PRINTABLE VERSION HERE

The beginning of the third century of department stores

Some big players in the European department store world, including Dr. Christopher Knee from IADS, were interviewed for The Future of Department Store by Erik Van Heuven, published just before the covid-19 pandemic. They make a number of interesting and insightful points about department stores. Do these points still hold after the first wave of lockdowns, and will they provide a guide to the future in the “new normal”? Dr. Christopher Knee reviews the conclusions drawn by then at the light of what we perceive today of the new realities.

How a crisis will concentrate the mind

In the months before the Covid-19 pandemic a number of famous department stores were suffering (JC Penney, Macy’s, Barneys New York, Debenhams, House of Fraser…) generating a familiar plethora of articles predicting the death of the 19th century format, often using Darwin as a meme. More recently as a result of the pressure all retailers have experienced, the end of department stores is once again described as imminent.

What do the actors themselves say about it? In The Future of Department Stores, a book published just before the pandemic, 12 important European department store retailers shared their thoughts on the opportunities and challenges for department stores.

There follows a selection and synthesis of some of their preoccupations and how they might be viewed in the “new normal” post-pandemic world.

Heritage and branding

Department stores are conscious of their heritage. It is viewed as an asset which distinguishes them from other retail formats. Their history is often deeply embedded in their brand, as it is in the cities in which they have traditionally played a significant role, defining whole areas and attracting tourists at least as much as major city monuments. In some cases, it is difficult to imagine the city without the store (try Paris without Galeries Lafayette, London without Harrods or Selfridges, Milan without Rinascente, Amsterdam without Bijenkorf, Brussels without Inno, Berlin without KaDeWe, Helsinki without Stockmann, or Madrid without El Corte Ingles). These landmarks are slowly beginning to come back to life.

What is important is that the measures and protocols taken to ensure staff and customer safety are in line with the store brand and image, whether they court exclusivity or family-orientation.

Space-time

This emphasis on the “wonder” inspired by the department store building has continued since the format’s founding, with major architects hired to remodel or build new stores around the world. The recent wave started with Rem Koolhaas and the Prada store in New York in 2001, an approach which was quickly adopted by department stores, notably the Selfridges in Birmingham by Amanda Levete and Future Systems, opened in 2003. Investments have continued with Koolhaas at KaDeWe as a recent example, and the hugely expensive refurbishment/restoration of the Printemps store in Paris. These places are designed for “shopping” rather than buying, and for customers to linger and dream. While this will no doubt be the case once again in the future, the health crisis underlines a defensive preoccupation with convenience, even in the luxury world. Furthermore, although the space variable remains an important component of the winning formula, time and speed have become a real part of the offer of intuitive shopping.

Global and local experience

The status of the department store in the city makes it an experience in itself. The KaDeWe building in Berlin, like the Rinascente in Milan have historic significance, just like the Marshall Field’s in Chicago (which inspired Selfridges in London) and which elicited large protests when it was renamed Macy’s. These buildings have both tourist and local appeal. But it is the local customers which department stores now have to woo back, until international travel regains its former volume which will not be for some time. It was precisely because of the experience of neglect felt by local customers that Galeries Lafayette opened a special tourist store across the street from the flagship with tax-free and group facilities. It is this tension and mutual dependence between the global and the local which is the challenge for flagship department stores. Stores in smaller cities require a different sensitivity. (see concept of “the 15-minute city”.)

There is no doubt that the food offer including restaurants has become an important component of the experience of visiting department stores. Food is fashion and embodies perfectly the need to offer a global food experience as well as to emphasise the low carbon footprint fresh provenance and local taste and production.

Management

Department stores have also been working for a long time on their business model and structure, and how to make it efficient (this was indeed the original role of the IADS, to bring “scientific management” to the format). However, a different model is now required: some elements of the original model act as a brake on the development of department stores, with silos slowing its response to change,  merchandising models unable to adapt to competition and to the new relations with brands, and employment practices which discourage the kind of engagement customers have come to expect.

This revolution remains to be fought: getting away from what one retail leader has called “mismanagement” is a fundamental requirement for many industries. Classic theories still dominate and are no longer capable of delivering the leadership, engagement, flexibility and agility needed in the current century. This characteristic has been accelerated by the health crisis.

E-commerce

The march of e-commerce has been accelerated also. It is no longer a “must-have” because your retail business is old-fashioned without it. E-commerce for many was the only source of revenue during the lockdowns. Online selling represents huge convenience for customers. For retailers, it has opened up a whole range of innovative solutions to getting essentials (and often less essentials) to customers.

However, these are rarely profitable solutions for the long term. What remains is diminishing returns as online grows. With the covid-19 spread, online became a way to remain present in the mind of the customer, but not a source of profit for the future. The original goal of the IADS, to make department stores efficient and profitable has not yet been reached for the online business. As the CEO of the online business whose department store division failed puts it, we are “not good enough yet…”. While before the pandemic, most department stores were struggling to offer the same assortment online as they did in store, the more recent point of view would appear to be that the “infinite shelf” or “endless aisle” is too expensive, and that choice, selection, curation and indeed personalisation are the ways forward to increased convenience and frictionless retail.

Conclusions

Department stores cannot remain a volume business:

Unless department stores can attract large numbers of tourists and a significant local clientele, they will not remain volume businesses. Locally, the middle class which the department store format was engineered to serve is shrinking. Hence the tendency to move upmarket. With the continuation of the covid-19 scare, we will have to learn to serve fewer customers.

Department stores need to know their customers:

As a corollary to the above, department stores need to know their customers. This does not necessarily mean knowing them individually, but knowing what kind of experience, assortment and service they are seeking – and also how to surprise them. Technology understanding and investments will become crucial. Such a close contact with customers moves us still further away from mass retailing.

Who are the local customers?

Department stores will need to learn to address their local customers more clearly and appropriately. This also applies online: most online department store customers come from the areas around the physical stores. Even the large luxury brands are conscious of this lacuna. Customers are (re)discovering their community and their environment. However, this means losing some of the benefits of economies of scale.

Choices:

The best way to address customers in the future will be to “cut across the noise” and curate the offer. And the offer needs to match the store brand as well as the targeted customers. This will involve some difficult choices. Department stores may choose to offer above all convenience, or entertainment, or a curated selection, or value, or innovation… In the past, department stores attempted all or most of these. In the new normal, customers need one unchallengeable reason to visit.

Simplifying the store:

One of the main objectives of department stores in the new normal should be to simplify: this means simplifying operations to focus on profitability; and simplifying the offer to appeal to a local customer mindset. Department stores are both complicated and complex. Complicated in their operations which can be simplified through appropriate strategy and management. Complex in their DNA which can be managed through a shift in business model and technology.

Want to go further or exchange your ideas? Share your thoughts with us at [questions@iads.org](mailto:questions@iads.org)

Credits: IADS (Christopher Knee,)

PRINTABLE VERSION HERE

The killing of George Floyd in the US and the consequent protests around the world have brought to the surface a long-felt sense of injustice that has found an echo so deep that it has forced media, businesses and politics into a frenzy of self-justification and defensive posturing.

The reaction has some things in common with the viral spread of the MeToo movement three years ago following the revelations of harassment and sexual abuse by Harvey Weinstein.

Mary Barra, CEO of GM, Ken Frazier of Merck, Arvind Krishna, boss of IBM, are just some of the Fortune 500 names who have recently spoken out in support of Black Lives Matter, in complete contrast to the deafening silence we have grown used to on these controversial issues. From the department store side, Michelle Gass, CEO of Kohl’s, has been outspoken against racism and referred to her company’s CSR report. John Lewis who recently appointed a new chairman who is a woman and black, published its first diversity report just before her arrival. Although John Lewis’s overall diversity numbers are good, there is still a strong imbalance between higher and lower levels in the company.

Is the situation and these pronouncements different now? Are these bosses to be taken seriously this time, or are we witnessing another episode of “race washing” which defuses a short-term crisis without yielding any substantive changes?

“Give the lady what she wants”

Marshall Field, founder of Marshall Field’s department store in Chicago

Underrepresentation is everywhere

There is clear underrepresentation in business of most non-white straight male groups in top roles. For example, according to The Economist (13/06/20), although black people make up over 13% of the US population, only 4 of the current Fortune 500 CEOs are black, and 6-7% are female (including Best Buy, Kohl’s and JC Penney) . The same goes for other top positions in business. Even among those companies which claim good practice on diversity, there is sometimes an element of bad faith: look closely at the makeup of company boards and it appears that many of those which claim to have a diverse board are counting non-executive directors equally. Very few indeed will have a woman at the executive helm who is not an owner’s family member (which is not to diminish those people’s competence). Similarly, in whatever country, ethnic minority groups get fewer in number as you move up the hierarchy.

What is the excuse?

The main argument put forward by businesses has been that racial and gender inequality are problems for society to solve. Only society as a whole through government can tackle poverty, inadequate schools, a flawed justice system, and dominant domestic arrangements.

After an incident at Nordstrom Rack where the police was called to deal with three black youths wrongly suspected of shoplifting, it was commented that “Nordstrom cannot fix society on its own as it relates to stereotypes”.

There is of course a moral imperative which recognises that businesses exist in society with employers and employees, customers, suppliers and stakeholders. It has been pointed out that business is where races mix in a world which is often sharply divided into separate communities. As the multinational 3M has put it, “businesses have a responsibility to help lead”.

The business imperative for diversity

What is the impact of low diversity on business? Any imbalance in employment of different social groups represents potential waste of talent as employees at all levels may be excluded in spite of their high ability. A number of reports have considered this angle and by and large link lack of diversity to underperformance. A paper published by the World Economic Forum argues that “diversity brings many advantages to an organization: increased profitability and creativity, stronger governance and better problem-solving abilities”.  It continues, “companies with more women in the C-Suite are more profitable”. BCG claim that “diverse leadership teams boost innovation”; and for McKinsey, “many successful companies regard I&D (inclusion and diversity) as a source of competitive advantage. For some, it’s a matter of social justice, corporate social responsibility, or even regulatory compliance. For others, it’s essential to their growth strategy”. It is no accident that JC Penney, long recognised for its efforts in promoting diversity, has a specially designed training programme called “winning through inclusion”.

What is to be done?

Most under-represented groups appear to reject quotas and affirmative action which they claim have not worked. Having the scales tipped in their favour, reduces their voice when they do get to the table. Furthermore, it should not be what some have called a “box-ticking exercise” (ok, we’ve got a woman, so we are not un-diverse). Rather, what is needed is a) focus: diversity is a difficult topic which needs a strategy. Also, the situations of different under-represented groups are not the same. Race, gender etc. cannot all be solved together; b) the problem should not be ghettoised for example through a “diversity committee”. It should be the concern of the whole business and led by the CEO; c) metrics and measurement. Goals and targets need to be set, (not quotas) including follow-up, for example, of executives who leave; d) management practices need to change. Managing diverse teams is a new skill which needs to dispense with “affinity bias”, the tendency to assume we are working with people from a similar background.

In terms of merchandise, the list of faux pas is a long one: Macy’s got publicly shamed and had to apologise for a set of plates on the theme of weight reduction which were insensitive. The well-known racist sweater design by Gucci wich raised a storm of protest prompted the comment from film-maker Spike Lee: “we’ve got to be in the room”. In other words, if there is no diversity in the company, there will be costly and offensive mistakes made (whether you have a “diversity officer” or not, apparently).

Are there any best practices?

A four-part series appeared in Women’s Wear Daily at the end of June as part of the panic following the realisation that the George Floyd killing and its aftermath was perhaps more significant than first supposed. It attempted to paint a picture of fashion, brands and retailers in terms of their diversity employment and policies but ended up as another example of evasion and prevarication on the part of many of the companies approached. Many claimed they had no data to share. Macy’s CEO was quoted as saying that diversity and inclusion has been in the retailer’s DNA for years, but it needs to and plans to do more, in light of the recent protests over the killing of George Floyd. Many followed his line that diversity “requires long-term action” as though the problem had only just been identified. Even Nordstrom which came off relatively well for a department store, confessed that they “must do more”. In the Forbes “Best Employers for Diversity” ranking of 2020, Nordstrom occupies position 273, Macy’s 293, and Bloomingdale’s 339.

Although not noted for diversity in management positions, John Lewis in the UK as mentioned above, recently appointed its new chairman: a black woman who came from outside the retail industry. The management board of the John Lewis Partnership now consists of 8 people mixing ethnicity, gender, continuity and expertise in a convincing cocktail.

Are we really listening to our customer?

An Accenture study has found that “42% of ethnic minority shoppers would switch to a retailer committed to inclusion and diversity” and 41% of LGBT shoppers would do the same. It is never one element that shapes how people perceive a retail brand. Many points of interaction including marketing and advertising, store environment, front line employees, products and services, and public statements contribute to brand reputation. We are beginning to hear the faint rumbling also of black influencers being short changed by brands, of fashion students at Central St Martins or Parsons demanding more mixed teaching.

As the report on retail by DLA Piper surveying businesses in the US, the UK and Europe concludes: “the most senior people driving strategy in the largest listed retail firms in the US, UK and mainland Europe are not representative of the customer groups they serve or the type of diverse leadership which can give them a proven competitive edge”.

Conclusions

Undoubtedly, the US is a special case in terms of ethnic numbers. Few other countries have a comparable racial/ethnic mix, and indeed few other countries collect census details like the US. Nevertheless, the lessons are broader: diversity is the opposite of sameness, uniformity, and the “affinity bias” mentioned above which smothers innovation and creativity. At the present moment, racial diversity is under the spotlight. It is a perfect moment to learn that our customers are diverse beyond simply age, and if we are to keep them, we will need to cater to that diversity, whether ethnic, gender, sexual, disability or other. We will not have the means to do so successfully if we rely on a traditional uniform leadership. “To start building diverse senior teams for the future, retailers need to take deliberate and proactive action” …. Only this “will ensure the pipeline is filled with leaders of the future” (DLA Piper).

For companies, this means:

• Having a real strategy for diversity
• Recognising that diversity concerns the whole company; a “diversity officer” may have the effect of absolving everyone else from responsibility
• Pushing for diversity where it is needed: at the top and particularly in senior executive and operational roles

Want to go further or exchange your ideas? Share your thoughts with us at [questions@iads.org](mailto:questions@iads.org)

Credits: IADS (Christopher Knee,)

PRINTABLE VERSION HERE

Fashion is the second most polluting industry worldwide, which is now a top worry for retailers. How come? Consumers want to reduce their environmental impact and ask for "green". Retailers have to follow their customers and avoid becoming irrelevant: 60% of 19-24 years old Chinese women living in Tier 1 cities prefer brands and stores that seek sustainable solutions.

Department stores have several options to engage on sustainability: corporate initiatives, eco-friendly brands, rental clothing, and resale. But how far have we gone? Turning desires into reality, a panorama of the industry’s actions below.

CSR: Clarity of messaging does not replace clarity of purpose

![2020 ARTICLE Sustainability: the options for department stores go for good

Department stores are going environmentally friendly instore and want their customers to know it. Some, including Galeries Lafayette and El Corte Inglés, joined the Fashion Pact during 2019 G7 in France, along with global brands and suppliers. In order to commit on climate, biodiversity and oceans, specific actions and goals were set: eliminate single-use plastic packaging by 2030, support new technologies and new antipollution measures to protect oceans and rivers, reduce greenhouse gas emissions to reach zero net emission by 2050, switch to 100% renewable energy on the production line by 2030, among many other goals. But is that enough for customers?

To remain convincing and credible, department stores are forced to do more than switch off lightbulbs at night.

Two years ago, before the Fashion Pact, IADS member Galeries Lafayette launched its Go For Good initiative, a programme advocating transparency in the fashion chain, from raw material to finished product. An instore corner is dedicated to the operation and features several sustainable brands; its size shows that options on the market are not as wide as one would expect in terms of suitable brands. They also launched a sustainable capsule collection via their private brand, named Fashion Integrity, in 2016, which is supposed to be relaunched at some point.

Last fall, at the same time as the Fashion Pact, IADS member El Corte Inglés launched the Sustainability Movement with the aim of building a healthy, sustainable and prosperous environment. It focuses on three areas: product, planet and progress. El Corte Inglés has even  developed a product guide with sustainability criteria for fashion, home, mass consumption, leisure as well as sports goods and accessories.

More recently, Seattle-based Nordstrom outlined its new environment sustainability goals for 2025. The principles include using sustainably sourced raw materials in half of Nordstrom Made products and ensuring 15% of them are sustainable. The retailer also added a “Sustainable Style” category filter on the navigation panel in many categories on its website and app to facilitate search.

Is this enough to please consumers? Where does sincere commitment end and “green washing” start? Gone are the days when turning off the heating system and switching bulbs was enough to proclaim yourself sustainable and gain the full customer’s trust. Now, general opinion is much more inquisitive and critical. For instance, when Swedish fast fashion giant H&M claims to invest on sustainability, through its eco-friendly Conscious collection, and by collecting customers’ old clothes to recycle them, reactions are mixed. Customers do not forget that the core business of the fast fashion player requires consuming chemicals and water to produce garments.

Resale: a solution during a global economic crisis for customers?

![2020 ARTICLE Sustainability: the options for department stores thredup

Resale has become a trend in retail over the past few years, and it is likely to continue. According to ThredUp’s 2020 Fashion Resale Market and Trend Report, resale is expected to grow 5 times over the next 5 years. Younger customers, especially Gen Zs, are fond of this business, as for them, buying vintage links sustainability with savings.

![2020 ARTICLE Sustainability: the options for department stores GEN Z power

![2020 ARTICLE Sustainability: the options for department stores shifting habits

For now, digitally native platforms are playing their cards right and winning over the market. TheRealReal claims to extend the life cycle of luxury products by reselling them, to the point of having several physical locations across the US. Their growth exceeded by far the growth rate of the retail market in the US for the last 5 years.

Last year, Farfetch launched the pilot Farfetch Second Life, a new service that enables customers to sell their own (and old) bags in exchange for credits to spend on their platform.

This suggests that acquisition of start-ups is, for now, the only way. For instance, H&M has taken a majority stake in re-commerce platform Sellpy; which is now opening its first online store outside Sweden in Germany. The start-up is an all-inclusive platform for resale, handling the entire process from picking up the goods from sellers’ homes, to photography, sales, and shipping.

What about department stores? Neiman Marcus Group is the first major retailer to invest in the resale business, as it has bought a minority stake in Fashionphile, a 20-year-old business specialising in the buying and selling of used luxury handbags, jewellery, and accessories. Fashionphile has set up space inside some Neiman Marcus stores for customers to bring in pre-owned products for sale.

At the beginning of this year, Nordstrom launched a resale shop dubbed 'See You Tomorrow', available online and in the NYC flagship. It features an edited, authenticated assortment of apparel, accessories, jewellery and watches from a variety of brands, pulled from the Nordstrom Quality Center, the facility that receives and processes returned and damaged merchandise from Nordstrom's full-price channels.

Last year, British Selfridges partnered with London-based fashion resale app Depop, offering it a space in the luxury department store’s Designer Studio for three months.

Resale platform ThredUp has launched many shop-in-shops inside Macy’s and JCPenney. “People will always want to buy new stuff,” says ThredUp CEO James Reinhart. “What’s really changing [is] the line between 'it’s brand-new' versus 'it’s new to me'.”

Travel will still be very limited in the next few months, and tourism (a significant portion of the business of some department stores) should remain slow. The resale market, which exploded during the lockdowns, as money was tight for consumers, is a good balance between sustainability and savings. Played well, it could be a way to attract the local clientele that is facing tough times and lead them to spend time in department stores. The only question that has not been solved so far is the business plan: is it profitable? And if not, can it attract enough customers to be considered as a marketing investment?

Rental: Selling things while giving the impression of selling services

![2020 ARTICLE Sustainability: the options for department stores rent

Renting clothes went quiet during the lockdowns, for obvious reasons:

• Hygiene: renting does not feel like the best way to avoid infection
• Lack of events: weddings, proms and galas were cancelled

The timing might not seem optimal for the clothing rental market amid the health crisis as retailers, including department stores and all our members, clean or quarantine all items tried instore (we will issue a special piece about our members’ actions soon). However, as the world slowly exits lockdowns, the fashion rental market is not dead yet. For instance, YCloset in China has seen the numbers of people renting increase since lockdown measures were eased at the end of March. The concept of renting clothes is particularly attractive to millennials, while Gen Z are still a bit reluctant about it.

Launched in 2009, pioneer Rent the Runway has been dubbed “the Netflix of Haute Couture” by the New York Times. The designer clothes renting company has physical locations across the US, and also drop-off boxes in several Nordstrom department stores. The company recently launched RTR Revive, a resale initiative allowing customers to buy items that were taken out of the rental circuit at a low price, a service available through their website and in some Nordstrom Rack locations.

H&M has also entered the rental market with a concept featuring a selection of some dresses, wedding dresses and exotic evening tops that can be rented for one week. All items are made of sustainable materials and come from H&M’s Conscious Exclusive collections.

Other department stores have also dipped a toe in the rental market: Bloomingdale’s launched “My List at Bloomingdale’s” trial last fall, providing more than 100 exclusive pieces from 60 brands for rent, covering all women’s apparel categories. The customer browses the curated assortment and adds pieces to her list, with the option to prioritise favourites. Within three business days, a box is delivered containing four pieces from the list. Once ready for a new batch, pieces are returned and a new selection of four items is sent out immediately with no limit to this cycle.

Last year, France’s Le Bon Marché hosted luxury rental service Armarium to offer customers the opportunity to rent pieces from the Spring/Summer 2019 collections of around 50 labels.

During the spring of 2018, Galeries Lafayette gave space to Panoply, a rental service specialised in luxury and designers’ clothing.

This February, UK-based peer-to-peer wardrobe rental platform Hurr Collective opened a pop-up store in Selfridges.

Not to mention that clothing rental company Le Tote acquired Lord & Taylor department stores last fall from Hudson’s Bay Corp, demonstrating that such a partnership might be of interest for both businesses.

It seems that no department store has a dedicated clothing rental service instore. However, even though current timing might be off, renting clothes could be a good option to sell additional services to a clientele that might. Not otherwise have visited the store. Indeed, it is an opportunity to suggest underwear, accessories, beauty, alterations, and services such as hairdressing or restaurants.

Conclusions

Customers are expecting more from department stores when it comes to sustainability, and retailers are under scrutiny at a moment when financial stability is challenged.

How may we attempt to combine sustainability and profitability:

• Know what your priorities are: if you have old buildings in city centres, maybe it is better to renovate them and make it known (and save money on operations) rather than engaging in ambitious product-oriented operations.
• Know what your customer wants:

+ Better communications: transparency is a must for customers. Be ready to show everything. For example, the financial report of IADS member Falabella includes pages fully describing the actions taken and measuring them.

+ Avoid green washing: it is linked to a better communication. Department stores should take real measures and offer real answers to customers, who are more and more demanding. Do not claim without grounds. The price to pay is too high.

+ Communicating on eco-friendly assortment does not exempt department stores from taking ecological measures at the corporate level.

• Resale: in a post-covid world where many jobs have been lost and the economy has dramatically slowed down, resale should become a significant part of the retail market and might just be the future of fashion. It is a way to attract local customers and generate traffic instore.
• Rental clothing allows for cross-selling including merchandise and services (in beauty for example). Like resale, it could attract the locals and bring traffic instore.

Food for thought to go further (share your thoughts with us at [questions@iads.org](mailto:questions@iads.org))

• Why would a department store go green? Is it for profitability or to bring traffic instore? Is there already a working business model somewhere?
• Is it more rewarding to communicate on a green assortment or on corporate measures? Who do you need to convince? Your customer or your shareholder?
• What should be the place of ‘sustainability’ in the department store organisation? An obsession from the top like at Selfridges? A job per se? A KPI for all team members?

Credits: IADS team (Louise Ancora, Christopher Knee, Selvane Mohandas)

PRINTABLE VERSION HERE

![2020 ARTICLE E-commerce & Department Stores

E-commerce has become an essential part of the department store toolkit. It is tasked with increasing sales, improving service to customers and, thanks to an optimised structure, boosting profitability in the same way the return on space did in yesterday’s model.

However, e-commerce pure players and most of the e-department stores are losing money in operations, competing for a fickle customer who appears to chase the cheaper option in their mostly indistinguishable offers.

*Is that an inescapable fate? If it is, why are some department stores entering the game now, when so few have succeeded so far? Learning lessons from the small number of best-in-class players, the few who are making money, might be a good idea for the newcomers.

And for others too.*

“Think about customer relationships, revenue will follow”

Michael Kliger, CEO Mytheresa

For a long time, Rinascente of Italy has been sceptical of e-commerce. And yet over the last two years, under the impetus of its owner Central of Thailand, it has invested 20 m Euros and created a 50-person business unit to make 15 000 items from 650 brands available to its customers in Italy. Liberty of London, which has been online for 12 years (its site now accounts for some 10% of sales), has restructured its e-commerce through an investment in a Salesforce CRM platform and a datalake with Azure to allow its 40-strong team to improve their service as well as to link with their recently launched B2B platform operating in 32 countries. LVMH, owner of historic Bon Marché store in Paris, last year rechristened its 24Sèvres website (named after the address of the Bon Marché) as 24S, increasing its offer to men’s wear, bringing its total number of brands on offer up to 200, available in over 100 countries, most recently South Korea and Germany.

The future is online…

One reason, of course, is that, as Bain tells us, by 2025 e-commerce will account for 25% of the luxury market. Customers, as we are repeatedly told, are “channel-agnostic”, that is they expect to be able to shop whenever, however, and wherever they want. Furthermore, the competition is upping its game: brands are going direct to consumer and bypassing intermediaries (Gucci and Burberry are examples of prominent presence on the web with substantial visitor numbers); multi-brand sites are also growing with Farfetch, YNAP, Ssense, Mytheresa and MatchesFashion as notable examples.

…but does the future pay?

However, it is also generally acknowledged that online retail is at best a lower margin business than physical retail has been, and at worst a seriously unprofitable one. Unlike physical retail, the main cost headings online are fulfilment and supply chain; customer acquisition; and IT investments. Even those companies mentioned above are rarely straightforwardly profitable. The 2019 YNAP results were seriously impacted by what has been described as “its painful tech upgrade” with a losses of around $10 m. Ssense, which said by its owners to be profitable, recently acquired Polyvore then immediately shut it down, an expensive customer data purchase. The Farfetch CEO has declared that it would reach break-even by 2021, some 14 years after its launch, while reporting a current loss of £85 m. Only MatchesFashion and Mytheresa (which both started as small brick and mortar shops) are currently profitable. They have also remained small in terms of assortment, while on the other hand YNAP offers upward of 800 brands, and Farfetch some 2000.

What lessons can be learnt from this and what are some of the success factors?

Retail brand or product brand?

Online retail is not the same as physical retail. The cost structures and business models are different.

![2020 ARTICLE E-commerce & Department Stores

Rinascente has announced that it will soon be introducing a “gamification” element to its site. While this will be welcome to the extent that it contributes to engagement and productivity, it should take care not to reduce the convenience of online shopping, even though it expects 70% from mobile. The company is aiming for sales of 80 m to 100 m Euros in 2 years. Since it will ship from store, it will serve Italian customers only, for the initial phase. However, the pick-from-store solution was a serious drawback to the recently launched Fenwick site in London during the lockdown. It also apparently proved a disaster for the early Sälling online experiment in Denmark. It is indeed difficult to imagine pickers competing with the huge number of shoppers which Rinascente attracts on many days. Breuninger of Germany cleverly operated the other way around when it used stores as extra stock for web purchases when the DC proved too limited for the rush of online orders during confinement. SM of the Philippines also initiated a new “channel” during lockdown which served customers from the stores.

Rinascente is so far a modest e-commerce proposal but is planning to be augmented in the future by a “marketplace” offering many if not most of its 120 concessions in order supposedly to generate more traffic and income at little extra cost. While the benefits are extolled by tech company salespeople, they may be less obvious on the ground.

![2020 ARTICLE E-commerce & Department Stores

Liberty, which is still experiencing very limited traffic online (just over 600K visits last May, compared to YNAP’s 13 m or Farfetch’s 21 m), is both a retailer brand and a product brand – and an international one at that. It apparently derives the greatest part of its profits from own-brand merchandise and from selling fabrics as a wholesaler. This places it halfway between a retail brand (which most department stores are) and a product brand (such as Burberry, its Regent Street neighbour). Arguably, product brands need to “tell a story” online, while retail brands need to prioritise curation and convenience. This difference is, or perhaps should be, reflected in the online experience: is it proposing shopping involving browsing and gifts, as claimed by the Liberty e-commerce director, or is it an efficient experience for time-poor customers? In this sense, it falls between two stools. In some ways similar to Liberty, is the Fortnum & Mason web site which, according to the chief customer officer, is in effect the ground floor of the store (and it also consists mostly of its own brand offer). It would be inconsistent for the Liberty site to offer a marketplace, like Rinascente is planning.

![2020 ARTICLE E-commerce & Department Stores

On the continuum of models, 24S plays both the card of the Bon Marché store of which it is the website, and that of LVMH, many of whose luxury brands it offers as well as others. But it comes down more on the side of retail than of brands. Most of its sales are apparently achieved outside France, and perhaps for this reason, it has never wanted to be associated through its name with the Bon Marché store which is relatively less well-known abroad. 24S probably has about twice the traffic of Liberty, because of the notoriety of the brands, but is still very small compared to other multi-brand websites. On profitability, Bernard Arnault, the owner of LVMH and 24S has been quoted as saying “we haven’t found a way to make it (24S) profitable… they are all losing money… the bigger they are, the more money they lose”.

Bon Marché operates a separate site called La Grande Epicerie, dealing with the high-end food offer of its eponymous store.  Although food online is a case on its own, partly because it is primarily local (apart from food gifts), it nevertheless offers a range of services from which there is much to be learnt.

Limited assortment and unlimited customer knowledge

The right and appropriate assortment is just as important online as it is offline. Successful online players limit their assortment online. The “endless aisle” is a trap: some 65% of the business comes from 30 brands, according to Mytheresa CEO, and inventory costs also exist online. Furthermore, operational efficiency increases if there are fewer photographs to be taken.

However, keeping the assortment curated requires excellent customer knowledge. This means being prepared to select customers on the basis of their lifetime value and eschew the lure of the quick one-off sale. Sophisticated and effective customer acquisition requires data and the intelligence to use it.

Typically, the more wealthy customers who have the potential to become long-term clients value curation and convenience online. Understanding which customers are worth engaging and which aren’t, also solves part of the customer acquisition puzzle. A corollary of this point is, of course, that buying requires a high level of expertise and agility in order to satisfy and indeed anticipate those precise customers’ needs.

![2020 ARTICLE E-commerce & Department Stores

The recently launched Printemps online site (printemps.com) challenges some of the above: it complements their small specialised online offers as well as the Place des Tendances by the Printemps.com site, launched in 2013, and which is a relatively small site offering around 400 brands. The Printemps.com has been described as mobile first, targeting 20 to 40-year olds and is forecast to break even in 4 years. It is very much a “magazine” format offering goods for sale. It is possibly an attempt to create a “story line” for a multi-brand retail format by using the magazine format to deliver brand value through lifestyle.

Conclusions

Recent high-end fashion online launches and upgrades thus demonstrate several things:

• That online and offline are different businesses
• That retail brands and product brands require different models
• That there are indeed ways to make online retail profitable
• These include

+ keeping a tight rein on assortment

+ choosing customers according to their lifetime value

+ and making sure the buying skills are sufficient and adapted

• That there is perhaps still some room for innovative thinking and new models

Credits: Dr Christopher Knee, IADS

An indepth analysis from Retail Prophet's founder Doug Stephens, where he describes his 10 archetypes for future retailers. Interesting enough, when he mentions the appetite for online "Apex Predator" retail giants, the only parameter not taken into account in his analysis is to know who owns the goods. Marketplaces do not own the goods, which ultimately put pressure on brands, who have to finance their stock. One may wonder if this is viable on the long run for creativity and diversity of the offer.

Another point worth to note: among the many examples to illustrate the 10 archetypes, only 2 department stores are mentioned: Selfridges for its customer experience, and Nordstrom for their customer service. Where would you put your own department store in this list?

Read the full article below

How to survive the future of retail