current online Walmart development would appear to confirm the success of that move. On the other hand, with its acquisition of Bonobos, it was clear that Walmart was buying a brand alongside many others (Bonobos founder who joined Walmart has coincidentally left the company in 2020).

Department stores are not bad at innovation as the small Bloomies format or the Nordstrom Local shops testify. Even acquisitions can benefit a department store business as the

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now being moved into Nordstrom stores illustrates. But this has not been taken on with the hope of transforming the business model of the company. For the moment, the two stores remain much as they were with

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probably assured after yet more cost savings, while

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and relying increasingly on its off-price chain.

Perhaps with department stores, business model innovation or new formats need to be developed in-house. Otherwise, an acquisition should serve as a tool for a specific task.

Credits: IADS (Dr Christopher Knee)