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Many department store companies today are struggling with their physical store legacy. Stores may be too big, too many or unsuitable. Some big decisions are currently being considered in the light of the acceleration of trends provided by covid, the apparent disaffection of customers with stores and the declining profitability of the existing department store model. Some companies are closing stores, some are upgrading them, and others are considering different business models.

Stores vs online, and brand value

Figures from before the covid pandemic estimated the global share of online retail to be 18% in 2021. This is now probably a serious underestimate.

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The true figure has certainly leapt in some countries due to lockdowns, in some companies who had been resisting online investments, and indeed in those companies who were most advanced in omnichannel retailing who saw a real possibility of making up for losses from stores through the online route.

As the graph shows, the increase in the share of online retail was a trend before covid. It has likely been accelerated over the past year, which means that it will not return to its previous level but will continue to grow more steeply.

The negative impact on physical stores is a clear example of businesses suffering more from their own actions than from those of competitors. Indeed, the discussions about overstoring have been going on for some time. Even companies which have been aggressively growing their online business have often simultaneously been multiplying or expanding stores.

Some believe the most important asset of retailers lies in their brand value. The recent case in the UK of Boohoo.com acquiring Debenhams and Arcadia brands without the stores, and Asos buying Topshop, again while closing all their outlets, are cases in point. Barneys, once a famous luxury department store operation in the US, is now owned by Authentic Brands Group and licensed to Saks. The selling off of the physical real estate, often initially with a lease-back deal, may be an early sign of the end of the traditional model. The latest case is that of Stockmann in Finland which has recently sold off its Helsinki, Tallinn and Riga stores.

How does one determine whether a particular market has an excess of retail space?

According to Statista, the retail space per person in selected countries in 2018 was as follows:

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Another trend which arguably started well before covid was the “unmalling” of America and traditional store closures in many other markets too. But according to Coresight, in the year so far in the US there have been 2548 store closures and 3199 openings. The positive balance of openings, however, are often on a very different basis. For a start they have different, shorter and more flexible lease conditions, the rents are lower and/or adapted, and the stores themselves are often quite different (not least, smaller footprints). One commentator has only half-jokingly described stores for the new generation of retailers as a customer acquisition cost. The chart above shows different retail space densities across countries, showing both excesses and potentials.

What’s the use of selling space?

So how have department stores been reacting to this situation?

a)    Reducing or closing

As some department store companies have been failing, there has been something of a natural attrition of stores. This has been the case with Debenhams and BHS in the UK, for example. Some companies have been closing stores, starting with the least profitable ones such as Galeries Lafayette transferring part of its regional network to franchise operators, Macy’s or John Lewis. The John Lewis case is particularly interesting since it has long been expanding physical stores: between 2008 and 2016 (the last year it gave figures), it increased selling space by 40% at the same time that it was pushing online growth. It argued for the “halo effect” at the time, saying that £6 out of every £10 spent online was driven by the shops. That figure today is only £3. In the meantime, it is planning to reduce drastically its retail footprint in its Oxford Street store, converting the rest to offices. Something similar is being planned by Marks& Spencer at the Marble Arch end of Oxford Street which has applied to demolish the building and replace it with a smaller store topped with offices. Fenwick, an important store and real estate owner in New Bond Street is doing the same while simultaneously struggling to build an online presence.

b)    Changing or transforming

The fact that John Lewis is closing 16 out of 50 stores will free up investment funds allowing it to give the remaining stores a fighting chance. But the remaining stores will have to be different. Not only is John Lewis thinking of a totally different use of space such as housing or entertainment, but it is also apparently looking at other forms of retail such as garden centres. Other companies which own or have use of their store buildings are converting them to offices like Filene’s in Boston, into “dark stores” like El Corte Ingles in Eibar, or thinking of the department store as a mixed-use complex including hotel, shopping and restaurants like the yet to be opened Samaritaine of the LVMH group in Paris. What is clear is that the traditional department store format will not cut it at the moment, if only because it is not sufficiently profitable as a model to survive in current numbers. Other models have come into existence such as Showfields or Neighborhood Goods which would appear to be better adapted to consumers’ expectations. Or going further still, Amazon and Walmart, from opposite directions, seem to be thinking of physical stores as “satellites” in the retail ecosystem.

c)    Flagships plus local

While a number of smaller outlets are being reinvented as local stores with an emphasis on personalised service with agile and flexible structures adapted to the convenience of local customers (see IADS Exclusive on local), flagships are developing their USPs for the future and acting as brand carriers for their companies. Recently remodelled or even recently built stores will still have a significant role to play in the future as they stand as attractions in their city centres. Numerous examples prove this point such as Rinascente in Milan, El Corte Ingles in Madrid, Selfridges or Harrods in London and others. Most striking are those which have committed to major architectural creativity, starting with the 2003 Selfridges in Birmingham by System Design with Amanda Levete, and continuing in no specific order with the Galeries Lafayette Champs Elysées with BIG, their Foster designed Luxembourg store, the KaDeWe concept by India Mahdavi, the Breuninger Dusseldorf by Daniel Liebeskind, the Galleria Guanggyo, Korea, by OMA, the above mentioned Samaritaine by Sanaa of Japan, and many others. Architecture is not enough, however, and it will remain to be seen how successful these investments turn out to be in building the brand and attracting customers.

Department stores are dead, long live department stores

Department stores can be city landmarks where life and experiences are lived; they can also be convenient local places for shopping and picking up orders; and they have become the physical face of an omnichannel ecosystem which can take many forms. The nature of the stores themselves is shifting, as is the organisation structure behind them, and the profit model on which they are based. These shifts question the need for traditional store formats and organisation.

Many companies have reached a point where they appear to have too many physical stores and/or too much selling space. The examples above point to actions that have been taken by some companies faced with these problems. In some cases, they are surprising and reflect difficult choices. But they are also signs that department stores are resilient, adaptable and evolving. The need for innovation is greater than ever – and this means retail innovation. We need to remember that technology itself is only a tool (albeit a useful one) and not a substitute for new retail thinking.

Credits: IADS (Dr Christopher Knee)