An article in The Economist looks at the cost of e-commerce for fast fashion retailers using the example of Inditex. Basically, the store model is described as a “giant bundle of fixed costs” including rent and staff and which turns profitable only when enough merchandise is sold through them. Websites and warehouses cost less to run but because the retailer pays for each delivery, the more is sold, the more the variable costs increase. On paper, the shift online looks appealing, if only because the online channel has significantly lower wages and rent expenses. However, if more customers choose to shop online rather than in store, then the retailer incurs higher variable costs while still having to cover the fixed costs of stores.

Inditex has been reducing store numbers and has set itself a target of raising the share of online sales from 14% in 2019 to 25% by 2022. It has apparently managed to keep operating margins at 17%, while those of, for example, Fast Retailing, parent of Uniqlo the only rival to match Inditex’s sales growth, is a third lower. Considerable investment is being made to allow stores and website to work seamlessly together, in particular with technology such as RFID to locate inventory and fulfil orders either from stores or from a warehouse.

Another troublesome cost of online sales is the high return rate which can be as high as 30%. However, encouraging customers to return orders to stores reduces that cost as well as opening up the possibility of further sales. The item also has a higher chance of being sold again when returned to a store. In the case of Zara, at least, a lower number of stores will mean less visibility for a brand which spends practically nothing on advertising.

For the sustainable shopper, what should be the choice between bricks and clicks? A piece in the Financial Times looks for answers at analysis by fund manager General Investment Management. It makes the point that, as retailers make the last mile delivery more efficient, online will gain the edge. However, this is not guaranteed. Indeed, remembering the economies of scale for stores mentioned above, while store shopping would normally generate higher emissions than online, the emissions per item generated by a larger store shopping trip would fall below those online. Customer transport emissions can vary tremendously according to whether the trip is made by car, on foot or public transport, for example.

Still, online shopping will generally be a greener option than driving to the store for just a couple of items. Somebody who does that three times a week could save about 2kg of carbon a week even by switching to an averagely efficient e-retailer.  The article concludes that “bundling orders, minimising returns and avoiding rush shipments would all make a difference. As, of course, would buying less”.

Imagine that, during the recent pandemic, retailers offered customers to shop in store remotely using selling associates, then sent the purchases within the day by personalised delivery (or even organised kerbside pickup by the customer travelling to the store by car), and probably had to deal with a higher return rate than normal for a store sale, then those retailers were accumulating all the most costly options both in terms of their own expenses and in terms of emissions and damage to the environment.

How Inditex is refashioning its business model (The Economist)

Carbon counter delivery van vs shopping trip (Financial Times)

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

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

The “creation myth”

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

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

Around the world in 100 stores

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

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

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

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

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

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

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

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

What does diversity look like?

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

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

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

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

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

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

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

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

Die another day

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

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

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

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

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

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

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

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

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

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

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

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

Credits: IADS (Dr Christopher Knee)

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

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

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

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

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Buy Now Pay Later (BNPL) financing solution is not new, and retailers already know for years such interest-free instalment plans. While basically being a loan, it is nowadays marketed as a convenient payment option and has steadily and quietly developed over the 2010’s. Covid-19 only accelerated its growth as both retailers and consumers found great interest in such a payment method.

According to Affirm fintech, BNPL is expected to triple over the next two years. Stating BNPL is rapidly growing is an understatement. According to

https://www.iads.org/files/pmedia/public/r6872_9_article_1_-_buy_now_pay_later_platforms_-_coherent_market_insights.pdf

r6872_9_article_1_-_buy_now_pay_later_platforms_-_coherent_market_insights.pdf

published in July 2020, the global market was valued at USD 7 320 million in 2019 and should reach USD 33 638 million by 2027. North America is currently the biggest market by volume and revenue and Asia Pacific is expected to be the fastest growing region in the future.

That said, what does BNPL have to offer? Should retailers bet on it and why? Should customers trust such a payment method? Is it a sustainable model or will it change in the future?

BNPL and retailers: a match made in heaven?

First, let’s see how it works from a financial point of view. Like most payment solutions, BNPL firms are paying full purchase amounts upfront while charging fees to retailers: they are usually coming as a flat fee along with a commission, both taken on each transaction. Depending on the countries and whether it’s Afterpay, Klarna or Affirm (some of the largest BNPL companies), fintechs charge retailers a flat fee of USD 0.3 to 1 (for processing the payment) and a commission of 3% to 6% depending on the purchase amount. These rates are higher than debit card (accounting for 0.5 to 1% per sale) or credit card ones representing up to 2% per transaction.

Retailers’ margins have been dramatically challenged over the past years. Discount periods and rates have only been rising, sometimes representing up to 10 months a year, especially in fashion, a crucial part of the business for most department stores, and for BNPL users. Acceleration in e-commerce has also been affecting margins with supply chain investments and customers’ expectations for free and fast deliveries. In this environment, BNPL solutions are efficient but they surely represent additional costs for retailers. Last, it’s worth knowing that, as Klarna states on its website, BNPL technology allows customers to set price alerts on saved items for them to “never pay full price again”. Not really a message merchants want to hear…

On the bright side now, numbers claimed by BNPL companies are like winning the lottery as the benefits in volume and recurring spending seem to be worth the high fees. Retailers, by offering a BNPL option, are creating a relationship with consumers that are keen to purchase. According to BNPL companies, shopping carts increase up to 30%, abandonment at checkout decreases up to 25%, repeat customers increase up to 20%, and return rate reduces. Affirm, Afterpay, and Klarna see average basket value rise 85%, 30%, and 45% respectively.

The magic in BNPL solutions also stands in their younger customer base. Afterpay claims that 73% of their shoppers are Millennials and Gen Z consumers. And merchants say that 30% or more of Afterpay customers are new to their brand. Macy’s (partnering with Klarna), said that 40% of shoppers using BNPL are new shoppers and 45% are under 40 years old. Only 25% of Macy’s existing customers are under 40.

Considering the challenges retailers are currently facing, proposing a BNPL payment option is worth it: sales volume will increase, customer base will grow and merchants might start long-term relationships with younger consumers they would not have been able to reach otherwise. Retailers will also benefit from additional and unprecedented visibility thanks to BNPL apps, designed to display brands and products in a seductive way. These new shopping apps are a complementary channel for retailers, and an important one as they are targeting younger generations.

Many younger customers are considering themselves as being part of a community. This is why word of mouth explains a fair part of the BNPL success, recommendations from friends or influencers working their magic. In 2020 in the U.S.,

https://www.iads.org/files/pmedia/public/r6873_9_article_2_-_buy_now_pay_later_services_growing_quickly_among_u.s._consumers_-_the_ascent.pdf

r6873_9_article_2_-_buy_now_pay_later_services_growing_quickly_among_u.s._consumers_-_the_ascent.pdf

shows 27% of BNPL users heard about it on social media and 18% through friends and family. In this environment, BNPL is appealing to younger generations facing difficulties in accessing credit cards or simply considering them old-school or untrustworthy.

Furthermore, BNPL is about data. Becoming shopping destinations, BNPL apps are connecting customers to merchants thanks to an algorithm personalising brands, products and deals for each user. Needless to say, fintechs are gathering a huge number of information on shoppers while remaining very silent about the ownership of such data. Because of that, it’s hard to believe that ownership would go to retailers. So the question is key when entering a deal with a fintech. But retailers might learn a lot about their new customers anyhow, as they are collecting all information about the purchase itself.

IADS members have already embarked on BNPL business. Interestingly, The SM Store in Philippines has developed a partnership with 13 banks, not with a BNPL fintech. Started in January 2021, the department store offers to pay any item in 3, 6 or 12 interest-free instalments, depending on the purchase amount. Though they are not called BNPL, IADS members are offering -and have been offering for a while- instalment plans through their credit cards.

Pay later, but pay up

Whether it’s through Netflix or Amazon Prime, we are all living a part of our lives through subscriptions. Watching a movie at home has become a seamless experience as well as its payment thanks to monthly instalments. As a result, consumers are more and more used to frictionless and contactless payments solutions and Covid-19 has accelerated this trend.

When it comes to customers, BNPL promise is double. First, convenience. As applying for a classic instalment through a retailer’s credit card requires much information and sometimes frictions and delay, the BNPL registration process is supposed to be seamless and fast. The approval, relying on the shopper’s debit card, is occurring in real time and not affecting applicant’s credit score (assuming they pay on time).

The payment part is easy: shoppers just have to confirm instalment terms (number of payments, amount of each one) and total cost of the purchase. Payments due in three or four instalments are interest-free, while the interest rate goes from 15% to 24% for payments from five to six instalments or more. If BNPL option is not offered by the retailer, fintechs can instantly create a virtual one-time card number to be added to Apple or Google wallets.

Convenience is also a factor in budget management. A Cornerstone survey shows that most BNPL millennial customers in the U.S. don’t really need to postpone payments as they earn more than USD 75 000 a year and hold credit cards, but rather prefer paying in instalments to help their budgeting.

Second part of the promise: providing essential financial service. Given the current economic environment, it’s true that flexible financial options have proved necessary to some people. To appeal to them, Affirm motto is reassuring: “Pay at your own pace. When you buy with Affirm, you always know exactly what you’ll owe and when you’ll be done paying. There are no hidden fees—not even late fees.” BNPL solutions usually cover payments from USD 50 to USD 17 500 so they are now also used to pay for small daily expenses, bills, or even tuition fees.

Trouble in paradise?

One of the main interests for merchants using BNPL solutions is to access to younger customers and engage in long-term relationship with them. But it might come at a risk. A BNPL study conducted by The Ascent shows that only about 1 in 5 of consumers who use BNPL apps actually understand how they work. To some immature customers, an item will seem more affordable than it is if its payment is split in multiple months. If they end up paying important additional fees, who will the shopper blame, the BNPL company or the retailer? One can guess that the retailer will be seen as guilty, putting the customer relationship at risk for the future.

Whether it’s splurging or just paying for commodities, these payment options are often stretching consumer financial capacities beyond their real means, leading some of them to fall into debt. And this is currently the major factor limiting an even bigger increase of BNPL, as complaints regarding the late fees are increasing. For instance, Afterpay charges USD 10 for each missed payment and USD 7 if the instalment remains unpaid after a week. Users missing all the instalments are charged a late fee of USD 68. Considering most of the payments made using BNPL are under USD 500, these fees are relatively high.

According to a survey conducted in the U.S. in November 2020 by Credit Karma, nearly 40% of consumers who used BNPL missed more than one payment. Nevertheless, Klarna, which has partnerships with over 250 000 retailers, said credit losses have fallen across all major markets. Afterpay, also said that late fees from consumers accounted for less than 9% of company’s income in the 2020 last quarter.

What’s next for BNPL?

While BNPL business surged with the pandemic, and given the nature of its customer base, the question of responsible lending policies arose in some countries. In the U.K. for instance, where the BNPL market represents USD 3.7 billion, consumer groups asked for regulation. As a result, the U.K. Treasury announced BNPL companies will have to conduct affordability checks before lending to customers.

More responsibility could come through certification. Sezzle, a BNPL company has recently been “B Corp” certified. This certification concerns for-profit companies that are taking into account the community they are engaging with. In the case of Sezzle, “B Corp” certification has acknowledged a commitment to financial education and a support to young adults in their purchase needs.

But still, is BNPL a sustainable business model? Fintechs could be considered as an additional middle-person between consumers and retailers, a position usually only occupied by banks. This is where an interesting battle might happen. As a direct competition to banks, Affirm launched a debit card, showing BNPL companies are willing to gain on the banking industry. On the other hand,

https://www.iads.org/files/pmedia/public/r6874_9_article_3_-_how_banks_can_use_customer_data_to_compete_in_the_buy_now_pay_later_space_-_forbes.pdf

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knowing they are ideally positioned to enter the market. They are able to tailor BNPL solutions through their own debit or credit cards, additionally taking advantage of all the data they own as well as their capacities in terms of security. In that case, banks could eventually eat BNPL firms alive.

***

What about retailers? Even though BNPL might only be a fleeting trend led by younger generations, offering a BNPL payment option to customers is as profitable as it is necessary to gain additional shoppers and new sources of revenue. At least for the time being, even if BNPL solutions are a competition to retailers’ credit cards.

For tomorrow, the goal could be to transform these shoppers into store-branded card holders by evolving the credit card solutions to include BNPL options. The example of Macy’s is really of some interest. Besides offering Klarna’s BNPL options to customers, the department store has invested in the fintech, showing a first step and possible path to fully include BNPL in its offer.

Credits: IADS (Christine Montard)

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

Stores vs online, and brand value

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

![What should we do with our stores? 1

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

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

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

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

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

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

![What should we do with our stores? 2

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

What’s the use of selling space?

So how have department stores been reacting to this situation?

a)    Reducing or closing

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

b)    Changing or transforming

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

c)    Flagships plus local

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

Department stores are dead, long live department stores

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

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

Credits: IADS (Dr Christopher Knee)

PRINTABLE VERSION HERE

Keeping markets under close watch, IADS collected innovative concepts related to key topics such as luxury experience, contemporary models, and reinvention.

Check out what luxury stores are thinking up to capture customers' attention in the third edition of the Retail Review.

![Retail Review 3 LV

Louis Vuitton, Tokyo

Inspired by reflections of water expressed through the building’s rippling exterior, the luxury retailer’s Tokyo flagship location has been completely transformed by Jun Aoki and Peter Marino. The store offers a full range of collections with upper levels dedicated to VIP clients.

More on Louis Vuitton

![RR3 Hermes

Hermès, Tokyo

As Hermès reopened one of its Paris locations, it also opened a new flagship store in Tokyo inside one of Omotesando’s most notable buildings. Upon entering, customers can peruse silk, jewellery, beauty, perfume, leather, and equestrian collections for both men and women.

more on Hermès Tokyo

Hermès, Paris

Hermès’ beautiful flagship on Rue de Sèvres in Paris has undergone a year-long renovation with its central striking feature of three huts made from ash wood, which the VIP lounge overlooks. The store has been fully reorganized to house evolving product lines, including its recently launched colour cosmetics collection.

More on Hermès Paris

Browns, London

The London store is the newest manifestation of Farfetch’s Store of the Future, blending digital and physical experiences by using an app that connects with interactive mirrors to give recommendations and provide product details.

More on Browns’ new boutique in London

![RR3 Kith 

Kith, Paris

In Paris, visitors are presented with a restored Carrara marble staircase that falls under a chandelier-adorned ceiling crafted with resin-cast Nike Air Max 1s. The space presents Sadelle’s restaurant in the courtyard and a basement level used as a rotating gallery space.

more on kith

Swarovski, Paris

Moving away from the accessibly-priced space, a crystal Willy Wonka factory concept appeals to a wider audience to showcase the brand’s shift into luxury. As customers sit on a sofa surrounded by walls of colourful jewellery, salespeople bring the products on trays for a personalised experience.

more on Swarovski

Diesel Hub, Shanghai

In an effort to converge living, dining, working, and shopping, Diesel has partnered with RTG Consulting and Muse Group to unveil a new concept for the brand called “Diesel Hub” in Shanghai. The 900 sqm retail space offers a Diesel Brave Bar that proposes food, beer, and specially developed spirits.

more on diesel

What: Fashion brands are caught in international politics games

Why it is important:  The Xinjiang incident is not affecting only brands: worldwide retailers should also watch the developments of this affair.

Following sanctions imposed by western countries on Chinese officials as a response to the alleged use of forced labour in Xinjiang, Chinese customers inflicted a retaliatory response to western brands, among which the most affected was H&M. The response was swift and damaging: the brand was removed from social media including the geo-localisation of its stores, some of which were closed by force. Other brands were engulfed in the backslash, and therefore, most of them toned down on the topics of forced labour and Xinjiang.

The only brands that remained out of this movement were the ones who had not communicated on this topic previously, or which were not particularly transparent on the issue. As a consequence, observers fear that it might encourage brands to lower the voice on forced labour and more generally on sustainability, as soon as it can strike potentially damaging political nerves. It is also feared that, on the mid-range, brands find themselves in an impossible situation, with Western customers asking for transparency that can not be provided without potentially affecting sales on their most lucrative market for the time being, China.

Is that a brands-only problem? Western retailers should watch out the development of this topic with great care:

• Their private labels are subject to the same expectations of transparency from their local, Western, customers, and any move might jeopardize their supply chain badly,
• China has demonstrated with this move that they were ready to hit hard on the economic aspect as soon as politics needed it. It raises questions on the behaviour of Chinese customers once borders open up again, in case a retailer displeases them by its own declarations or commitment to local customers, now that any message on social media or Internet has a worldwide resonance.

Fashion, Xinjiang and the perils of supply chain transparency

What: The American supermarket chain has achieved an unprecedented combination of cool and hard-discount.

Why is it important: The retailer’s low-tech business model is e-commerce-free, the in-store experience being the brand’s stronger asset.

Born in California, Trader Joe's has been breaking grocery retail codes for fifty years. It has been owned for more than forty years by the Albrecht family, owner of the German hard-discounter Aldi and which has just bought its alter ego Leader Price in France.

Trader Joe’s has not changed a lot in 50 years and continues to offer competitive prices and a positive customer experience. Today, the brand has 515 supermarkets, opens about 20 stores a year and accounts for about USD 15 billion in sales per year.

A low-tech company

Almost absent from online commerce, Trader Joe's didn’t suffer from the pandemic, despite competitors offering delivery or click & collect options. The queues outside the stores only got longer. This is what is obsessing retail professionals and economics professors with the Trader Joe's model: customers are ready to queue to shop and accept there are no delivery options.

The company assumes being low-tech. It collects almost no data on its customers, does not have a loyalty programme, and mainly runs its communication through a pamphlet printed with "soy-based" inks in which customers discover the best products. "The store is our brand, our products work best when they are sold as part of the in-store customer experience," explains Jon Basalone, in charge of stores. "Amazon's strategy is simple: ‘If you hate shopping, we deliver to your home’. The only way to compete with them is to make the in-store experience something entertaining," says Mark Gardiner, a former publicist who was hired for a few months at TJ's ten years ago and dedicated a book to it.

Revenue per square meter

Trader Joe's is much smaller than Walmart or Albertsons, but its revenue per square metre is unprecedented: almost twice as high as Whole Foods Market (bought by Amazon four years ago). "Trader Joe's strength is to be attractive to all categories of consumers. It's far from the 'discount punishment' model, where you accept a degraded shopping experience to access low prices, "explains Frank Rosenthal, who has taken a multitude of French executives to the U.S. to study Trader Joe's magic.

Nineteen cents a banana

Trader Joe's banana price is unchanged since 2000 (19 cents). The key to the equation: more than 80% of its offer is sold under its brand name. The brand sources itself from a myriad of manufacturers around the world, negotiating ultra-competitive prices in exchange for the promise of volumes.

To optimize its costs, Trader Joe's also has a limited offer: it offers around 4 000 references when competitors can display 50 000. Each store is between 750 and 1 100 sqm, compared to 3 500 sqm for a Whole Foods Market. The customer must be able to shop in fifteen minutes while having that sense of local grocery.

An army of teammates and cashiers

Unlike the European hard-discount, the stores have a lot of teammates and cashiers. They choose people who are naturally extroverted. Restocking is done in real-time to encourage customers and employees to exchange. There is no automatic cash register, but two crew members organising the queue. Trader Joe’s pays better than most other supermarkets and offers good health insurance that attracts seniors in particular.

Trader Joe's, l'américain qui gentrifie le hard-discount 

What: GDR’s head of strategy explores how NFTs can help retailers and brands imagine the next potential developments of the ‘token’ economy.

Why it's important: NFTs and crypto-tokens could become a key weapon in every brands’ arsenal as digital and physical worlds converge.

NFTs (Non-Fungible Tokens) are an application of blockchain technology where each crypto token is unique. Because of this, NFTs can be used to prove ownership or authenticity of a virtual object like a digital artwork. NFTs contain information about the product’s past and present. They keep a dynamic track of ownership and usage, and the record is transparent and accessible to all.

NFTs now: they’re great at creating excitement and PR

There is a lot of excitement around using the tech to sell digital art. Well-off digital art patrons can purchase 6-figure crypto-art pieces. Gucci released a Gucci Ghost gif, bought for USD 3,600 back in February that is up for sale with a new price tag of USD 16,000. Since November 2017, there has been a total of USD 174 million spent on NFTs. It may be hard to imagine the real long-term applications for NFT, but many believe that the new ‘token’ economy is a revolution that is ready to have an impact on retail.

Fashion brands are leading the way

NFTs have allowed fashion studio RTFKT to offer viral sneaker designs, memes, and collectable exclusives offered to gamers which they can wear in games and virtual worlds. With NFTs, RTFKT can offer unique and exclusive digital products to each customer, allowing them to justify the five-figure price tags.

NFTs have also broken into the virtual home space. Argentinian designer Andrés Reisinger recently sold ten pieces of virtual furniture on Nifty Gateway, a digital design marketplace, where the most expensive piece sold for almost USD 70,000.

Nike has used NFTs to link physical objects as a way to prove authenticity and fight against counterfeits. Nike’s CryptoKick blockchain-enabled system will be used to track ownership of the physical shoe and give owners a digital replica to be used in virtual worlds which are stored in a digital locker.

NTFs application are virtually unlimited. So what’s holding us back?

Tokens, like NFTs, reduce friction in transactions and offer a quicker analysis of market conditions providing greater transparency and decentralization. There is also a higher level of customization for digital products and services.

What is holding us back?

• No common network or agreed upon platform
• A variety of cryptocurrencies and tokens that exist
• No regulation and legal frameworks in place yet

NFTs tomorrow: an opportunity to reinvent your retail experience

Once we get over these obstacles, NFTs’ applications are virtually unlimited. The retail experience could be reimagined around decentralization and transparency. Currently, NFTs and cryptocurrencies are already the lifeblood of virtual worlds, like Decentraland, where you can buy virtual real estate and even create a business hiring real humans to work in your virtual business.

Decentraland will soon open museums to display NFT artwork. The next move will be into retail and virtual shops. Decentraland will be hiring real human shopping assistants to sell NFT-backed jackets, shoes, and accessories. The metaverse world is becoming more human. Eventually, our lives will be completely intertwined between physical and meta.

Embracing the digital future

The possibilities for future innovation as digital and physical worlds continue to merge are almost limitless. The first-mover advantage is paramount so brands and retailers should move fast if they think the transparency and exclusivity offered by NFTs can elevate their brand proposition. Brands and retailers can leverage NFTs to create exclusive limited editions, provide GenZers and gamers with virtual replicas of iconic physical products, invest early in metaverse real-estate, and offer customers the opportunity to pay with crypto in both worlds.

NFTs: what do they mean for retailers and brands?

What: A review of Doug Stephens’ book, Resurrecting Retail.

Why it is important: The book provides an actionable future vision for any business leader looking not only to survive, but thrive in a very different post-pandemic retail world.

Resurrecting Retail was released on 13 April and reveals real-time research conducted on how the pandemic has impacted every market, industry, profession, service, and category of product. The book emphasizes that the big players such as Amazon, Alibaba, JD.com, and Walmart are coming out of the crisis even stronger and are better prepared to capture more of the global economy. But how?

Stephens believes that we are past the time when the average retailer could win with an efficient supply chain and a steady flow of exciting products. With technology, a brand can leverage social and digital platforms to connect with customers in more personalized ways. Without that personal tie, it is too easy to lose customers to those giant retailers.

COVID-19 has permanently changed consumer habits as people have begun to rely on digital shopping and e-commerce making it harder to draw customers back into brick-and-mortar stores. Brands must think about purpose and personal relevance in order to win in the current marketplace. Every form of media needs to be an extension of the store evoking an emotional connection between the consumer and the brand.

How Can A Retailer Win In This Digital Age

What: Gen Zers regard online shopping as an experience and have high expectations for it.

Why is it important: In order to capture the increasing e-commerce wallet share of Gen Zs, brands will need to make their digital experiences seamless.

Younger customers value good digital shopping experiences and will quickly move on from brands if the experience is poor. 38% of GenZers said that they will allow a brand one second chance to fix a mistake before switching to a rival. Over one-third of young shoppers have abandoned a purchase or posted a negative review because of a poor digital shopping experience.

Nearly two-thirds (64%) of Gen Z said they want to keep buying almost everything online, which could have ramifications for brands and their direct-to-consumer and e-commerce strategies. As these customers reach adulthood and gain shopping power, they are demanding instant gratification from their digital experiences. Retailers and brands need to make a good and lasting impression on Gen Zers, or risk losing them to competitors.

Gen Z also expects fast service with 80% saying retailers that can deliver in fewer than 24 hours are more appealing. They also expect free shipping and personalized suggestions on products based on their shopping history.

Brands could lose fickle Gen Zers over poor digital experiences

What: Supply chain optimization tools bring sense to a complicated operation.

Why is it important: Demand planning software is becoming essential for businesses to be able to understand risks and respond to them quickly.

Tools like sales & operations planning (S&OP) help organizations consult with their factories to coordinate the production capacity of their production lines, among other things. Use of the tools have resulted in better forecast reliability and accuracy as well as reduced and forecast bias. Planning tools help companies increase product availability and decrease the number of back order to have a maximum capacity utilization and more efficient inventories.

S&OP and the pandemic

When COVID-19 first started spreading in China, S&OP tools were able to help companies shift their stock and speed up the supply chain in order to avoid shortages. The central communication, visibility, and control was crucial to avoid major disruptions in the global supply chain.

Integrated planning

There are still several companies that use Excel as a planning tool, which reduces their transparency to a minimum. Integrated planning tools open the visibility companies can have to their suppliers, whether it be a first, second, or third-tier supplier.

Last month, the Suez Canal was blocked leading to the disruption of many supply chains for 6 days. An end-to-end planning system provides companies with options and alternatives so businesses can make speedy decisions in times of crisis. In moments like this, time is of the essence and action plans must be implemented quickly to avoid disruptions in the supply chain.

Looking ahead

Blue Yonder, a supply chain software vendor, advises companies to ask themselves “What is going on in my supply chain right now?” While this seems like a straightforward question, it is difficult to answer for many companies. A cloud-based platform that enables petabytes of data to be quickly processed quickly makes it possible to monitor the supply chain in real time. It can also look ahead to predict future states of the supply chain using machine learning algorithms. Machine learning can predict disruptions that are coming before they happen, giving companies the ability to act in advanced.

Step to IBP

S&OP is just the first step in adopting supply chain optimizing technologies. The next step is IBP (integrated business planning), which will help companies see potential disruptions and changes in the supply chain for the next 18 months. By integrating market intelligence, leveraging CRM, improving demand sensing, and linking it to financial planning, companies can use machine learning to act on future disruptions proactively rather than reactively.

COVID-19 has solidified the importance of having an agile and resilient supply chain.

Pandemic accelerates implementation of IBP

What: A review of the major areas where retailers are forced to innovate in the coming months and years.

Why it is important:  WWD identifies 3 areas: social and digital marketing and sales processes, omnichannel capabilities and, interestingly, sustainability. We also believe at IADS that our role is to expose our members to innovative solutions in each of these topics, which is the reason why we will be creating a new channel dedicated to this topic in the future.

In the past, innovation used to be a topic on the desk of every CEO, but not considered as critical for surviving. After all, despite various disruptive announcements and new practices coming from the likes of Amazon or Apple, the playbook and business model en vogue in retail was working well, and for some IADS members, 2019 was even a record year in terms of numbers.

The pandemic radically changed that situation: now, retailers find themselves in a situation of “innovate, or die”, for numerous reasons.

The most obvious reason, after a year of lockdowns all around the world, is obviously the need to reach customers wherever they are, and not assume they will be coming to the store. This implies muscling up the communication capabilities - digital marketing, social media of course – and, in parallel, the selling processes themselves – livestreaming, social commerce -. The need for innovation is even more urgent that all players have now the possibility to improve, thanks to newcomers from the tech world who came up with new solutions, far cheaper than the investments such moves needed in the part (such as Shopify for e-commerce, for instance).

Also, technological innovations will also allow retailers to stay in the omnichannel course, once situation is back to a semi-normal. Customers are now expecting some services and interactions with stores and retailers, and take them for granted: offline/online services such as Buy Online, Pick Up in Store and what it implies in terms of stock unification and logistics, or product data enrichment (facilitated by the use of technologies such as QR codes) and what it implies in terms of product search capabilities.

Finally, another area where innovation is going to be impactful is the sustainability topic. This subject has been left on the side of the road at the peak of the pandemic, but is poised to make a come back once things settle down and customers are back in stores. Optimizing operations to be not only more economically efficient but also sustainably viable will then be not only a differentiating point but a basic expectation from customers.

At Retail, Innovation in High Gear

What it is: we need to deconstruct jobs into tasks

Why it is important: the old-fashioned “job” is no longer relevant to the new agile company. Retail jobs are shifting too, becoming increasingly polarised between customer service stylists and fulfilment roles. The authors propose a new “operating system” for work.

Agility has become a trope in discussions about how retail is changing, especially since the covid pandemic. Now John Boudreau of the University of Southern California’s Marshall School of Business and a senior research scientist at its Center for Effective Organizations and his co-author consultant  Ravin Jesuthasan look at what this means for work in an article in MIT SMR, prefiguring their book of the same title, due out next year.

The answer is that we need to deconstruct jobs into more granular units such as tasks and deply people according to their skills in those tasks. This will lead to new forms of recruiting, rewarding and engaging workers as well as a better understanding of how automation might replace, augment or reinvent human work. They describe a work operating system which allows people the flexibility to engage in work beyond their jobs.

In all industries, including retail, we are witnessing major shifts in the tasks expected of employees  (see Article : The Retail Renaissance) as well as a need to be able to adapt in situations of uncertainty.

Work Without Jobs

What: the Mint Fashion Flash March 2021 report

Why it is important: Discover Mint’s latest monthly report, intended as a catch-all fashion flash digest showing different categories from collaborations to lifestyle.

Mint Group, an agency representing the likes of Saks Fifth Avenue, Nordstrom, David Jones or the Real Real, and partner of IADS, shares its FW21 report for Men’s Fashion.

Mint Fashion Flash

What: China Department Stores Report 2020-2021 issued by the China Commerce Association for General Merchandise (CCAGM) and Fung Business Intelligence Centre (FBIC).

Why is it important: The report showed that, although some retailers like SKP in Beijing, outperform the sector, most of the surveyed department stores lack product appeal and competitiveness. They should transform and upgrade while focusing on digital and direct sales.

I. Overview of China’s retail market development

During the Chinese New Year period in 2021, key retail businesses saw dramatic growth across product categories. Sales of jewellery, apparel, communication equipment and home electronics increased 160.8%, 107.1%, 39% and 29.9% year-on-year, respectively. Some e-commerce platforms saw a 49% year-on-year increase in fitness equipment sales.

Department stores have been adding cultural and entertainment activities to their locations in recent years. They have introduced facilities for children’s entertainment, electronics and digital goods shops, cinemas, bookstores, karaoke, indoor basketball courts, etc.

The COVID-19 outbreak has further accelerated the shift to online shopping. In 2020, China’s online retail sales accounted for 24.9% of total retail sales of consumer goods, compared with 10.7% in 2015.

II. Key trends of the department store sector

2020 saw some impressive sales numbers for a number of high-end department store and mall operators. SKP (Shin Kong Place) in Beijing recorded CNY 17.7 billion (USD 2.7 billion) in sales revenue in 2020, maintaining its double-digit sales growth. Meanwhile, retail sales of Plaza 66 in Shanghai surged 60% compared to the previous year. These businesses sell a high proportion of luxury goods, benefiting from the rise in domestic luxury consumption.

Cosmetics consumption has been significantly upgraded over the past two years, with a considerable increase in demand for mid-to-high-end cosmetics. Young consumers aged 16-25, in particular, are becoming more interested in these categories.

From a digitalisation perspective, 89% of surveyed respondents have established an e-commerce business and among them, around 94.4% are selling via WeChat. Department stores have been selling online through live streaming (75%).

III. Key issues and challenges

Product appeal and product competitiveness are at the core of top-performing department stores such as Beijing SKP, Hanguang, and Hangzhou Tower. However, most of the surveyed department stores are lacking in product appeal and competitiveness, offering homogeneous products at unattractive prices. Factors contributing to the problem include brand image and brand positioning, product mix, management practices, relationships with brand owners, and price levels.

Transformation and upgrading are urgent needs. However, they are not without risks as they involve product repositioning, business optimization, renovation and reconstruction,

functional facility optimization, crossover operation. Despite the accelerated development of online business, the level of digitalization of the industry as a whole remains low.

The traditional concession model still dominates the operation of China’s department stores, and although direct sales have been identified as an important strategic direction for the sector, more than half of the surveyed department store operators stated that the proportion of direct sales business to their bottom line is less than 10%.

IV. Direction of development and transformation initiatives

Department stores will continue to revamp and upgrade. Meanwhile, omnichannel retailing and online-to-offline (O2O) integration will dominate the retail scene. 73.2% of the respondents cited “pursuing O2O integration” as the most important goal in the next 12 months, followed by “strengthening supply chain management” (58.5%). Developing on-demand delivery services will rise.

45.8% of surveyed department store operators said that they have added more experiential

elements in their stores compared to a year ago. Wangfujing Group has cooperated with international artists and creators to craft events, themed cultural curation and video content, combining technology and entertainment.

The survey reveals that 71.1% of respondents have already engaged in the direct sales business, higher than 67.1% from the previous year. Most surveyed department stores operate direct sales business in food & beverages (55.9%), cosmetics (54.2%) and apparel (45.8%). Also, around 36.1% of the respondents have launched their own private labels. Even if risky, another 26.5% plan to develop private labels in the future.

SKU management is a key area that both brands and department stores have been focusing on over the past year. They have been sharing data to identify best-selling products and target their marketing efforts towards those specific products, driving sales through the use of big data and consumer analytics.

Buying and selling on social media apps has become increasingly popular in China. Social commerce sales accounted for around 30% of the online retail market in 2020. WeChat and Douyin are the most used social platforms. Department stores have leveraged new technologies such as facial recognition, AI, robotics, and VR, to enhance the consumer experience as well as collect data for analysis to better understand customers’ needs.

China’s Department Stores Report 2020-2021

What: British larger retailers are looking to venture into the sector with smaller store formats.

Why is it important: Convenience now accounting for 22% of the UK retail grocery market and shopping convenience stores online could only be a growth opportunity.

There are many national operators in the UK, such as the Co-op, McColl’s, Waitrose, M&S Food, Tesco, Sainsburys and Spar, which each have convenience store formats and stock a wide range of products. In recent times, major supermarkets such as Asda and Iceland expressed interest in venturing out into smaller store formats.

Despite established retailers trying convenience store formats, Brits are choosing to support their independent and local retailers rather than established chains: almost two-thirds of Brits have been shopping locally in the last 12 months. This growing trend is set to outlive the pandemic, with 91% saying they will continue shopping locally to support smaller and independent retailers even after all restrictions end. The share of non-affiliated independent convenience stores in the UK accounted for 40% of the market last year.

“The convenience market had been growing robustly prior to the pandemic, and the impact of Covid-19 on societal trends has served to reinforce that growth, with convenience now accounting for a 22% of the UK retail grocery market. Furthermore, customers have become increasingly used to shopping convenience stores online. We see this online last-mile delivery as an incremental growth opportunity, which is why we struck a partnership with Uber Eats last year to offer home delivery from over 400 of our stores”, McColl’s said.

As changing shopper habits and the pandemic have altered the UK retail landscape, the function of convenience stores has expanded beyond just a quick stop for a newspaper and bottled beverages or snacks. By evolving to offer a diverse range of products and services, convenience stores have become a viable alternative for consumers to purchase essential everyday items.

Consumers nowadays may be increasingly surprised to find such a range on offer at their local corner shop, but it could be a taste of things to come. Local entrepreneurs are continuing to step up their fight against the encroachment of Tesco, Sainsbury’s, Waitrose and M&S into a market once dominated by independents.

A special report in The Economist magazine looks at what it calls the third retail revolution, the digital age, which turns the era of mass production supporting mass consumption, on its head. While store closures ravage the US (which has the world’s largest retail space per head – see IADS Exclusive: what should we do with our stores), parts of Asia are embracing e-commerce. But they are not leapfrogging physical stores but rather developing the new “omnichannel”.

In China, as well as the giants Alibaba and JD.com, Pinduoduo is working on “community group-buy” or “interactive commerce”, in which customers club together to buy products.

Others such as Shopify (LINK to forthcoming CEO meeting) are allowing brands (Direct to Consumer brands) to by-pass giants such as Amazon. Innovations are also taking place in grocery retail where profits are elusive, and consolidations taking place (Suning taking over Carrefour in China).

One of the secrets lies in customer data, thanks to which Pinduoduo again is pioneering “consumer to manufacturer” (C2M). This allows manufacturers to make specialised products directly for consumers cutting out intermediaries, with lower inventory, better margins and reduced waste.

The impact on retail employment is considerable, as the figures show less need for routine retail jobs but a significant increase in “advisory” or “stylist” jobs as well as transport and warehousing jobs.

In conclusion, the article predicts a cleaner future retail model than the one built around mass production and mass consumption, that has been dominant for 150 years. To see something of the future, we need to look at the innovations coming from e-commerce as well as those from concepts such as Showfields (LINK to upcoming New Business Models meeting presentation), for example.

The return of one-to-one commerce 

E-commerce profits may become harder to make 

The rise of the rebel brands 

Independent retailers may choose multiple sales channels 

The importance of omnichannel strategies 

How to know what customers want

Shop assistants and the retail renaissance 

Welcome to democratised retail 

What:  Reviewing omnichannel and the costs associated to such a strategy which went from nice to have to must have in one year.

Why it is important:  Stores remain central in the omnichannel set up as they allow saving costs. However, they will also need to transform to bring in something else than shelves filled with products.

Customers used to be in the past acting as unpaid labour for retail industry, by taking care themselves of the ‘last mile’, driving to the store, purchasing products from shelves and going home. Following the pandemic, this era is now over, as most customers grew accustomed to order digitally and either get the product delivered at home, or, at minimum, be available by pick up at the store.

The Retail Industry Leaders Association and McKinsey remind that pick up orders grew by 103% in 2020, while online sales supported by physical stores rose to 37% from 32% in 2019. The problem is that being able to fulfil digital orders (either from a warehouse or from a store) has a cost, which was in the past supported by customers: software costs, logistics, workforce, costs of shipping and returns, seriously indenting profits.

Ironically, these costs explain why stores will remain central for retailers in the future, as they are still a cost-saving point of product returns, especially in the case they manage to trigger a new purchase while customers are present (this is exactly the reasoning made by Magasin du Nord when they decided to expand their pickup service points surface, leading to 15% additional purchases made by customers coming in to pick up goods and parcels).

The omnichannel age is here — and it's expensive

What: McKinsey’s survey about the future of the USD 1.5 trillion wellness market.

Why is it important: McKinsey’s latest research shows that consumers care deeply about wellness and that their interest is growing. In a survey of roughly 7 500 consumers in six countries, 79% of the respondents said they believe that wellness is important, and 42% consider it a top priority. The market is estimated at more than USD 1.5 trillion, with annual growth of 5 to 10%.

Consumers define wellness across 6 dimensions: health, fitness, nutrition, appearance, sleep and mindfulness. Consumers expect to increase their purchases of both wellness products and services over the next year, with a strong focus on health categories.

Customer profiles

• Wellness enthusiasts are high-income consumers who actively follow brands on social media, track new-product launches, and are excited about innovations,
• The socially responsible consumers prefer (and are willing to pay more for) brands that are environmentally sustainable and with clean/natural ingredients,
• Price-conscious consumers believe wellness products are important but compare features and benefits before purchasing to get the best deal,
• Loyalists prefer to stick with their routines and the brands they know,
• Passive participants are only marginally involved with the wellness category and don’t actively follow brands or new products.

Consumer trends

Trend 1: Natural/clean products get their day in the sun

Consumers are keen for natural/clean products in an array of areas, such as skincare, cosmetics, multivitamins, subscription food services, and sleep enhancers – particularly in Brazil and China.

Trend 2: More personalisation, please

A majority of consumers around the world say they prioritise personalisation now more than they did two or three years ago – especially in the United States, the United Kingdom, and Germany.

Trend 3: The future is digital

A majority of consumers will continue to project more growth in e-commerce than in other channels over the next years. McKinsey sees traditional channels holding for certain product categories: fortified foods, multivitamins, and skincare. Other breakout categories (such as fitness wearables) are almost entirely online native. Consumers in China report the highest share of wellness spending online, followed by those in Japan Europe, United States, and Brazil.

Trend 4: Under the influencers 

In the United States, Europe, and Japan, 10 to 15% of consumers say they follow social-media influencers and that they have already made a purchase based on their recommendation. A much higher percentage say they definitely will consider doing so in the future. In China and Brazil, the percentage of consumers who say that an influencer has driven their purchasing decisions is much higher, at 45 to 55%.

Trend 5: The rise and rise of services

Experiences are increasingly available as offerings. Consumers are shifting toward services that address physical and mental health needs (for instance, personal trainers, nutritionists, and counselling services). Services do not replace products that remain a critical part of the segment, at roughly 70% of consumer wellness spending.

Trend 6: Category lines continue to blur

With the above trends in mind, companies are considering how to play across the health and

wellness categories and channels. It’s critical to identify the areas where consumers are open to giving these companies permission to extend their brands. A majority of consumers don’t want a single solution or brand to help them with all facets of wellness.

Winning in the wellness market

The global wellness market is healthy and growing. More consumers said they were going to spend more on wellness than those who said they would spend less. The majority of consumers planning to increase their spending is large in some categories, including memory/brain enhancers, anti-aging products, beauty supplements, non-invasive cosmetic procedures, nutrition (sports nutrition, juice cleanses, nutrition coaches, fortified foods), and meditation/mindfulness offerings.

The future of the USD 15 trillion wellness market

What:  Now that markets are about to reopen, the moment to reconsider the raison d’être of a store has come

Why it is important:  Digital capabilities are empowering stores and retailers into making their brand and name richer, in terms of content. But stores do remain relevant in the “digital age”, especially department stores.

It has been now more than a year and a half that the outbreak of Covid-19 started, and its consequences, lockdowns across the world, induced long-lasting changes of customers behaviours:

• Shift to e-commerce for convenience, practicability and fear of crowds,
• Work from home, quasi total disappearance of daily commuting and international holiday travels.

This situation raises the purpose of a store: what is it for, exactly, in the digital age? More than just a distribution hub (which used to use the customer as the last-mile logistician, an approach that is over now that anyone has the possibility to have the product home-delivered), or a place to find a nice curation of products, some retailers explain that stores are now part of a bigger purpose, and contribute to their branding:

• Selfridges sees itself as a theme park, all about having fun.
• Browns sees itself as a platform for experience and connectivity that is not available online.

Self-proclaimed retail prophet Doug Stephens argues that now is the time to put the distribution of experience, not products, at the centre of brands and retailers’ strategies. For him, the store is a stage and a studio, it’s about building and broadcasting experience that is then relayed offline in the other stores, or online on the digital channels. Interestingly, Stephens precises that we are not anymore in “the retail business, but in the show business”.

This is, ironically, a quote that we heard from many CEOs in the department store business over the last decades.

What’s a store for?

What: Jean-Marc Bellaiche details Printemps’ new strategy.

What is important: Le Printemps wants to reassess connection with tourists, especially those from China.

“Right now, the equivalent of 85% of our revenue is not operational. I’m convinced people do love physical retail and department stores. In December, and in January-February for the stores that were open, we recorded sales increases of over 50%, in some cases even doubling the previous years’ figures. Department stores, with their huge spaces, will continue to exist, but they need to transform themselves,” Jean-Marc Bellaiche said.

Le Printemps group operates 19 department store branches, the Le Printemps website, eight Citadium stores and the Place des Tendances and Made in Design websites. In the 2018-19 financial year, the group recorded a revenue of EUR 1.7 billion.

Start-up-style management techniques

On day one, in typical start-up fashion, Ballaiche set up a video-conference to which all employees were invited, something which has now become a ritual. Gradually, Bellaiche has also brought more women and younger faces into the executive committee. “My goal is for every member of the Le Printemps staff, to feel like an entrepreneur,” he said.

Despite the new approach, the issue of the store closure plan remains. But the group announced this week that encouraging sales figures along with lower rents will allow Citadium to keep 3 stores that were supposed to close.

According to the plan, the group’s remaining branches will reposition on the market within the next three to five years, with Le Printemps investing EUR 40 million to EUR 50 million annually. At the same time, store renovations will continue. Outside France, the group has put the planned Milan opening on hold but has stepped up the pace for the one in Qatar to open in 2022 ahead of the World Cup.

Recapturing the wow factor

On the clientèle side, Bellaiche is keen to reassess Le Printemps’s connection with tourists, especially those from China. “Chinese consumers are driving the luxury industry as they will soon account for 50% of the market,” he said. He wants to offer new services to these consumers, notably by forging new relationships with tour guides and operators.

As for Le Printemps’s French clientele, the goal is to appeal to younger consumers, tapping Citadium’s expertise. The group is also keen to strengthen its position in menswear, the leading category in some branches outside Paris, and attract more families. To make progress in this direction, Le Printemps has started to redefine the values that constitute its brand identity, working on themes like inclusivity and sustainability.

To attract these consumers, “we must recapture the wow factor. We must think ‘surprises’ again. This is why I’m planning to mix up the various departments’ approach,” said Bellaiche. The boundaries between home decoration, food, beauty and apparel will therefore become more fluid. The Made in Design range will be deployed more extensively at Le Printemps branches in 2021. The new strategy will also enable sporting and high-tech goods to be featured. Bellaiche also wants Le Printemps to open up to a greater number of small fashion and beauty brands.

The omnichannel challenge

Now that e-tail is booming, Le Printemps’s biggest battle will be fought on digital with an effort that includes modernising the group’s IT and technology platforms and its supply chain. “Printemps.com must mirror the range in our physical stores. It will then become a useful tool enabling shop assistants to boost the range they can offer to their customers, and generate additional sales” said Bellaiche.

Inside Printemps' transformation under Jean-Marc Bellaiche 

Printemps to Keep Three Citadium Stores It Planned to Shut

Related item:

• New Printemps CEO unveils transformation plan

What: the effect of the pandemic on retail real estate.

Why it is important: Apart from closing down for insolvency, retailers have been reducing the number of their stores as Covid has accelerated the trend towards online.

This Forbes article looks at retail real estate investment yields as well as leases and associated costs. Apparel retailers and department stores, in particular, felt the brunt of the Covid-19 pandemic, with analysts predicting 20% less retail real estate by 2025. As traditional brick-and-mortar businesses burn through cash reserves and consumers opt for e-commerce, many retail properties will remain vacant in the first half of 2021.

The future of retail real estate

What: The rate of returns is increasing as e-commerce gains traction.

Why it is important: Retailers need to change return systems for the sake of the environment and the bottom line.

Historically, retailers wanted to make returns as easy as possible for shoppers in the name of customer service. Returns incur a cost for retailers, and at the same time, are not very sustainable. According to a survey done by AlixPartners, 71% of American consumers are more environmentally aware, with 28% stating that it impacts their buying decisions.

The problem is that customers have not made the connection yet that most of their returned products do not end up back on a shelf, but rather these items tend to be liquidated, destroyed, or sent to a landfill. In addition, there was an estimated 16 million metric tons of carbon dioxide emitted from the transportation of returns last year.

Retailers don’t want to be the first ones to act when taking away free or easy returns, but in reality, it is not a sustainable business model. Some retailers will allow consumers to keep their unwanted items, but this can result in negative brand awareness as it will end up super discounted on resale sites.

Creative returns solutions

• Give the role of returns management to a sustainability person rather than a supply chain manager.
• Highlight the financial impact that reruns have on the bottom line.
• Partner with companies like Oporto that help liquidate returned inventory through other channels.
• Increase customer awareness to the environmental impact of their purchasing decisions.

Don't make it free, don't make it easy_ How retailers can support sustainable returns 

PRINTABLE VERSION HERE

What: A certification with strict environmental and social criteria for operations along the entire textile supply chain.

Why is it important: The recognition of the GOTS certification across consumers and business channels has grown incrementally year over year and has a direct impact on purchasing and partnership decisions.

Textiles have proven to be an important good in the past year as COVID-19 has called upon many industries to shift their supply chains to answer the increasing demand for masks and medical supplies needed around the world. To continue the sustainability series, we will explore one specific certification that addresses organic textile production: the GOTS certification. As consumer interests in the transparency of the supply chain connected to their fashion brands continue to rise, department stores need to promote their GOTS products and partnerships and ensure that there are sufficient organic products available for these environmentally aware consumers.

What it is

The GOTS (Global Organic Textile Standard) is the world’s leading textile processing standard for organic fibers. The standards were developed by the certifying bodies IVN (International Association Natural Textile Industry), JOCA (Japan Organic Cotton Association), Soil Association, and OTA (Organic Trade Association). GOTS enables textile manufacturers to qualify their organic fabrics and garments with one certificate accepted in all major world markets. This is an important step towards the harmonization and transparency of textile labels.

A GOTS certification is an assurance that the product meets the global standards for the processing and manufacturing of organic textiles. The standard covers the entire post-harvest processing including spinning, knitting, weaving, dyeing, and manufacturing of apparel and home textiles made with certified organic cotton and wool and includes both social and environmental criteria. GOTS is a key certification to ensure the authenticity of organic fiber and its safety.

How it works

GOTS sets the standard by creating requirements for the production of organic textiles to make sure every step of the supply chain is covered from harvesting and sewing to packaging. The requirements are based on environmental and social criteria to guarantee that the textile is produced in an eco-friendly manner. It also certifies that laborers and workers are protected and treated with fair trade norms during the process.

Some of the key features of GOTS is that it prohibits the use of harmful chemicals in the production of organic textiles, it covers the entire production process from plant growth to packaging materials, and the textile must have 70% organic fiber at minimum. If chemicals are used, they must adhere to strict environmental and toxicological guidelines. All textiles must meet a certain level of criteria and quality to be certified and the product is tested and appraised at every stage of the process by an experienced certifier. All processors and textile manufacturers are expected to meet strict social criteria to ensure fair trade practices and safe working environments. Yearly audits and surprise checks are conducted to verify that there is a continuance of correct practices.

GOTS is not the only standard that exists in the cotton and textile space. The OCS (Organic Content Standard) is used to verify organically grown raw materials from farms to the final product to increase organic agriculture production. OCS has seen record growth with a 48% increase of certified facilities in 2019. Another noteworthy certification is Oeko-Tex which qualifies that textiles are free of harmful chemicals and safe for human use. While GOTS only covers organic textiles, Oeko-Tex includes certifications associated with organic and non-organic textiles.

Why is it important

Until 2003, the sale of organic cotton items in the United States relied predominantly on e-commerce, mail order catalogues, natural and health food stores, and small specialized eco-textiles shops or boutiques. Today, department stores like Nordstrom and brand stores like American Apparel, Levi’s, Nike, and Timberland also have organic cotton items for sale.

The trend of using organic cotton has expanded a lot from the United States to Europe in the past few years. Typically, brands have found that outsourcing their eco-textile and organic cotton items to Turkey, China, India, and Pakistan can reduce costs and increase economic efficiency. American Apparel, on the other hand, uses GOTS-certified cotton to process sweatshop-free t-shirts made 100% in the United States in downtown Los Angeles. The company’s turnover has increased 50% per year since 2002 and the brand has expanded to Europe through its success.

In Europe, Germany and Switzerland are the top two markets for organic cotton textiles. The French market for fair trade products is also growing rapidly. With the involvement of large brands and retailers, the number of points of sale for organic cotton and GOTS-certified items has exponentially increased and can be found in regular sale channels like department stores and supermarkets.

The concept of organic cotton is successfully being marketed to brands and retailers in the fashion industry as being part of their policies for CSR (corporate social responsibility). The involvement of large fashion brands and retailers that are using organic cotton has generated a lot of attention from other parts of the textile industry, from designers and the media. This has further strengthened the interest of consumers in organic cotton textiles and clothing as well as their willingness to purchase.

Limits and Criticism

In 2019, 40,645 metric tons of organic cotton were sourced from Xinjiang, China, a province with allegations of forced labor, prison labor, child labor, and serious human rights infringements. The region produces one-sixth of the world’s global organic cotton. Credible reports of forced labor involving the Uyghur and the Kazakh ethnic groups in China have caused some countries, such as the United States, to ban the import of both raw cotton and goods containing cotton from the province.

There are eight GOTS-certified facilities in Xinjiang, yet GOTS has failed to comment on the implications or impacts of this revelation of harsh labor environments on the future of these facilities or their certification. GOTS’ silence around the issue is a bit alarming as China has the fifth-largest amount of GOTS-certified facilities in the world.

As the region produces such a large portion of the world’s cotton, the traceability of the cotton from Xinjiang can become easily blurred as it moves through various supply chains and gets mixed with other textiles around the world. Traceability can be a difficult topic, but GOTS was ranked best in the “Traceability of Clothing with Textile Seals” by the German consumer product testing organization Stiftung Warentest. They concluded that GOTS offered full transparency and traceability while complying with strict social and ecological criteria through all stages of production.

GOTS: The latest fashion trend

GOTS-certified textiles have created quite the buzz in the fashion industry from consumer demands. The Organic Industry Survey conducted by Organic Report reveals that savvy customers seek out companies of integrity through the achievement of GOTS certification.  It seems to have become the standard that the market expects on a global scale. In 2019 alone, the number of GOTS-certified facilities grew globally by 35% from 5,760 to 7,765 located in 70 different countries. The growth has been seen in both production and consuming regions.

Retailers do not need to be GOTS certified unless they are involved with a business-to-business trade activity where they sell to other retailers or they repack and relabel the GOTS products. The benefits of certification include streamlined processes when adding a product to the certification or getting label approvals throughout the year, a license number that will help keep trade secrets confidential, and access and membership to the GOTS public database which receives over 2,000 hits a week in the United States.

Though retailers and department stores do not need to be GOTS certified, it is important that they are transparent about their affiliation, if claimed. While the GOTS logo can be used on websites or labeling, retailers need to make sure not to give the impression that all products are GOTS certified. If the GOTS logo is used in general to show that GOTS goods are sold among others, each GOTS product must show the logo with its license number, label grade, and certifier reference. The GOTS organization audits and investigates any unauthorized or misleading use of the trademark and will take legal or public action if needed to safeguard the credibility of the program and labeling system.

With COVID-19 increasing the demand for masks and medical gowns to be manufactured, being GOTS certified has helped some United States companies win state and federal contracts because of their proven traceability systems. This raises a few interesting questions to think about. Does this mean that GOTS certification can bring a competitive advantage not only with consumers but also in the business-to-business world? Can affiliation with GOTS certification open doors to other business opportunities?  On the consumer side, should department stores ensure that there is a certain percentage of GOTS-certified merchandise offered to meet the rising customer demands?

Credits: IADS (Mary Jane Shea)

Read Also: Textile Exchange Organic Cotton Market Report 2020

Read Also: GOTS label guidelines