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Department stores are being challenged to rediscover what it means to serve their local customers. Going local in retail has been a trend for some time but the Covid-19 pandemic has brought it into focus and perhaps accelerated the trend. What does this mean for department stores and their business model?

The trend to local

The current Covid-19 pandemic has all but put an end to international travel and tourism, and indeed put a serious dent in national travel and tourism too. The proud department store boast comparing their visitor numbers to those of the Eiffel Tower, the Colosseum, the Great Wall, the Statue of Liberty, now seems irrelevant. At least this is the case for the world’s flagship stores, some of which relied on foreign tourists for upward of 60% of their business.

Even at a local level, shoppers are tending to remain in their own areas of the city rather than travel to shop.

For those department store chains present at a local level in smaller national cities, the challenge of getting their customers back into their stores is already great, especially if many customers have been tempted to use online alternatives. For the large flagships, the challenge is acute. Indeed, our city-centre flagships have been privileging customer experience in an effort to convince visitors to browse, stay as long as possible, be inspired and “shop”, as opposed to enter, search, find, pay and leave.

With the fear of contagion, shoppers are more than ever interested in convenience, in a frictionless intuitive experience, which allows them complete control over their use of time and effort. Even in the luxury world, as the hospitality industry is keenly aware, convenience is a type of luxury. The luxury retail world needs to take this on board in terms of knowledgeable and sensitive staff, and maximum use of technology, including for payments or inventory search for example.

If we combine this with another trend, that concerned with global warming, diminishing carbon footprints, gas and particle emissions, energy use and environmental preservation generally, then localism becomes even more attractive, and addresses a younger demographic. To a certain extent, this has already taken root in parts of the food retail industry, and, for example, in department store Manor’s local produce traceability to nearby farmers; see also Whole Foods local sourcing.

Local city

Department stores have been at the centre of the life of cities since their invention in the 19th Century. A reassessment of cities is currently underway in the light of environmental, health and social considerations which concentrates, for example, on grouping inhabitants’ needs within a 15-minute radius by foot or bicycle. Work, home, shops, entertainment, education and healthcare should all be available within the same time a commuter might once have waited on a railway platform, according to Carlos Moreno of the Sorbonne.

The recent opening of the first full-line Nordstrom store in Manhattan has attracted a lot of attention. Perhaps the equally important openings of two Nordstrom Local stores in the city have been less commented. The first Nordstrom Local in Melrose, LA, was noticed but, like the Manhattan stores, the two further ones in LA were not. And yet these are efforts to cater to a local population in terms of service, assortment and of course convenience. "Whether it is our Nordstrom Local locations on the Upper East Side and in the West Village, our new flagship opening, or our Nordstrom Rack locations across the city, we want to bring the added convenience of services such as online order pick-up, fast and easy returns, alterations, styling and more as close to customers as possible," Nordstrom's president of stores Jamie Nordstrom said in a statement.

The combination, at least for the moment, of flagship global brand store with local outlet, appears to be replicated with Nike which has recently opened its third House of Innovation in Paris after New York and Shanghai, while simultaneously developing the Nike Live local concept in California (Melrose and Long Beach) as well as in Tokyo.

Local community

It has now been conclusively demonstrated that most of the traffic for online department store customers comes from the area near the bricks and mortar stores. So even if the store itself depends heavily on tourists, the online sales form a hub pattern around the store. When this channel took off during the pandemic, a number of stores concentrated on what they could do to help their local communities. John Lewis, for example, donated £1.4 m to around 3000 local charities during the lockdown.

John Lewis has also recently vastly increased its local reach in spite of plans to close stores by partnering with 500 Coop shops to serve as collection locations.

Technology plays a part in convenience and efficient service: Marks & Spencer has recently introduced a Mobile Pay Go facility in 310 stores. It is available through the app and linked to the loyalty programme, and for the moment targets convenience shoppers. The Japanese giant Lawson convenience store company is rolling out prefabricated stores to local communities in China and planning to develop them in Japan also.

Economies of scope

The advantages of a local perspective described so far are clear in terms of serving the changing needs of the market. It allows:

• Targeting and personal service (return on service investment)
• Increasing quality of offer and relationship (adaptation to market)
• Developing trust and loyalty (dependable and stable customer base)
• Supporting the local economy (earning good will/increasing intangible asset)

However, it also requires some costs. For example:

• Adjustments in marketing (local and social media)
• Adapting assortment (local merchandise team)
• Agile supply chain
• Upgrade in staff skills base
• Relative management autonomy

Traditionally, department stores have relied on economies of scale: centralised management and support departments have allowed larger companies to get better prices for volume from suppliers, to minimise supply chain costs per unit, to rationalise management processes to reduce the marginal cost of growth etc. And these might still be relevant, to some extent, for some businesses.

However, the current situation underlines the obsolescence of the traditional mass-market approach of department stores. Other industries (and in particular manufacturing which is where the original inspiration for department store management found its roots) have moved on.

Technology and new management practices today offer new or refined capabilities:

• Flexibility which allows variety of designs or offers
• Rapid response to changes in market demand
• Greater control and accuracy leading to better quality and reliability
• Reduced waste of goods as well as of training and maintenance
• Greater predictability from information and data reducing markdowns and personnel costs
• More speed from smart processes and AI

All of these points challenge the assumptions of economies of scale which the volume-based department stores have been wedded to since their inception. (Even the higher end “luxury” department stores have been following that same logic, but compensating for their higher costs through a higher gross margin justified by enhanced service, innovation in merchandise or “customer experience”.) Arguably, technology, processes and management today allow a shift towards economies of scope, and a vastly different model of the department store.

Could it be that the team of outsiders currently running the John Lewis Partnership in the UK is moving in the right direction? They are closing stores (even recently opened ones), considering new businesses (retail and non-retail), planning to move to 60% online sales, developing partnerships (and reducing central staff) to increase flexibility, and revisiting their technology offer through further partnerships. Only time will tell; and it will depend at least as much on the execution as on the strategy. But the challenge of local is real.

Credits: IADS (Dr Christopher Knee)