PRINTABLE VERSION HERE

The IADS office is launching an observatory of 100 department store companies around the world for members’ information and to keep track of changes in the format. The companies are not selected by size since the list includes small businesses which may nevertheless be representative of the format in their country. The list is a subjective sample which expresses the diversity of the format, both as it exists today and as it has transformed itself since its beginnings in the 19th Century. The list will be updated and act as a tracker of the format around the world. The very diversity of department stores revealed by the list is an asset when companies share their particular strengths in a group such as the IADS.

The following is a commentary on the list which is a work in progress.

The “creation myth”

Just as cultures through time and around the globe have developed their own creation myths to explain the origins of the world, the planets and stars, and human beings, so too department stores have their own. Some see the origins of the department store in middle eastern markets, others favour 17th century Japanese kimono shops while still others maintain that the expansion of European drapers holds the key to the original idea of the department store. The most widely cited case of the first “modern” department store is probably the Parisian Bon Marché in 1852, described by Emile Zola in his novel Au Bonheur des Dames (1882), held up as a typical department store as well as symbolising the social, economic and technological changes which were both improving society as well as ravaging it (see H. Pasdermadjian, The Department Store, Newman Books, 1954).

Department stores today have become an extraordinarily diverse format. They mostly still adhere to the earliest characteristics which include free entry, fixed price, no bargaining, a certain size (the most common figure quoted is at least 2500 m²), divided into multiple departments selling a wide range of goods. Their original target was the growing middle class emerging with economic development and industrialisation. Over the last one and a half centuries, the format originally based on efficiency has become increasingly complex, making it less efficient and indeed layering on levels of complicatedness (See Yves Morieux, TED Talk). However, arguably, the mixed parenting of so many department stores has given the format extra resilience which, in spite of a decline in market share, has guaranteed its persistence in new and different forms in the retail landscape.

Around the world in 100 stores

At a regional level, the IADS 100 List includes 17 companies from the Americas; 39 from Asia; 34 from Europe; and 10 from the Middle East and Africa, Australia and New Zealand. There are some broad differences in the models operating across continents:

• In Asia, there is a marked preference for the concession model, in which department stores host brands/suppliers. This model is in some cases very close to the shopping mall model. In most Asian markets, the emphasis is on growth.
• In the Americas, and particularly North America, there is a dominance of the wholesale model in which department stores purchase and take responsibility for the merchandise they sell.
• In Europe the model is mixed with some stores favouring the wholesale model, and others operating more closely to the concession model. The emphasis in Europe is on profitability rather than growth.

It should be pointed out that none of these models are totally dominant on any continent. Furthermore, we can observe a series of shifts over time: the Asian companies are searching for competitive advantage in a crowded and competitive market and will be attracted to the exclusivity of own brands or partnerships. At the same time, Americans, while also exploring partnerships for exclusivity, will invite formats into their stores which may increase the proportion of concessions. In the multiple smaller markets of Europe, where the situation is already mixed, concessions are seen as reducing risk, but also as reducing the uniqueness of the offer.

It has often been remarked that department stores do not travel well. Large markets will therefore tend to breed larger companies. It is certainly the case that the US has produced a number of giant department store companies which result from consolidations over a long period of time in a huge market. Macy’s has swallowed and absorbed well over 20 different store companies. However, it has kept Bloomingdale’s as a separate division.

In department store terms, the Asian continent has traditionally been dominated by Japanese companies which have opened (and often closed) in many other countries (where their names sometimes subsist). They have also consolidated, in pairs, in their own market. However, China is a huge market which now has a significant number of players in the format which are growing in large part thanks to the expansion of the Chinese middle class which has historically been the motor of the department store format. It should be noted that Korea is also an important player with one of the largest market shares of total retail by department stores.

In Europe, the average size of department store companies is significantly smaller than on other continents, in part because consolidations have taken place within smaller countries rather than across the continent. There are some large companies such as El Corte Ingles in Spain, the only one left in its market. Germany has lived through consolidations for many years; and the UK’s wide variety of department stores has started shrinking with the recent loss of BHS, Debenhams and many House of Fraser. In the last 30 years, France has gone from over 12 department store companies to just three in 30 years, with a market share estimated at under 1%. The historically small market share of the format in Italy can be explained by a historic dominance of small independent retailers in fashion.

The importance of omnichannel business to the format also varies considerably. It ranges per company from almost nil to around 60% (or more during the Covid pandemic). In general, online business as a proportion of the total retail market is largest in China and the US, in part because of the giant dot.com pure players and marketplaces. It is hardly worth their while for a Chinese department store to attempt to compete with an Alibaba online marketplace, whereas in the US omnichannel has been growing in department stores (and indeed in other formats).

The proportion of global online sales is currently estimated at 18% of global retail sales, forecast to rise to 22% by 2023. Several department stores were above that before covid and we expect a “50% club” to emerge (those department stores registering over 50% of sales from online) already including John Lewis, with Nordstrom and Falabella knocking on the door and others not far behind.

What does diversity look like?

It is clear that even given the lowest size limit mentioned above, there still exists a huge variation in size among department stores. Some of the giants most often mentioned today are the Centum City, Busan, store of Shinsegae (293 000 m²), the SKP stores such as the Beijing one at some 200 000 m², or even Macy’s in Herald square New York, claiming to weigh in at 200 000 m² GLA. It is clear that operating such a business requires different skills from those needed to run one of the smaller stores (under 5000 m²) of the important Swiss chain Manor. An appropriate management structure including regional directors overseeing several smaller stores, or floor directors responsible for one or more floors of a large structure, is often created. The size of overall companies may also vary considerably in our list (see Liberty of London compared to Falabella of Chile, for example).

The composition of the department store portfolio of a company may consist at one extreme of a number of stores which are fairly well balanced in terms of size and revenue (such as the late Debenhams in the UK which could properly be described as a chain), or of a large flagship with a “long tail” of smaller stores capitalising on the flagship brand (which was the case of Galeries Lafayette before it put a number of its smaller stores out to franchise). Clearly an unbalanced portfolio of stores can make the retail operation extremely complex in terms of assortments, contracts with suppliers etc.

Some of the complications of running a multiple department store business may come from a history of consolidation. Frasers group in the UK, for example, over time acquired and, in some cases, consolidated over 20 different names. In each case this means merging company cultures internally, and communicating brand meaning to customers (there were street demonstrations in Chicago when Macy’s changed the name of Marshall Fields to its own in 2006). Macy’s, the world’s largest department store company in terms of revenue, probably has managed also the greatest number of takeovers of rival department store names. In Japan, several pairs of department stores have joined forces over the last decades such as Hanshin and Hankyu, Isetan and Mitsukoshi, or Daimaru and Matsuzakaya. However, it is sometimes complicated to understand exactly what that means in operational terms.

Indeed, in some places, one department store company has risen to the top and exercises a quasi-monopoly in the department store market after acquisition of its rivals. This is the case, for example, of El Corte Ingles in Spain which acquired its only rival Galerias Preciados in 1996. However, all countries are not characterised by one dominant department store company and a litter of smaller niche companies. Countries where department stores hold the largest market share in terms of the share of total retail trade, are often characterised by several strongly competing companies. This is the case in South Korea, for example, with companies Lotte, Shinsegae, Hyundai and Galleria accounting for perhaps over 5% market share. The same situation obtains in Chile with Falabella, Paris and Ripley waging war in an unforgivingly competitive retail market.

The degree of rivalry also depends on the market positioning of the department store companies. Some have chosen to remain or shift towards the luxury end of the market such as Breuninger in Germany, or Bon Marché, part of the LVMH group. Just as society is supposed to be polarising along income and wealth lines with significant shifts in Gini coefficients, so retail and department stores are finding it increasingly difficult to maintain profitability catering to a shrinking middle-class market. The degree of dependence on the tourist trade will also impact some but not other companies. Large flagships in world capitals will be operating a different business from those stores serving a more local clientele.

The situation can vary in markets where the format is older compared to markets where department stores are relatively recent creations. In the former, the emphasis will be more on precision retailing and maintaining profitability, whilst in newer department store markets, the emphasis will be on development and growth (as it was indeed when the format was created in Europe or the US). Thus, SM in the Philippines has, until Covid slowed us all down, seen a remarkable organic growth rate in terms of numbers of stores and centres around the islands of the country. Similarly, with Hong Kong and plans at Sogo of the Lifestyle Group, although recent political events have complicated matters. The outstanding example, in this regard at the moment is, of course, China where SKP is planning to open giant stores across the country in the next two or three years. In Thailand, The Mall Group is continuing its considerable investment programme, while Central Retail Group has been acquiring famous department stores in Europe such as Rinascente in Italy, KaDeWe in Germany, Illum in Denmark, and most recently Globus in Switzerland.

The perspective on development, investment and growth will depend to a significant extent on whether a department store company is privately held or public. Privately owned companies are expected to adopt a more long-term perspective than public companies. However, while this may be true to a large extent for family-owned companies, it is certainly not the case for equity investors who may take a company private after a takeover. The case of the Canadian company Hudson’s Bay which took over Lord & Taylor and Saks Fifth Avenue under US investor Richard Baker is an example of the latter case, Lord & Taylor having been sold and closed down.

This huge diversity within the same format translates into a considerable stock of collective experience to be shared in an organisation such as the IADS: the early development of e-commerce or marketplaces; concession management; private label development; fulfilment options; the adoption and integration of various softwares and technologies; organisation structures and HR management; supply chain strategies; marketing innovations and visual merchandising standards; store design… These are but some examples which may be expressed quite differently (or indeed at different moments in time) across the range of department stores, but which are nevertheless applied within a common format. The learnings are potentially huge.

Die another day

Just as we started with the department store creation myth, we need to end with an “apocalypse myth”. The end of department stores has been forecast for a long time. Every time a new retail format emerges, it is said to be another nail in the coffin of department stores. Thus hypermarkets, big box discounters, fast fashion chains, and, of course, online retailers have all been named at different times as factors hastening the doomsday of department stores. The most recent predictions have been related to death by covid, which is supposed to have accelerated an already active process of decline (see NYTimes piece).

The IADS believes to the contrary that those department stores which have survived, and in some cases thrived, will find the resilience to develop and be born again, perhaps with a modified business model. Visions of apocalypse are usually a reflection of our fears at any given moment. Those fears are real but can be harnessed and put to work to create a new version of the format using its diversity as a strength.

The IADS 100 List is intended to chart aspects of the format as it copes with the latest challenge (and perhaps future ones).

Note: How to read (and how not to read) the IADS 100 list

Is department store data available and comparable? While department store diversity can be a strength when shared, it also makes comparisons difficult. It is clear, for example, that data concerning revenue, profits, selling space etc. will often not be available from privately held companies. If the IADS obtains such data privately and confidentially, we will not publish it.

Standards between companies and between countries will vary sometimes quite considerably, because of history, accepted practices or indeed accounting standards and legislation. For example, in some companies, reported revenue will cover only sales of goods owned by the store and not the sales made through concessions operating within the store and paying a commission. This is the case for example with Harrods of London which officially reported a latest-year revenue of £607 m but unofficially a “gross merchandise revenue” (goods sold through the store) of £ 1 041 m. Some companies in Asia generate revenue mainly from concessions.

Profitability is also reported differently (when it is reported at all): it may be operating profit, EBIT, EBITDA, or net (attributable) profit. These are sometimes defined differently from one company to another. They can also give very different pictures of a company. For example, although some companies have been clearly still operationally profitable even during covid, they may still suffer an overall loss. The main interest of the IADS will be to evaluate operating profitability. We will however report overall department store, company or group profits where available.

The IADS also focuses on department store operations, sometimes the only activity of a group, but in other cases only a small part of a group’s operations. Ideally, we would be able to report a group’s results as well as those of the department store division within it. This is not always possible, however. In some cases, the differences are minimal while in others they can be considerable. The Hanwha Group of Korea is a large business conglomerate covering aerospace, chemicals, energy, finance, construction, as well as leisure and lifestyle under which can be found hotels, resorts and the Galleria department stores, representing around 1% of total group business. Similarly, the Sogo Seibu stores of the Seven & I group of Japan represent under 8% of total activity.

International companies are also sometimes structured by country in which the results of department stores are not distinguished from those of other formats in that country such as supermarkets or DIY. This also can pose a problem for the extraction of the pure department store activity.

Finally, many, but not all, of the companies listed have some e-commerce activity. That activity may be local or international (such as Breuninger in Switzerland or Bijenkorf in France). It may sometimes but not always be listed separately from the brick & mortar store activity. Probably the most notable in this respect is John Lewis of the UK for which online represents over half of total activity.

The “elephant in the room” is, of course, the past year of covid lockdowns. Some of the figures include that period, others include some of that period and yet others only cover the period preceding covid. This naturally makes any comparison of the effects of covid impossible. With time, as the list evolves, this problem will disappear. However, it should be noted that financial years can be very different across companies, even within the same country.

The latest figures from Statista show the impact of covid on retail sales in different categories online. While supermarkets and sports equipment have clearly benefited from lockdowns, tourism, travel, fashion, and accessories (important to department stores) have suffered. Overall, retail sales are expected to be down 5.7% in 2020. So the figure is likely to be considerably higher for department stores.

Credits: IADS (Dr Christopher Knee)

 ASIA: Sample of 39 companies covering 12 countries. Total sales € 88 bn

EUROPE: Sample of 34 companies covering 18 countries. Total sales € 55.1 bn

AMERICAS: Sample of 17 companies covering 12 countries. Total sales € 66.9 bn

MIDDLE EAST, AFRICA, OCEANIA: 10 companies covering 6 countries. Total sales: € 7.6 bn