What: Inclusion has been often seen as secondary compared to the environmental issues, but actually its importance is the same in terms of productivity and employees’ commitments.

Why it is important: Through a dedicated, visible and fully supported policy, employers can significantly improve happiness at work, reduce exists, and can advertise their employer brand to be even more attractive.

When facing the topic of sustainability as a whole, many companies consider it from the angle of the environment (CSR) and people come second. Some markets have been taking the leadership when  it comes to inclusion and equality, usually for historical reasons, such as the US. Even today, inclusion can be seen as a secondary topic or an ‘exotic’ one by non-US employers.

The Boston Consulting Group advocates that this topic (summed up by making sure that all employees feel valued, respected, and therefore are motivated), is actually central and benefits not to a minority but all employees.

DEI (Diversity, Equality and Inclusion) programs, for instance, increases happiness for both women and men, showing that such programs usually have influence beyond the group it targets. However, it is difficult for companies to actually measure the impact of their DEI policies, which is why the BCG has developed a new index, BLISS (Bias-free, Leadership, Inclusion, Safety and Support), to model the impact. According to them, an increase in the BLISS score can increase happiness at workplace by 30% and halve exits.

Of course, this requires full support from the leading team which should also reflect this approach to diversity in its own structure.

HR: Why Inclusion is no longer a nice to have 

What: 2023 should be the year of recovery for international retail, thanks to the reopening of China. However, this will come with shifts in the industry.

Why it is important: Tourists might have changed in nature (what they want) and in numbers (according to the destination). For this reason, department stores will have to carefully analyse the nature of the flows, in order to make the most of the touristic boon. The good news is that after 2 years of efforts on the structure and spending, this boon should come as a cherry on the cake and not a way to fill in a potential gap in sales.

Global travel has been heavily affected by the closure of global borders sparked by the 2020 Covid-19 pandemic. China was the last country to keep its borders closed and this restriction was lifted early 2023. Given its weight in global consumption, especially in the fashion and luxury segments thanks to its tourists, Visa expects that this reopening will set global travel on path of recovery in 2023.

According to the report, Asia Pacific monthly outbound travel could match 2019 as early as July 2023 (for comparison, 2022 reached 27% of 2019 levels). Interestingly, the pace of recovery is faster than in Europe and the US on a comparable basis in time.

Interestingly, the only cities to have fully recovered (or surpassed) their 2019 levels in 2022 were Paris (110%), which still ranked #1 mainly thanks to European and Northern American tourists, London (138%, #2), and Istanbul (103%, #3). But new destinations overperformed: look at Mecca (166%), Riyadh (167%), Medina (192%), Cancun (128%), Punta Cana (138%) or Los Cabos (132%). International operators should expect a change in terms of destinations, as Asia Pacific destinations are also expected to take the lion’s share in 2023.

Another interesting fact noted by Visa is the recovery in touristic spending was faster in restaurants than in pure retail. This is a sign that travelling individuals are increasingly looking for experiences rather than pure shopping.

China’s reopening sets global travel back on track in 2023 

What: Andreessen Horowitz releases its 4th update of its Marketplace 100 ranking.

Why it is important: Marketplaces are getting specialized and curated, away from the “anyone can list” approach that dominated 2010 to 2020.

Venture capital firm Andreessen Horowitz made extensive global research in order to update its Marketplace 100 ranking, after three years of economic volatility.

It includes, among others, three dozen newcomers, including marketplaces for refurbished electronics, precious metals, sustainably-raised meat, vacation villas and used car parts. The company identifies the following key take aways:

•    After two years of unprecedented growth, ecommerce penetration has returned to pre-pandemic levels. However, the way we shop has changed, as consumers are now buying sports cards via live drops and discovering sneakers curated by a personal algorithm.

•    Consumers opted to repair their cars, rather than buy new ones, a fallout from continued supply chain disruptions and inflation. This behavioral shift had big implications for auto parts marketplaces like RockAuto.

•    There’s big money in mental health, particularly for marketplace companies that help consumers navigate the perplexing insurance policies governing many therapy practices. Four companies on this year’s list help patients find in-network providers.

•    Nearly every ticketing company on the Marketplace 100—a noteworthy eight—outperformed already impressive 2022 numbers. But there’s reason to think this trend may level off in the coming months.

•    Marketplaces are getting opinionated, with platforms that carefully curate supply popping up across categories like food, clothing, and pets. This is a stark departure from the wave of “anyone can list” marketplaces that dominated 2010 to 2020.

•    While the top of the Marketplace 100 remains stable—Instacart has claimed the number one spot for three years running—younger companies like Whatnot (#9), TodayTix (#54), and Headway (#56) are growing quickly and showing signs of breaking out.

The top 100 marketplaces in the world 

What: Coresight draws the most important conclusions for retailers after the closure of the National People’s Congress in China.

Why it is important: The keywords for retailers operating in China are to navigate at sight, be ready for any positive or negative signal, and be able to adapt in real time, as a fast recovery to prepandemic levels is unlikely.

The 2023 National People’s Congress took place March 5-13, in Beijing. During this much-awaited event, the government announced the lowest GDP target since 1976, at 5.0%, after a 3.0% growth rate in 2022. Coresight’s analysts estimate that this is the visible part of a much larger iceberg of pessimistic forecasts (including a youth employment rate of 20% in 2022), suggesting that a strong recovery is not expected in the short term.

Retail-relevant policy discussion during the 2023 NPC centered around private industry support, after past year’s backslash on education, gaming and tech, and increased investment in the digital economy, including cellular, data and e-commerce technologies. A Bureau for Data Security is being considered, which would have consequences for companies exporting or importing data to and from China. SMEs will also receive a stronger support for their digital deployment.

WHAT RETAILERS NEED TO KNOW FROM THE LATEST CHINESE NATIONAL PEOPLE'S CONGRESS

What: Coresight makes a comparison of fast-fashion giant Shein and the new marketplace on the rise, Temu.

Why it is important: China is increasingly giving birth to international giants with business models mixing industrial capabilities with a digital core, who disrupt the retail industry.

Two Chinese e-commerce players, Temu and Shein, are attracting significant attention from consumers and retailers alike. While Temu is a marketplace that utilizes a consumer-to-manufacturer (C2M) model, Shein is a traditional retailer.

Shein uses a real-time fast-fashion model and adds about 6,000 new items every day. The company has started testing an e-commerce platform model in Brazil, which could help it diversify its revenue sources. Temu leverages the C2M model to provide fast and inexpensive services.

Both companies ship individual orders from China, but Shein is expanding its distribution centers in North America to get its products to customers faster.

When it comes to sustainability, Temu claims to offset carbon emissions for every delivery made, while Shein has invested $15 million in upgrading factories and launched a resale platform to appeal to Gen Z consumers. Both companies are expected to pursue sustainability initiatives to address concerns about the environmental impact of their products.

Comparing Shein and Temu 

PRINTABLE VERSION HERE

*Galeries Lafayette made headlines earlier in 2022 when the “Wellness Galerie” opened on 3,000 sqm in the Paris Haussmann flagship. It was a step forward in terms of space allocated and percentage of services offered, compared to products. However, the French department store was not the first mover, as the wellness category had already been explored by other retailers in the world. Shifts in customer behaviour, focus on sustainability at large including self-care, and the need for retailers to diversify and explore new categories to stick to trends or generate new revenue streams… these are all reasons why retailers that are increasingly exploring or expanding their offer in this new category are multiple. Let’s review how department stores are currently addressing wellness.*

What are we talking about?

The wellness market is a growing category that includes products and services designed to improve or promote physical and mental health and well-being. It includes gym memberships, healthy food and supplements, beauty products, mental health services, and more.

The exact definitions of the market differ, which is why the size estimates of the market can significantly vary. While McKinsey evaluates it to be around $1.5 trillion in 2020 for what regards wellness consumer goods (encompassing fitness, nutrition, overall physical and mental health and appearance), the Global Wellness Institute (GWI), a non-profit organization based in the US, evaluates the total market at $4.4 trillion for a total of 11 sectors, of which personal care & beauty, healthy nutrition, and physical activity-related goods represented $2.6 trillion in 2020. However, here again, it is difficult to properly evaluate the size of the market addressable by retailers, as they are continuously creating new services and offers, and therefore blurring the boundaries. For instance, if we take the 11 sectors as defined by the GWI, should Mental Wellness and Spas be added to the addressable market, for an additional amount of $199m?

Whatever the numbers, they are sufficiently significant to make that category attractive, all the more that wellness as a whole makes sense for a department store:

•    There has been a growing focus on health and well-being in recent years, with more and more customers becoming interested in living healthier lifestyles. While studying the market in 2021, McKinsey found out that 79% of respondents believed that wellness was important, and 42% considered it a top priority,

•    It can be a profitable business when looking at the customer profiles interested in this category. Most of these customers are willing to (or already used to) pay a premium for wellness-related products and services, which is a good incentive for margin-squeezed department stores to look at this category,

•    Finally, wellness can help to differentiate from the competition. Offering a wide range of wellness products and services can help department stores to position themselves as destinations for health and well-being, which can be attractive to consumers looking for a convenient, one-stop-shop for their wellness needs. It is also a way to regain market share from specialty stores and specialized retailers, such as Sephora, that ended up taking the lion’s share of global beauty (a flagship category for department stores usually displayed on the ground floors for the vast majority of them). By looking early at wellness, department stores are able to take a position at the right time and make sure they can reap the first mover advantages.

In order to address this category, department stores can either:

•    Reorganise their existing offer to create new “wellness-branded” sections merchandise and brands already available in the department store offer, but regrouped and presented in a novel way,

•    Create new departments from scratch, with newly sourced brands and products such as wearable devices or ingestible cosmetics, and also introduce new services enhancing customers’ well-being (gym, yoga studios, etc..),

•    Some, especially in the US, go even further by including health services and light medical acts with injectables. This echoes the historical role of department stores as social hubs in city centres, accessible to anyone and housing everything under the same roof. Of course, such a strategy heavily relies on local regulations as performing light medical acts in a department store might not be allowed in every country.

To be noted: wellness is new and trendy, and it can lead to abuses, as it has also been the case in sustainability. Just like some retailers have been accused of “greenwashing” by heavily advertising their sustainable actions, others have used wellness as a blanket word to sell any kind of product (regular beauty brands, jewellery or even lingerie) in order to lure in customers.

Department stores initiatives typologies

We could empirically define five different types of initiatives led by department stores:

•    The “2.0 beauty salon”,

•    The bit-by-bit upgrade approach,

•    The specific case of the US and how healthcare is a selling point,

•    The digital approach,

•    The holistic set of solutions.

The 2.0 Beauty salon

Department stores began to offer a variety of beauty services as a way to attract and retain customers in the early 20th century. These services could include services like hair styling, makeup application, and skin care treatments.

Beauty salons are today a common sight in most department stores, as they offer convenient access to a wide range of services and products, including products from the store itself (a great incentive for department stores to operate salons themselves at the beginning). In addition, beauty salons perfectly fit into the “everything under one roof” initial proposal of department stores. This is why they can be found in department stores across the planet, usually in locations which otherwise would be less performing from a strict retailing point of view: the second basement in Corte Inglés Castellana (Madrid), a side part of the ground floor at Magasin du Nord (Copenhagen), higher floors in Stockmann (Helsinki) and NK (Stockholm), the top floor at Harrods (London) or a side floor in Steen & Strom (Oslo).

It is therefore easy for most of them to consider either upgrading spaces or increasing the offer available in such salons. However, due to their history in any given city, they might be perceived as old-fashioned and not attractive by the younger generations (for that reason it is interesting to note that KaDeWe in Berlin, which staged a total revamp of the store for the past few years, has not created a beauty salon per se, but instead opened a 200 sqm “beauty lounge” where brands’ shop-in-shops propose an vast variety of services).

This is why some department stores decided to create new-generation beauty salons in new locations, to make sure the novelty is fully perceived by the customers.

For instance, Le Bon Marché opened L’Institut, a 152 sqm space on the top floor of the store, in September 2022. The space is operated in partnership with brands (providing products, services and expertise) and the accent is put on intimacy and privacy. Equipped with 6 cabins, this new space is a new, and rather high-end, interpretation of the traditional beauty salon, however still very much focused on services based on beauty and care (in partnership with brands such as Dior and Guerlain).

Le Printemps went further when finishing the revamp of the Haussmann store in March 2022 and the new beauty space was unveiled:

•    On the Beauty floor, large areas were dedicated to beauty services (manicure, pedicure, brows, hair care). Such services were already available prior to the revamp but scattered in the store. Gathering them in one single location allowed Printemps to communicate about a new generation of beauty salons, in addition to making the offer visible, powerful and efficient,

•    Expanding beyond traditional beauty services, a partnership was signed with Face 2 Une, a spa proposing manual massages and machines,

•    In order to also propose unprecedented brands, Printemps has also made a partnership with a crowdfunding platform, aiming to contribute to the development of new brands and sell them in the store,

•    Finally, in addition to the traditional beauty offer, a section is dedicated to food treatments coming in complement to beauty products.

All in all, the ‘2.0 beauty salon’ is all about upgrading the offer, marginally adding related services, and making sure that the new location is perceived as new and as distant as possible from the traditional salons, unattractive to the new generations. However, even though they are making sure products and services are upgraded when compared to the previous offer, these department stores are not specifically going beyond the ‘traditional’ beauty and care offer at large.

The bit-by-bit upgrade

Some stores are venturing into uncharted territories and literally going beyond beauty to propose new services, one step at a time. Flannel’s in the UK has been an interesting watch for the past years, as they use wellness to attract Gen-Z customers. For instance, they have dipped a toe into the very light medical approach by opening a “social media-ready clinic” in partnership with a DTC cosmetics brand specialized in non-injectable treatments for lips in their Liverpool store last May. The space includes a live streaming screen and a champagne recovery room, and customers are also able to physically buy products which otherwise are only available online.

Going a step further, Flannel’s inked a partnership with Barry’s, a gym club, also in the Liverpool store. The 700 sqm club proposes fitness classes, protein shakes, and the possibility to test clothing and equipment from the nearby “World of Active” space. Interestingly, this partnership allows Flannel’s to enjoy collaboration in terms of customer base, but also propose highly specialized services and machines provided by Barry’s.

At this stage, Flannel’s has limited its experimentations to the newly opened Liverpool store. It is interesting to see that they are flirting both with the idea of suggesting customers come and do their work out in the store itself, but also to enjoy paramedical services (which can stay only this way: the UK regulation would prohibit the sale of injectable products in the store).

The interesting case of the US and how healthcare is a selling point

The US regulation is less restrictive when it comes to this particular point compared to Europe, which is the reason why US retailers have been getting closer to the healthcare market, adding up new products and services to their initial beauty and care offers. Even though some therapies might be available online, when it comes to in-person treatments, there is no possibility to bypass the store visit. For that reason, retailers see medical treatments as a great way to generate footfall and repeat visits from high-margin customers.

For instance, Saks Fifth Avenue offers medical-grade beauty treatments (botox and filler injections) in their Manhattan flagship. 3.4m women got an injection of Botox in 2021 in the US only, 41% of them aged 36 to 50. For that reason, such non-surgical procedures can be extremely profitable and this is why SFA was reported to consider expanding this service to Miami and Houston. In 2021, Nordstrom had also introduced injectables in the New York store for the same reasons.

However, it is not only about non-surgical medical acts (which anyways are limited by what local regulations allow from state to state, even in the US), but also venturing in new territories: mental health, and sexual well-being.

Mental health proved to be an important topic for customers during and after the Covid-19 pandemic (in the US, the number of people reporting anxiety or depression quadrupled in 2020). This is the reason why CVS, the largest retail pharmacy in the country, has added licensed social workers trained in behavioural therapy in 13 locations in 2021, offering mental health assessment and counseling, either in person or remotely, on a 24/7 basis (which is more flexible than what usual therapists might offer). Such staff is also able to make prescriptions. Rite Aid, a competitor, has opened “virtual care rooms” in 13 locations offering teletherapy, which Walgreens also offers in partnership with specialized companies. Walmart has acquired an online medical and mental health care operator, to complete its Walmart Health services.

Sexual well-being is also a territory being explored by retailers, even though for now the category is somehow a catch-all term. It can go from lingerie, sex toys and jewelry at Nordstrom, to shaving products, massagers and lubricants at Bloomingdale’s. Interestingly, it is systematically packaged under the umbrella of body positivity and inclusion in order to relate to the broader notion of well-being.

Outside of the US, some retailers also ventured into the paramedical market. The IADS reported the interesting case of the French supermarket chain Monoprix which opened a new concept in 2021 in Paris. It is a mix of reworking the offer, and proposing new services:

•    Clear sections cover many well-being health-related topics: sleep, relaxation, nutrition, feminine case, sexuality, junior and senior care, even going to Ayurvedic and CBD products (remember that Monoprix is a supermarket, not a concept store),

•    Customers also have the possibility to connect to a distant GP in 20 minutes maximum, a strong novelty in France, where practitioners are increasingly difficult to access,

•    Finally, they are also able to have an ophthalmologist service, with examinations, prescriptions and frames done on-site.

But wellness should not be considered as an in-person-only, OPEX-consuming category (in space and people). It is also possible to synergize digital capabilities in order to make the most of the online platforms that were built or revamped during the 2020 pandemic.

The digital approach: what to do online with wellness?

It is obviously possible to sell the wellness offer online, as e-commerce is a great way to both test the trend and attract new customers. Saks Fifth Avenue did so at the beginning of 2022 and reported that it attracted 25% of new customers to SFA. However, the biggest challenge is to merchandise and animate properly the digital space:

•    For instance, Nordstrom categorizes wellness in the Beauty online section, while SFA and Macy’s have dedicated specific independent sections (in the case of Macy’s, with a focus on “wellness at home”, allowing to unify categories which would be otherwise separated),

•    Online platforms have to be animated. For instance, SFA proposes live fitness workout classes with celebrities, or branded seminars, in order to make sure customers are well aware of the new services available overall within the company.

Some retailers have gone further and used wellness as a way to reinforce the retailer brand equity and generate additional sales, such as Walmart, which launched a specific shop-by-diet app, in order to target the 200m customers following specific alimentary diets in the US. The app, which is separate from the other Walmart apps, allows customers to scan grocery items when purchasing to verify that they align with their dietary needs.

As seen so far, the various typologies show that department stores as a whole are quite active in wellness, however, their actions are still fragmented or touch specific aspects of the business. We have identified 2 specific examples where department stores approached wellness from a holistic point of view: Selfridges and Galeries Lafayette.

The Holistic approach

According to McKinsey, customers define wellness across 6 dimensions: health, fitness, nutrition, appearance, sleep and mindfulness. This broad compass is the reason why the category is difficult to address as a whole by retailers. Some of them have already started, such as Kohl’s in the US, which announced in 2020 the launch of the Kohl’s Wellness Market, which was however still very much based on goods only.

Selfridges’ early 2022 wellness program, “Superself” (as a seasonal animation) was another notable attempt. It gave the possibility for customers to enjoy therapeutic experiences such as sex counselling or confidence coaching sessions, for both couples and individuals. It was also possible to use VR sensory pods to “facilitate a deeper connection with the self”. Selfridges doubled down on wellness during summer 2022 by transforming their Corner Shop (the store’s most profitable space on the ground floor dedicated to seasonal animations) into a “Feel Good Bar” proposing products, services and access to professionals to advise customers on improving sleep, overall health, and sex. The product offer included at-home health tests allowing customers to inspect their blood, thyroid and genes, and they had access to acupuncture, IV drips, and oxygen therapy, while the Selfridges cinema was temporarily transformed into a sleep session area.

Galeries Lafayette significantly raised the bar in September 2022 when they opened the Wellness Galerie. The 3,000 sqm basement space, formerly used for shoes (which shows the leap of faith made by the management), was transformed and dedicated to a permanent offer mixing products (40% of the offer) and services (60%). The move was timely: already in 2020, McKinsey noted that of all customers, who were spending 30% of their wellness expenditures on services and 70% on products, 37% of them were expecting to spend more on services at 37%, vs. 23% in products. Unprecedented services in a French department store are proposed, such as physiotherapists, a hyperbaric chamber, a sauna, a hammam, a studio and gym, private salons that can be hired to test products with friends… and a “wellness receptionist”, here to advise on the variety of services and products available. The gym, for instance, remains accessible outside of the store opening hours.

Conclusion: is wellness a must-have for department stores?

*The new approach to wellness is increasingly making traditional beauty salons look old-fashioned, and they will have to adapt to remain relevant. For that reason, it is probable that department stores in the world will have to embrace the new trend while being fully aware of the challenges waiting for them:

•    Competition: The wellness market is highly competitive, with many companies and organizations offering products and services related to health and well-being. Differentiation will be key.

•    Customer demand: Department stores will need to accurately gauge and respond to customer demand for wellness products and services in order to be successful in a market where they lack experience (for instance, in physiotherapists’ time management).

•    Expertise: The wellness market can be complex and multifaceted, with many different products and services falling under its umbrella. Expertise in various and different areas will be needed.

•    Marketing: Marketing is critical to the success of any product or service, and this is especially true in the wellness market, as the target customers are already over-solicited by the first entrants.

•    Regulation: The wellness market is subject to various regulations, which can vary depending on the location of the store and the specific products and services being offered.*

Despite these challenges, there are many good reasons for department stores to consider entering the wellness market. For one, the market is large and growing, with strong consumer demand. Additionally, department stores have the advantage of being able to offer a wide range of products and services under one roof, which can be attractive to consumers who are looking for a one-stop shop for their wellness needs. Finally, by offering wellness products and services, department stores can help to position themselves as destinations for health and well-being, which can help to differentiate them from competitors and attract customers.

When Chinese customers are said to be more sensitive to the notion of sustainability when it relates to personal well-being, no doubt that having adequate spaces and offers will help global department stores accommodate the needs of this returning population in the future.

Going further on Wellness:

Feeling Good The Growing Wellness Market

IADS Exclusive: Business Case 6 Monoprix

IADS EXCLUSIVE: wellness the next step in galeries lafayettes makeover

Sustainability: Western versus Chinese Icicle

WWD: The Wellness Boom

Credits: IADS (Selvane Mohandas du Ménil)

Check out the collection of pictures here!

printable version here

The IADS travelled to Berlin last November to meet with Andre Maeder, the CEO of the KaDeWe Group, a few hours before the unveiling and celebration of the store’s ultra-luxurious revamp after years of work. Berlin is not precisely coming to the top of mind when it comes to luxury retail when compared to London, Paris or Milan… yet. But while the city undoubtedly is a buoyant and energetic place, the upgrade of KaDeWe, combined with a shiny new airport, might very well be a game-changer and put Berlin on the international luxury map.

We review our store visit below, showing the second largest department store in Europe in size remains true to its roots of acting as a local meeting point and a city landmark, and does not only rely on tourists for its future.

Company history and background

The Kaufhaus des Westens (German for 'Department Store of the West'), abbreviated to KaDeWe, was founded in 1907 by Adolf Jandorf and Eduard Josef Wertheim. Spanning across more than 60,000 sqm (gross), it is the second largest department store in size in Europe, after Harrods in London (92,000 sqm) and before the Galeries Lafayette Cuppola building on Boulevard Haussmann (45,000 sqm). However, a large specificity of the store is that it dedicates a large portion of its surface to non-retail activities, which explains why KaDeWe falls second to Galeries Lafayette in continental Europe when it comes to net retail surface area (40,000 sqm, the same as Selfridges’).

Contrary to many of its European counterparts which started earlier but on a smaller scale and then grew, the store has been spacious since its inception, as it already spanned across 24,000 sqm at its opening. Severely hit during WWII, with even a US bomber crashing into it in 1943, it took until 1956 for its full reconstruction and the store quickly became emblematic of the material prosperity of West Berlin versus the eastern part. The store then doubled in size between 1976 and 1978, reaching 44,000 sqm, and finally added a seventh and eighth floor in 1996, reaching the current store size.

While the founders were pushed out during WWII due to their Jewish origin, the store was transferred before the war to a company called Hertie, acquired in 1994 by KardstadtQuelle AG, which renovated most of the floors between 2004 and 2007 in order to prepare the store’s one-hundredth anniversary. The Kardstadt premium division, which included KaDeWe, Oberpollinger in Munich and Alsterhaus in Hamburg, was then purchased by Signa Group in 2013 for €1,1bn. Signa then sold a majority stake to Central Group in 2015.

Central Group does not release numbers by department store companies. The KaDeWe group was reported to achieve a total turnover of €600m a year pre-pandemic, achieved 42% through fashion and 14% through food, a category that has been a centrepiece of the store since 1995. In terms of clientele, KaDeWe achieves its turnover through 80% of locals, and a mix of 10% European and 10% international tourists.

The KaDeWe group has been led since 2014 by Andre Maeder, a seasoned Swiss executive who started his career in the discount fashion company Charles Vögele, and who then moved to Harrods, S. Oliver, Hugo Boss, and Kardstadt. The group expects to surpass its pre-pandemic levels in 2023.

Visiting the store: making sure locals and luxury customers go up in the floors

We visited the KaDeWe store in mid-November, a day before its official inauguration after a few years of work to revamp the building. This is the reason why, at the time of the visit, Dior hoardings were covering all windows, as the brand’s takeover of the façade (similar to what has been done with Harrods at the same time) was to be revealed during the inauguration.

The whole store, while being extremely large, paradoxically gives a feeling of intimacy when moving from space to space, once the monumental entrance and luxury section have been passed. This is likely thanks to the revamp conducted by architectural company OMA (Rem Koolhas) in 2021. OMA divided the store into 4 quadrants per floor, each of them corresponding to a different street entrance (including two new ones on opposite sides of the building that were opened during the reconstruction work). Each quadrant has its own core void acting as an atrium where a monumental staircase has been built. All four staircases are also unique, allowing each to convey a distinct atmosphere between quadrants on the same floor.

On the ground floor, from the main entrance on Tauentzienstraße, visitors are immediately welcomed by the Cosmetics area, which is quite graphic and spectacular with a combination of generic signage and branded walls. Interestingly, the beauty section used to be in the back, and luxury accessories were sitting in front of the entrance: a switch was decided in order to make the entrance more welcoming with more entry-price point products.

Given the fact that the cosmetic section is surrounded by the luxury accessories juggernauts, some brands were encouraged to develop new concepts in order to ‘melt’ into the general concept. For instance, Louis Vuitton, which is in direct eyesight from the entrance, has a shop with transparent walls, which is unusual for their typical department store presence. The other brands are all displayed in their own shop-in-shops alongside two pathways running across the entire length of the store, giving a sense of perspective. Each brand was invited to display a new concept: for instance Burberry built the first store with its new concept in Germany.

The perfume section, designed like a boudoir featuring international specialist brands (Byredo, Francis Kurkdjian, Byredo…) appears almost by surprise, as it is not visible from the entrance. Its design reinforces a sense of intimacy which is surprising considering it lives on the 7,000 sqm ground floor of such a large department store. The path naturally leads to a 200 sqm work in progress section, which will house more beauty and jewellery brands, followed by a watches and fine jewellery section (including the Hermès store, as the brand specifically requested to be in the back of the store in this section), that was redesigned in 2020 with an extremely luxurious execution. Two elements were noteworthy there:

-    The Bücherer second-hand section, which felt like a luxury boutique without any taste of vintage or second-hand feeling, leading to the fact that customers were more looking for rare treasures than bargains in this section,

-    The bar, operated in partnership with the Waldorf Astoria, is also extremely luxurious and gives a taste of what awaits during the visit, as each floor has, at minimum, one bar to encourage time spent in-store as well as repeat visits.

The first floor is dedicated to men’s fashion and has an entirely different feeling, as each of the 8 floors of the building have been redesigned by a different architect. The notion of quadrant is even more perceptible here:

-    A vibrant fashion section mixes shop-in-shops with brands’ concept (including the only Jacquemus and Dior Homme shop-in-shops in Germany) and generic areas signalled only with a brand logo,

-    The dressy section has a very cosy feeling, including the new Zegna store concept,

-    The formal section feels a bit older and will be upgraded in 2023,

-    A very large shoe section with floating display units in the middle and peripherical shop in shops all around, feels very luxurious and reminds us the quality of the Shoe Level execution in Dubai.

The second floor is dedicated to women’s fashion, and feels less organised, due to the upgrade of the whole floor remaining unfinished. While the international fashion has a very enjoyable atmosphere thanks to its musical background (as surprising as it might sound, Andre Maeder had to force the store to air music in its aisles when he arrived) and Art Deco design, the classical fashion feels somehow disconnected. Transitioning from one space to another feels sometimes brutal in terms of design, ambiance and even music. While the international fashion section favours open generic areas with cool brands, the classical fashion section displays a series of semi-closed shop in shops in central sections, and as a result, the general feeling is less modern than what the first floor conveys.

In the central section of the floor, a hoarding hid (at the time of visiting) the new Dior popup, organised as a part of the store take-over, which covers 200 sqm and is designed to give the illusion of a boutique. Pop-ups are an integral part of the store policy, as at any given moment there are 40 active popups in the store, dotted across the floors.

The third floor is dedicated to Accessories and Shoes for women, including lingerie, surprisingly accessible immediately adjacent to a staircase and next to bags. The design of the floor gives a large perspective allowing the eyesight to go far, which encourages one to discover and explore the aisles. Some cosmetic brands are repeated on the floor, as well as some jewellery brands, next to beauty service, VIP shopping and a soon-to-open hairdresser, who is a household name in Berlin. The accessories section is completed by a large Luxottica eyewear shop-in-shop, and the shoe section which was refurbished in 2014 and feels extremely modern, luxurious and airy (it was one of the first section to go through such an upgrade). The size of the luxury brands concessions is surprising, as Chanel, Louis Vuitton, Dior and Gucci all have 70 sqm each to display their shoes and accessories, which contributes to giving a very luxurious feeling to the space.

The fourth floor includes sport, kidswear and toys, travel accessories, a library, an outlet and seasonal animation.

The decently large sport section is actually a popup as KaDeWe wanted to test the category, with a fairly high quality of execution. When visiting, it did not feel like a popup at all and the management is currently thinking about  keeping it as it is and move forward with new brands. It is efficiently decorated with dynamic fixtures and decorative flooring that reproduces a running track (also seen in El Corte Inglés Castellana and in Attica city centre stores).

The kids section is vast, and includes fashion (both through generic displays and branded shop-in-shops) and toys in a series of rooms that hide the immensity of the offer. It naturally leads to travel accessories and bags, including luxury luggage brands such as Rimowa.

The outlet section is well executed and “clean”, with products sorted by brands and sizes (including LVMH and Kering brands). A sense of visual merchandising both on the racks and on the mannequins and well-maintained fitting rooms help avoid feeling like a second-class customer.

Finally, the 100 sqm Christmas section is very immersive, and displays an own-bought selection of products.

Overall, this entire floor is extremely immersive as each of the universes work well, however, transitioning from one to another can be somewhat brutal.

The fifth floor is dedicated to homeware, tech and stationery. The home offer used to be displayed on 2 floors and was regrouped into something more coherent and homogeneous. The space is divided into kitchen, bathroom and bedroom subspaces, going from mid-priced brands to luxury ones (including the only Hermès tableware shop in shop in Germany). The floor also houses a Global Blue Lounge.

The sixth floor is entirely dedicated to restaurants and delicatessen, including a tobacco and lotto shop. This is a traffic driver as there is virtually every price level as well as food choices, from Veuve Cliquot and Chandon shop-in-shops, to Ladurée tea salon, a 2,000 sqm sweets shop, a German deli, a beer garden, and 30 restaurants including a caviar bar available across the floor, totalling 7,000 sqm. The gourmet offer used to be on the fifth floor for 60 years, yet now has been concentrated on the sixth floor with restaurants and F&B, as the retail offer reclaims the space formerly dedicated to offices.

Interestingly, it is possible to access parts of this floor outside of the store’s opening hours via a special lift, which also leads to an art gallery where pieces costing as much as €50,000 have been sold. The German deli remains open at night, as well as 6 restaurants and 2 bars, open until midnight.

60% of visitors come up to the floor, which represents 12m visitors a year and 15% of the total turnover, via a model split 20/80 between concessions and wholesale, while the ground floor is almost 100% concessions and the store in general is 50/50.

The seventh floor is dedicated to a winter garden under a beautiful glass ceiling, and includes a self-service restaurant, but there are signs that this space is also about to transition to another usage. Off limits, the floor also houses the spectacular in-house food production plant, as many items are produced on the premises. For instance, all Lenôtre cakes are produced in the store, as well as all restaurant food. Interestingly, there is currently not much advertising focused on the fact that the food is the freshest possible as it is prepared from raw ingredients on site.

What’s great and what’s next

As a whole, it can be surprising to see such a level of execution and such a display of luxury goods and experiences for a city like Berlin. It shows both that the market is changing, and that there are some expectations in terms of new flows of tourism. Even though Central Group’s size might have helped, convincing so many heavyweights from the luxury industry to accompany such a grand vision is no small feat, justifying KaDeWe’s ambitions to become not only a luxury destination store in Continental Europe, but also a jewel in the Central Group crown.

Without any doubt, the revamp of KaDeWe is spectacular, as it involves many structural redesigns, in addition to new concepts and brands. Even though international luxury brands are all displaying their best in terms of concept and product offer, one can feel that the strategy does not only rely on tourism, as the store is built to be more than just a place to shop. It also invites customers to trade their most precious currency: their time.

To achieve that, the strategically located and perfectly executed bars and restaurants dotting each floor are helping, as they bring some breathing space during the shopping experience with a specific flavour each time. The 6th floor is also spectacular, and its ability to draw 60% of traffic from the ground floor is certainly a prowess, even if the cool staircases (including the OMA-designed which is bound to become iconic with time) also help.

As a consequence, KaDeWe remains a place for locals where they can gather around a beer or a Louis Vuitton bag, even during evenings (at least for the beer) when the store is closed. This guarantees that the connexion between the store and 80% of its clientele (locals) is not hampered by a luxury upgrade of this magnitude.

Another interesting development to watch will be the opening of the new Lamarr department store in Vienna by KaDeWe group, scheduled for 2024 (20,000 sqm, also designed by OMA). It will be interesting to see how the innovative features seen in KaDeWe Berlin, dictated by the weight of history and structure, will be translated into such a blank slat.

Going further on KaDeWe:

KaDeWe celebrates 115th anniversary

KaDeWe’s Berlin new concept

Central Group and Signa unveil luxury department store in Vienna

Credits: IADS (Selvane Mohandas du Ménil)

PRINTABLE VERSION HERE

The 2023 edition of the NRF Big Show took place on 14 – 17 January. After a virtual edition in 2021 and a limited reopening session in 2022, this edition showed that retail was back on track, with more than 1,100 exhibitors attending, to be compared with the 900+ previous record in 2019. As usual, a wide variety of themes were explored during this somewhat overwhelming event, and it is difficult, if not impossible, to recap all the conversations that took place.

We made a selection of presentations we attended, with a focus on department stores topics. Before doing so, looking at the big picture in terms of topics addressed also help understanding the general mood of the event:

-    The economy was not top of mind even though there were echoes of inflation and recession. Speakers were excited by many other topics and the socio-economic context did not overshadow every presentation,

-    Metaverse was of course not a topic anymore but excitement about Web3 was very much palpable,

-    CSR and ESG were widely discussed and mentioned in almost each and every presentation, confirming that going green is not a choice anymore, as we have echoed in our last White Paper released this month,

-    Social media is becoming more personalized and difficult to operate as customers are torn between their will to log out in order to go on a digital diet, while balancing the fear of missing out on important news if they do so,

-    Exceptional customer experience goes deeper, and it does so through how consumers are treated, what they get, and also the information they are provided with, including informing them about the sustainability aspects of their transaction.

Speakers we listened to during this event discussed retail transformation, physical stores and business models, customer experience, sustainability and retail media.

Table of contents:

-    Leading through transformation and purpose: Macy’s

-    The store of the future is less about the store and more about the business model: Havaianas, Sunglass Hut.

-    Retail strategies for major disruptors: GDR Insights

-    Curated, captivating, contemporary: a blueprint for physical stores: Neighborhood Goods, Studs,  CAMP

-    Building an innovative and personalized luxury experience: Farfetch, Harrods

-    Retail media networks: how the physical store will power retailers’ next phase of growth: Albertsons, Nordstrom

-    Placing sustainability at the heart of retail: Holt Renfrew

Leading through transformation and purpose: Jeff Gennette, Chairman and CEO, Macy’s

Gennette reviewed the actions performed during the pandemic in order to help the company get through the hurdle:

-    Inventory control was key to managing cash, and this led to negotiations with vendors, a review of the supply chain, and deals with smaller-sized operators,

-    Macy’s also learnt to use data and mix it with human forecasting to allocate the stock in the right locations in a quicker way through the use of smaller-scale channels,

-    Geopricing  was also reviewed, in order to geographically match the price according to the location of the customer, and avoid any kind of margin-damaging mistake.

As a consequence, Gennette considers the company to be in a much better position now that the synergy between online and offline is clearer, and works well: stores are needed to support online, as online penetration decreases when there is no brick-and-mortar in the region. The question is indeed not so much about having stores at all, but the type of stores needed:

-    Malls are no longer the main focus, and Macy’s closed a number of second and third-tier locations in favour of off-mall locations,

-    In regions with stores but where densification is needed (Dallas, Atlanta), or regions where stores are exiting malls in favour of smaller locations (Saint Louis), the group opened Market by Macy’s locations (8 locations to date),

-    In new markets where new doors are opened (Seattle), the group opened Bloomie’s locations (2 locations to date).

Even though many locations were closed in the review process, leading to a decrease in terms of square footage, the group currently operates more stores today than in 2019 in net numbers. Genette was very clear that the off-mall, new-format business was his new focus.

He also tackled the notion of talent retention, mentioning that compensation and benefits reviews helped with the frontline workers, but that it was the strength of the group’s brand that helped with specific populations such as data scientists for instance. He also mentioned that while the group had focused for a long time on frontline and boardroom diversity, it led to some gaps in middle-management which were being addressed.

Finally, he also reviewed the current customer’s state of mind. Even though the company enjoyed a great holiday season, Macy’s realized good sales masked a shift in terms of consumption, with the usually slow weeks in November and December (during which customers are not buying gifts but products for themselves), being even slower than usual. Even though the luxury customer is in very good shape, and enthusiastic about occasion wear (as shown by the sales results in dresses, formal men’s clothing and luggage), consumers overall are cautious, as they are under multiple pressure points (inflation, wage inflation, interest rates…).

Macy’s acknowledged this cautiousness in its own operations: reduced OTB, and more open reserves, to limit early season commitments and to be able to respond in a flexible way if and when needed.

The store of the future is less about the store and more about the business model: Alberto Serrentino, CEO of Varese, Alberto Funaro, CEO of Havaianas, Giorgio Pradi, President of Sunglass Hut.

Serrentino explained that the post-pandemic “new normal” places the store at the centre of a new game, by becoming a multi-purpose hub (customer acquisition, logistic hub, service hub, omnichannel hub). Hence, the traditional KPIs do not work anymore and need to be redesigned, knowing that everything starts with the data captured by stores. However, rethinking the store means rethinking the retail business model itself.

This is why Luxottica/Essilor (parent company of Sunglass Hut) acquired stores 27 years ago, a risky move then, as they saw this strategy as a way to collect sales data from customers and control the sales process.

Of course, the Covid-19 pandemic forced the digitalization of the business (from 2% of the business in 2019 to 12% in 2022, mostly on luxury products and through the use of endless aisles), but the store remains at the core of the model, be it in terms of experience (through the increase of omnichannel services allowing to display fewer products and focus on the quality of interactions) or people (with a globally trained workforce connected via a platform allowing the sharing of good practices but also guaranteeing a common culture among every business unit).

Shoe brand Havaianas prides itself on embodying the notion of “Brazilian summer”, as they want to “own summer”. As a consequence, all their stores are designed to be experiential, surprising, and all different. Investments have been performed in customer data analysis in order to manage product development and allocation (each store has a different assortment), the tech underlying sales team trainings, development and tracking, as well as omnichannel capabilities in order to provide a seamless experience.

Summing up, the conclusion of this roundtable did not lead to the discovery of a new business model, but paradoxically emphasized the need for a strong culture and the human factor in order to achieve a differentiation which can not only rely on tech, even the most expensive or up to date solutions.

Retail strategies for major disruptors: Kate Ancketill, CEO, GDR Insights

Like it or not, everyone’s lives are now affected by the 3 C’s: Covid (leading to a reset of many organizations), Conflicts (leading to energy and cost of living increases, as well as shortages of all sorts) and Climate change (with extreme climate events disrupt power grids and supply chains). For Ancketill, a long-time friend of the IADS, this means that we are switching from an economy of abundance to an economy of scarcity, leading to a focus on geopolitics, energy sobriety, no more premiums for convenience, and life extensions of all products.

However, she believes that it is possible to “bloom from the gloom” thanks to the right strategy, according to 3 axes that she exemplified:

1-    Power is shifting from global friction to decentralized resilience: Apple introduced self-service repair, Tesco launched a B2B marketplace for its suppliers to deal with excess or unsold food stock, Tesla allows customers to produce and sell energy, mobile phone network Pollen allows users to buy a mini cell tower and create a signal for peer-to-peer mobile telecommunication, Weshop allows customers to sell their second-hand products and then become shareholders of the company with their earnings.

2-    It is possible to regenerate inclusively by switching from offsetting to insetting. “Offsetting” is based on the idea that business harms the environment and can compensate for this harm by planting trees. “Insetting”, on the contrary, supposes that the damage is fixed at every point of the chain where it appears. Ancketill mentioned a number of sustainable brands (such as the UK-based cosmetic brand Faith in Nature which has placed an eco-lawyer on its board as a representant of Nature), but also the current regulatory trend (the AGEC law in France banning single-use packaging for instance) or new services (Samsoe fashion brand selling its clothes with a QR code granting a prepaid social media credit in order to enable customers reselling the products) as examples on how to “inset” emissions.

3-    We are moving from small indulgences to immersive luxury, to what she calls the “dopamine” economy: it is all about maximizing the use of technology (i.e. metaverse, omnichannel capabilities) to create immersive experiences, be that in the real-world (WOW concept in Madrid) or in the metaverse.

Ancketill’s presentation was, as usual, complete with many examples and very energetic, and welcomed as such by the audience. IADS members can read the latest GDR Report from last July here.

Curated, captivating, contemporary: a blueprint for physical stores: Matt Alexander, CEO, Neighborhood Goods, Anna Harman, CEO, Studs, Amanda Raposo, Chief Experience Officer, CAMP

This roundtable was dedicated to business models placing the physical experience at the core of their offer: fully immersive “shoppertainment for kids” at CAMP (see the IADS analysis of the concept here), custom experience from one store to another and fully meshed into local communities at Neighborhood Goods (see the IADS analysis of the concept here), and niche-specific experience based on the fun factor for Studs (ear piercing lounges).

On average, Neighborhood Goods stores are 1,400 sqm large. When opening the first unit, the company expected brands to take up more space but they realized that richness came from the diversity of the offer instead of having 10-15 brands, they ended up with 50-75. This does not always imply a higher rotation: Asos was expected to rotate but has remained in the stores for the past 3 years. Interestingly, in addition to the width of the offer, Neighborhood Goods also sees private labels as a strong opportunity. In order to funnel customers to stores, people prevail over content as the company leverages the voice of their sales staff, trusted by customers. As a consequence, Neighborhood Goods’ promotional emails have a very high rate of engagement.

Camp, which has a different type of business, has 2 types of store formats: flagship stores (up to 1,500 sqm) with a hidden part which represents 85% of the total surface, and community stores (100 sqm) service as hubs for local audiences. Permanent animation in the whole network, be it generated organically or through paid partnerships, allows the stores to be destinations for families on a regular basis. And just like Neighborhood goods, when it comes to marketing, it is all about allowing customers to share their testimonies and feedback.

Both retailers strongly emphasized their reliance on the human factor in order to remain close to their customers, even though they knew them thanks to data.

Building an innovative and personalized luxury experience: Kelly Kowal, Chief Platform Officer, Farfetch, Michael Ward, CEO, Harrods

Ward shared how Farfetch helped power Harrods’ offering towards its online customers through its white-label technology. Such a decision was made after understanding that Harrods was too small to develop its own tech and would leverage what Farfetch has developed.

This was the opportunity for Harrods to build e-concessions on the one hand (as Ward sees this as an inevitable trend, with brands willing to recuperate as much of their margin as possible), but also to keep a strong focus on experience, which is at the core of what Harrods stands for.

It is not about showing off any kind of tech, which is something customers are not demanding anyways, but truly to maximize every touchpoint and make sure each of them is an experience per se. However, Ward was very clear on two points:

-    The tech provided by Farfetch helped Harrods leverage and scale up its customer analysis and understanding in an unprecedented way, but this forced both parties to learn how to work together. Farfetch is only specialized in apparel and accessories, while Harrods sells every category, and can collect as many as 200 to 300 data points during customer journeys in the store. Farfetch admitted that this kind of scale was somehow overwhelming even for them.

-    Data is a must-have but is not enough to craft a superb and individualized experience: it helps understand and make decisions, but personalization is much more holistic than just an algorithm. For instance, while data helps fine-tune the buying assortment and implementing the brands in-store, Ward still relies on his buyers to make the appropriate choices in showrooms in order to define a differentiating selection.

Ward also shared that he was planning to multiply fourfold the resources allocated to private shopping (people and systems) in 2023. As he put it, it is easy to make an experience come to life in the store, but his goal now is to make it truly omnichannel.

He concluded by stating that in 2023, his main area of attention would not be on tech, but on managing relationships with luxury brands and making sure that Harrods will be able to satisfy the demand for luxury products, which he expects to soar this year.

Retail media networks: how the physical store will power retailers’ next phase of growth: Kristi Argylian, SVP Retail Media Albertsons, Aaron Dunford, senior director of digital markets, Nordstrom

Retailers are facing a triple depreciation of their marketing activities: TV ratings are going down, third parties are not part of the game anymore with the death of cookies, and heavy investments have been funnelled into the digitization of the store. By delivering contextual ads during the purchase process, based on first-party data, Retail Media, the third big wave for digital advertising after search and social is seen as a perfect answer.

It took 14 years for the search market to go from $1 billion to $ 30 billion, 11 years for social media, and only 5 years for retail media. The market is expected to grow $10bn per year and it appears that this will benefit all retailers and not only Amazon: smaller operators are carving out their positions, which can be lucrative when one realizes that 1% of the market represents $450m.

When it comes to starting from scratch, Albertsons explained that the real question was not to consider an in-house or externalized development, but how to phase the launch out. Albertsons launched and scaled up quickly thanks to an alliance with a small group of partners, who are aware that at some stage, Albertsons will be willing to recuperate more control of its operations. But only partnerships have allowed them to grow fast and high, which is why for instance Albertsons teamed up with Pinterest to make their targeting more sophisticated, or Omnicom Media Group to go on the streaming TV market.

Nordstrom launched the first phase of its retail media network in 2019 but with full functionalities in Q4 2021. Through the understanding of the customer experience across many touchpoints, they are able to sponsor products at the right moment, which is extremely attractive to brands when considering the quality of Nordstrom’s customers. Onsite advertising now represents 40% of the total retail media sales.

Both retailers emphasized the fact that the whole process was extremely difficult, as it is all about breaking silos (e.g. Nordstrom’s ecosystem is composed of Nordstrom and Rack stores, or online, stores and apps, all with different systems and people) in order to collect all data in one single spot. This is the reason why Nordstrom developed its Analytics platform which aggregates everything. Now, this platform allows connecting platforms like Instagram with their in-store purchases. For Nordstrom, the next step is to open the retail media network to its in-store stylists and allow them to push specific products and brands.

Finally, both retailers also mentioned that, in order to be attractive to advertisers and stand out from the crowd, it is essential to be able to provide them with quick incrementality measurement tools through a dedicated API. As Albertsons put it, measurement is key and the problem is that there is no standard for now.

Placing sustainability at the heart of retail: Sebastian Picardo, CEO and President, Holt Renfrew

Holt Renfrew as a brand is older than Canada and prides itself to be the first luxury destination in the country. As such, the retailer decided to lead the change and embrace sustainability a decade ago, and as Picardo put it, their mission is “to give their stakeholders the power to express themselves and the opportunity to generate positive change”.

Very well aware of the pollution created by the fashion industry, Holt Renfrew started its journey by engaging in dialogue with brands. For Picardo, the climate crisis is here, regulation is coming, and there is the opportunity to take the lead on sustainability, which the company did.

They are helping brands use new materials by promoting the new items manufactured in that way to their customers (the “Holt Sustainable Edit”) and using tech in order to track progress and results. Holt Renfrew, which started as a fur shop, also decided to eliminate fur products from its offer in 2021, which is a strong move. They have also engaged with their suppliers on Scope 3 tracking, although this is a very complex topic.

However, for Picardo, sustainability used to be a marathon but this is not the case anymore and is transformed into a spring. He concluded by stating that “sustainability is the new digital”.

Credits: IADS (Selvane Mohandas du Ménil)

What: A review of the UK market which somehow gives a good understanding, if not comprehensive of the situation in the country.

Why it is important:  There is no mention of the increasing gap between regions and the city of London when it comes to luxury stores (Selfridges, Harvey Nichols and, to a certain extent, Fenwick) nor of the notion of “destination” stores, which might be very well the future for many department stores in Europe. In spite of these limitations, the report provides a fair amount of data and numbers.

According to Coresight, UK department store sales are expected to reach £11.4 billion ($13.8 billion) in 2023, with a growth of 2.9% compared to 2022.

The department store sector is dominated by three major mass market players (John Lewis, Marks & Spencer, House of Fraser) and two luxury stores (Harrods, Selfridges), with a total of 325 stores across the five major retailers.

The number of stores has declined by 43.5% since 2015 (this includes the closure of all 124 Debenhams stores) and major department stores are optimizing their store portfolio by opening smaller format stores and investing in private label, rental, resale, repair and sustainability services, digital apps and personalization.

Regarding the market specificities:

-    High inflation is affecting discretionary spending, leading consumers to seek value with private labels and trade down from mass market stores.

-    The return of international tourism and a resilient luxury consumer will support growth in luxury stores, notably Harrods and Selfridges.

-    The UK department store sector is expected to continue optimizing store fleets and making investments in virtual selling and livestreaming, particularly to reach a younger customer base.

Nearly all retailers have embraced circular services including rental and resale, with Selfridges looking the best positioned in this space as it is currently trying to incorporate circularity into its entire business.

There is no mention of either Fenwick, Harvey Nichols or Liberty.

An outlook of the UK department store market 

What: MIT Sloan differentiates ESG from sustainability as the former is simply a tracker but does not replace real actions.

Why it is important: MIT Sloan considers that the notion of ESG will be challenged in 2023, for various, and sometimes futile, reasons. But this might not be a bad things and will, for sure, not handicap sustainability as a whole.

MIT Sloan reviews the fact that while ESG became mainstream in 2021, things got bumpier in 2022 and 2023 will not be better. The authors remind that ESG is a way to evaluate and track how a business is affected by environmental and social issues, and that this notion does not replace the notion of sustainability, which is broader.

There are 2 types of backslash against ESG currently taking place:

-    Political tension about the KPIs tracked in ESG reports, especially in the US, with the accusation of making business commitments political (which is a non-sense as any business decision is political by essence),

-    In addition, ESG funds do not outperform anymore the more traditional funds, and this raises questions on the validity of implementing ESG tracking at the core of the business.

Since none of these questions will disappear in 2023, it should be expected that ESG will remain highly challenged during the coming year.

MIT Sloan does not consider that this is a bad thing, as filling in ESG reports is a distraction from actually doing sustainable things and moving the nature of the business.

ESG is going to have a rocky 2023. Sustainability will be just fine

What: In the US, many retail companies are increasingly struggling to find their new CEOs.

Why it is important: The issues are at the same time contextual and structural, and could end up in being a true challenge for the industry in case they are not addressed.

Many retail companies in the US are now operating without a CEO (Gap, Diesel…) as filling in those positions is increasingly difficult. 11 of the 91 US Fortune 100 retail companies saw their CEO leave in 2022. This is all the more challenging because the current context (inflation, pricing issues, consumer angst) requires strong leadership in order to stand out from the crowd.

In addition, many analysts also point out that the nature of the CEO job also changed in the past few years, as they had to adapt to many challenges (e-commerce development, global supply chain steering, investments in emerging technologies), after decades of being expected to “simply” be expert sellers.

The way to attract talent has also changed. For years, it was all about junior recruits climbing the ranks step by step. However, now, it is increasingly difficult to convince young talent to join and enter such programs (instead for instance of creating their own companies). In addition, said programs have to adapt by proposing relevant experiences (e-commerce department, discounting division for instance). Associations such as the NRF also play a more prominent role than in the past to promote the image of the retail industry.

As a consequence, many CEOs are now coming from outside the industry: the RealReal CEO comes from a tire company, or the Under Armour CEO from Marriott International, for instance. Other companies also decide not to have a CEO position and break it down into more digestible pieces, such as Pacsun naming two co-chiefs.

The whole situation, if not addressed, could soon add up to the woes currently experienced by the retail industry in the US.

The retail CEO pipeline is running dry 

What: Coresight compiled a report on the suppliers they consider as the most important when it comes to innovation in the last-mile delivery process.

Why it is important: Last-mile delivery is one of the costliest and most complex parts of the retail supply chain that can greatly impact a retailer’s ability to deliver excellent customer service and drive top- and bottom-line business growth.

The use and integration of innovative retail technologies and strategies are key for retailers looking to overcome last-mile delivery obstacles and provide their customers with a superior delivery experience.

The global last-mile delivery market totaled an estimated $128.5 billion in 2022 and is set to reach $200.4 billion by 2027.

In this report, Coresight discusses the US last-mile delivery landscape and opportunity, and identify the next generation of retail innovators in the space. By improving their last-mile delivery capabilities, retailers can offer their customers a superior end-to-end shopping journey that can drive customer loyalty and revenue.

They analyze, evaluate and score the top 10 companies based on their relative performance on a two-factor evaluation scale: level of innovation and market potential. Coresight categorizes the companies into three areas of innovation:

-    Robotics and autonomous vehicles

-    Delivery management platforms

-    Warehousing, micro-fulfillment centers (MFCs) and courier delivery

Companies mentioned in this report are: Bringg, Darkstore, Dropoff, Fareye, Locus Robotics, Nuro, Onfleet, Point Pickup, Starship Technologies, Veho.

Last-mile delivery innovators 

What: Retail Media is expected to be the next big thing for retailers in 2022 and 2023.

Why it is important: It is seen as a way of maximizing existing assets (stores) into integrating them in a marketing and media mix made available to third parties. Smart, but not that easy to set up, all the more that scale is the secret to profitability in this case.

According to Coresight, the global retail media industry is expected to see substantial growth in 2022, with a total estimated revenue of $75.1 billion, an 80.1% increase from the previous year. As a consequence, many retailers are focusing on building up their retail media networks (RMNs) to capture a larger share of advertisers' media budgets.

A recent survey found that nearly 90% of US-based retailers and speciality retailers already have retail media capabilities.

When it comes to on-site retail media, it is more suitable for multi-brand retailers with a higher level of site traffic, while off-site retail media is more advantageous for single-brand retailers, as it helps them reach a wider audience and drive traffic to their own websites.

Single-brand retailers face limitations in terms of the advertisers they can work with, however, non-endemic advertising presents a significant opportunity for them. On the other hand, multi-brand retailers have greater monetization potential, but they must ensure that the advertisements align with their brand image and avoid any possibility of cannibalization.

To make the most of the retail media opportunity, retailers should aim to make advertisements location-specific, personalized, and relevant to the customer. Additionally, the advertisements should align with the retailer's brand image, ensuring that they make natural sense to the customer. Overall, the growth of the retail media industry presents exciting possibilities for retailers, and they must consider their unique strengths and limitations when navigating this new landscape.

 A look at the Retail Media opportunities in the US

What: A new point of view challenging the importance of retail media networks, seen today in the industry as strategic and with almost unlimited potential.

Why it is important: Retail Media Networks offer many possibilities for retailers, however, scalability (of their systems, of their audiences) is key. Does this mean that department stores might have to team up in order to propose efficient solutions to brands?

The contributor argues that Retail Media Networks are mostly a fancy way to describe retailers’ ability to use their digital properties to sell advertising to brands just like what a media property would. However, she points out 2 major differences:

-    Retailers have access to their customer’s data, which is a treasure in a cookie-less world,

-    When customers visit retail properties, they are obviously doing so with shopping in mind, meaning that we are not talking convincing, but nudging them in their decision-making process.

This is why the author acknowledges the importance of the retail media network market today, which McKinsey estimates at $100 billion in 2026 (today, the global digital ad revenue is estimated at $616 billion). It is even expected that retail media network growth surpasses global digital advertising one in 2027.

However, she also makes a few comments that explain why she sees limitations to the retail media network expansion:

-    Not every brand is a potential spender, as CPG brands are mostly doing so these days, and their spending is not incremental, but comes from their trade marketing budgets,

-    To be credible, retailers need to have a significant base of customers, and/or a guaranteed amount of traffic,

-    There is a limit to the number of retail media networks brands can partner with,

-    There is a limit to the number of brands able to make the most of retail media networks,

-    Retail media networks do not improve relevance for customers, but the targeting, which is different.

The contributor concludes by reminding us that, while retail media networks still offer the potential for growth, they might not be the panacea, and might generate some customer fatigue at some stage.

Retail Media Networks are having a moment but it won’t last 

What: Are department stores losing touch with reality in Japan?

Why it is important:  The department stores’ woes in Japan are not specifically different from the rest of the world. Are the difficulties experienced by the format in the country specific to the market, or shall they be seen as a warning for foreign companies?

On January 31, 2023, the Tokyu Department Store in Shibuya closed after 55 years of continuous operation, leaving many shoppers with memories. The location will be used to develop a new retail development in partnership with L Catterton, LVMH’s real estate arm. The closure is part of a larger gentrification plan for Shibuya, which seeks to transform it from a place frequented by partying youths with little money to a more inclusive shopping zone for high-spenders.

The decline of Japanese department stores, such as Tokyu, is not a reflection of the overall health of the retail scene in Japan. The retail market grew from JPY 137 trillion to JPY 150 trillion from 2012 to 2021, and other retail outlets have posted strong growth. In comparison, department stores’ sales decreased from JPY 6.15 trillion to JPY 4.42 trillion, including a net loss of 59 doors (a quarter of 2011 total count). Even when compared to the evolution of mall sales, the fate of department stores in Japan seems like an anomaly.

The decline of department stores has resulted in a visually clear replacement of other retail outlets in many provincial towns and cities, causing inner-city decay and suburbanization.

To adapt, department store operators have embarked on corporate reforms that make them less reliant on retail, including diversifying their businesses, including travel, international logistics, telecommunications, entertainment, hospitality and real estate development, in the case of Hankyu. Others, such as Mitsukoshi, are exploring smaller-size formats and closing larger units. As the future of department stores in Japan is uncertain, their operators must continue to reinvent themselves to keep up with the ever-shifting retail landscape.

The changing role of department stores in Japan 

What: Shein is embracing a variety of new strategies in order to increase its traction and ensure market dominance.

Why it is important: New countries, new formats, new approach, including trying to seduce young designers by offering them the possibility to manufacture and sell their designs: it is time for department stores to consider Shein’s new approach and make sure that they are fencing off their market.

Shein gained ground as a leading player in the fast-fashion market in 2022, with global revenues of $22.2 billion, an increase of nearly 50% year over year, according to Coresight Research estimates. Comparing to recent sales metrics from ASOS, Boohoo Group and Inditex (owner of Zara), they believe that Shein’s estimated sales growth substantially outpaced its key competitors’ sales growth in 2022.

Shein’s recent plans for business expansion will help the company reach a broader consumer base in 2023 and beyond. These plans include forming an expansive business matrix by continually incubating new brands, testing an e-commerce marketplace model, opening new distribution centers to enhance delivery capabilities and extensively growing the Shein X incubator program. International expansion is also on the map, including Brazil and Mexic, or Japan with their first-ever permanent physical store in Tokyo.

Currently, Shein is reportedly raising $3 billion in funding at a valuation of $64 billion and has revived its plan to debut on the New York Stock Exchange (NYSE) via an IPO (initial public offering) in 2023. If executed, Shein’s IPO would be the first major equity deal in the US by a company founded in China since Chinese regulators clamped down on overseas listings in July 2021.

While Shein has a long way to go in terms of environmental, social and governance (ESG) initiatives, it has taken some visible steps recently toward ESG, including an investment of $15 million in upgrading nearly 400 of the factories in its supply chain by 2026 and the launch of its Shein Exchange resale platform in the US in October 2022. The company’s recent sustainable measures and existing appeal to Gen Z consumers could help the company to generate a considerable investment appetite for any share flotation in the event of an IPO.

Shein is exploring new strategies to assert dominance in fast fashion

What: The MIT Sloan reviews the subscription business model, which is credited with many benefits for businesses.

Why it is important: Inflation and supply chain disruption might make it harder for businesses to meet their obligations to customers on subscription plans.

MIT Sloan Management Review explores the subscription model and reviews its advantages for businesses (simplicity, ease of communication, generation of predictable long-term revenues, and high level of service).

However, the identified factors for success might be undermined by 2 unanticipated risks: supply chain disruption, and inflation. The combination of both factors creates deep interrogations for businesses based on subscription, as the question on whether they can still afford to meet the obligations they have made to their customers is raised, all the more in an inflationary context when customers could be tempted to give up their subscriptions.

MIT Sloan authors review a few business cases and the options at hand for business leaders involved in such operations.

New threats to the subscription model

What: A complete, 17-pages-long, report on the state of relevant technologies for retail, that Coresight considers very important for 2023

Why it is important: It is not about looking at tech for the sake of it, but considering that innovation is now a sine qua non conditions for retailers to stay in the game and make sure they do not lose precious margin points in their operations.

Retail spending on technology is expected to reach $229 billion in 2023, with a slight year-over-year increase. The industry is undergoing significant changes, with new trends emerging in retail technology, including the growth of the metaverse for shopping, the rise of live streaming for e-commerce, the use of AI/ML and external data for more accurate demand forecasting, and the implementation of IoT and sensor fusion for actionable data.

Retailers are also adopting cloud computing to reduce hardware costs and accelerate innovation, as well as microservices and headless commerce for a more flexible software future. Returns management platforms can reduce costs and increase sustainability, while associate enablement tools improve the customer experience. The growth of 5G wireless and the adoption of self-checkout and contactless payment terminals are other key trends in the industry.

To remain competitive, retailers must invest in new technologies that provide convenience and engaging experiences to customers across offline and online channels. These technologies can help retailers reduce costs, become more flexible, and cultivate new revenue opportunities. While technology is not a cure-all solution, it can be a powerful tool for retailers looking to stay ahead in an ever-changing landscape.

Top 10 trends in retail technology for 2023 

What: Bain & Company has released its Luxury Goods Worldwide Market Study in collaboration with Fondazione Altagamma for 2022.

Why it is important: Even in the face of economic turbulence, the luxury industry took a leap forward in 2022 and the industry is poised to see further expansion in 2023 into the rest of the decade to 2030.

After Covid-19, the market grew back to EUR 1.15 trillion, and surprised everyone in 2022 by growing 19 to 21 percent according to Bain’s estimates.

Despite uncertain market conditions, the luxury market appears to be better equipped to cope with economic turbulence than in the 2008-9 crisis as a result of a larger consumer base that is more concentrated on top consumers who are less sensitive to turndowns.

In 2023 sales growth in the personal luxury goods market could range from 3% to 5% in the base case and up to 6% to 8% in a more positive case depending on the economic recovery in China and the ability of the US and Europe to withstand economic headwinds.

The US market remained strong, becoming the top region for personal luxury goods sales, with Asia switching to second, and Europe following. The Americas personal luxury goods market reached an estimated EUR 113 billion, growing 25%. China remains crucial to the long-term future of the luxury market and is expected to recover by the second half of 2023.

Additionally, Southeast Asia and South Korea have been excelling in both growth and future potential, making new markets such as India stand out as its luxury market could expand to 3.5 times today’s size by 2030.

The luxury market consumer base is expected to grow from around 400 million in 2022 to 500 million people by 2030. Generational trends will be a powerful factor for this sector growth, with Generation Z and Generation Y (millennials) accounting for all of the market’s growth in 2022. The spending of these younger generations, including Generation Alpha, is set to grow three times faster than other generations through 2030.

Department stores experienced faster growth than in previous years, gaining 20%. That reflected a renewed value proposition in the US and successful reengagement with tourists in Europe.

The study suggests four growth engines that will profoundly shape the luxury market by 2030: Chinese consumers should regain their pre-Covid status as the dominant nationality for luxury and mainland China will overcome the Americas and Europe to become the biggest luxury market globally. Additionally, the younger generations will become the biggest buyers of luxury, representing 80% of global purchases. Lastly, online should become the leading channel for luxury purchases with an estimated 32 to 34 percent market share.

Bain & Company releases annual report with Altagamma

What: Some CEOs might have to review their vision on how work should be done, in order to improve their organisational efficiency.

Why it is important: New methodologies, which are not linked to fads or trends, could be strongly improving efficiency, even though they obviously require a change in mindset from the organisation itself, but also from its leader.

The Covid-19 pandemic has been disruptive in the way we work. This led some leaders to innovate in the way they interact with their teams, but others also decided to avoid changes for fear of opening Pandora boxes which anyways are already opened.

The Wall Street Journal interviewed Adam Grant, professor at the Wharton School of Business, about the potential consequences of such behaviours. He argues that organisations can be managed with a scientific approach, with every hypothesis being tried and checked, instead of just testing one idea. This can be unsettling because trying new things requires new reflexes and competencies, however, for him, leaders must be ready to change their approach to work and drop old ideas that can be paralysing their organisations as a result.

Addressing the future of work 

What: Tables are turning and recruiters now are in a more favourable position towards candidates.

Why it is important: CEOs admit that they might have gone too far and are changing their mind. This might generate workers’ backlash (especially the younger ones) unless markets deeply turn to their disadvantage.

Several executives in various industries are now cooling off on the “whatever it takes” policy that has been the norm since the pandemic when it came to retaining workers. In fact, they are even cutting jobs. The wave of layoffs started in technology and has now spread to other industries such as toy manufacturing, chemicals, and payments.

Executives feel that the labour market has shifted back in their favour and they have more power in negotiations with employees. The US unemployment rate was 3.5% in December and hourly earnings were up 4.6%. Hiring was lower in December, however, and some executives are leaving positions open or scrutinizing hiring. The Federal Reserve is raising interest rates to slow wage growth, but investors and executives are divided on whether it will lead to a recession. Whatever the case, the CEO of ManpowerGroup Inc. says employers are not as anxious and can take their time when it comes to hiring.

January is usually the peak month for layoffs, even during robust growth. For instance, Meta CEO Mark Zuckerberg declared 2023 as the "year of efficiency" for the company. After announcing 11,000 layoffs in November, the company is scrutinizing its hiring needs and reducing management layers. The rise in job cuts is a result of an end to the pandemic-driven growth and low-interest rates making technology investments cheaper and allowing companies to operate with a smaller workforce. Job cuts also serve as a signal to Wall Street that executives are focused on financial discipline.

As a consequence, companies say employees are staying in their jobs longer. Some companies, like Thermo Fisher Scientific, are having more success hiring data scientists and others with advanced skills. Companies are using this moment to reconsider their corporate priorities, including reviewing corporate perks once considered must-haves to remain attractive to potential candidates.

The bosses are back in charge

What: Coresight annually reviews the US department store market and explores the changes taking place.

Why it is important: Store and e-commerce integration is, according to Coresight, the only way for US department stores to operate efficiently, in order to convert and connect with customers while also making the most of the store fleet and improving the inventory management. Somehow, it is also expected that concentration increases as the top 3 companies already represent 67% of the total market.

According to Coresight Research, the US department store sector is expected to see a slight decline in revenue in 2023, totalling $85.3 billion. They anticipate that the revenue will grow slowly between 2022-2024, then start to pick up in 2025 and reach 8.1% below pre-pandemic levels in 2027.

Online sales will play a role in the growth of the sector, with a projected penetration of 36.8% by 2027. Kohl's and Macy's are the most popular department stores among consumers and the top three stores (Kohl's, Macy's, and Nordstrom) are expected to see a combined revenue of $57.6 billion in 2022, following a growing concentration in the sector.

The report suggests that 2023 will be a turning point for US department stores to integrate their online and physical platforms, making it easier for consumers to discover and purchase products. They will make investments in marketplaces, personalization, and virtual selling to support online sales growth, and in their stores and supply chains for faster delivery and convenience.

Retailers are also expected to form more partnerships and category expansions to meet the needs of consumers, leading for instance to shop-in-shop investments (physically and digitally). In the future, the distinction between online and in-store will fade as consumers shop in a seamless, integrated way.

The report includes numerical data about Dillard’s, JCPenney, Kohl’s, Macy’s, Neiman Marcus, and Saks Fifth Avenue.

An outlook of the US department store market 

What: The notion of “third space” has been evoked during a conference talk in Sydney.

Why it is important: This notion is at the same time extremely important, seducing, and difficult to toy with when it comes to pure profitability. Having a space acting as a town square would of course be extremely valuable to all stakeholders, but the difficulty is how to make this model profitable without being cynical at the same time.

Online retail experienced significant growth during the Covid-19 pandemic, but there is now a renewed focus on brick-and-mortar stores. Customers are looking to return to physical shopping for the experience while using e-commerce mainly for convenience.

At the eTail conference in Sydney, representatives from Blooms the Chemist, Godiva ANZ, and Catch spoke about their strategies for both in-store and online channels.

Godiva ANZ plans to make its stores a "third space" where customers can socialize, while Blooms the Chemist wants to improve its in-store customer experience. The speakers noted that the two channels complement each other and can be used to improve the overall shopping experience. Retailers are also using advancements in chat functionality and AI to replicate the in-store experience online.

Reexploring the notion of Third Space