Department stores have faced a difficult couple of trading years, with consumers remaining cautious and rates of saving increasing. While the recent cuts in interest rates may help in the short-term, the traditional department store format needs to be re-invented to stay relevant and competitive amid the changing retail landscape. This is particularly important with the growing influence of online shopping.
Australia has two full-line department stores: Myer, aimed at the middle-market, and David Jones, pitched at the luxury consumer. Myer, the larger of the two, currently operates 69 stores across the country, while David Jones has 36 locations. Both chains have recently announced network reviews and rationalisations that will result in the closure of underperforming locations. While some stores will be shut or downsized, there are still new sites opening, and existing ones being refurbished and expanded.
The Myer Melbourne store is the largest department store in the southern hemisphere in both size and turnover. In total, it will comprise approximately 32,000m2 when the $300 million redevelopment is complete in 2013. Myer recently announced that it would close stores at Tuggeranong in the ACT and at Forest Hill in Melbourne. Other outlets will operate in reduced space when the shopping centres in which they are located are redeveloped. In states benefitting from the mining boom, new stores are being opened, such as Joondalup in WA, and Mackay and Townsville in QLD. There are also stores under construction at Shell Harbour in NSW and Fountain Gate in VIC, and plans for a store at Woden in the ACT.
Last year David Jones opened a new store at Claremont Quarter in WA, and has a full-line store at Highpoint Shopping Centre in VIC, set to open in late 2013. Further down the track, new stores will be opened at Macquarie Centre (NSW), Pacific Fair (QLD), Sunshine Plaza (QLD) and Whitford (WA). They have also recently completed store refurbishments at Chadstone in VIC, Warringah Mall in NSW and Marion in SA.
Our market for department stores is relatively small compared with the US, where there are approximately 17 major department store chains operating; with the largest, JC Penney, having around 1,106 stores located across the country. A number of department store chains in the US also operate discount or clearance outlet stores, including Saks Fifth Avenue, Bloomingdale’s and Nordstrom. This trend is yet to take off in Australia, with David Jones operating two warehouse clearance stores at Birkenhead Point in NSW and Harbour Town in QLD.
The average size of a department store in Australia is approximately 14,500m2, but this figure is expected to decline gradually as stores are rationalised. While in the US, the average size is closer to 8,000m2, not including flagship locations. While regional shopping centres are defined as having one or more department stores as anchors, this is becoming less of a factor in enticing customers. Larger shopping centres now have a range of anchors, benefit more from the presence of mini-majors, and are less dependent on the success of department stores.
Spending at our department stores has fallen to its lowest level in more than two years amid heavy discounting and rapid growth in online shopping. The tough discretionary spending environment has also resulted in the need to clear excess inventory and a fall in productivity. David Jones and Myer have both recently issued a series of profit warnings as trading conditions have deteriorated.
The latest figures available from the Australian Bureau of Statistics show that retail sales at department stores are -4 per cent over the year to November 2011, compared with total retail sales growth running at +3.1 per cent. Increases in retail spending have been driven by non-discretionary expenditure, particularly on food, and at cafes and restaurants. While traditional areas of discretionary spending, such as clothing and footwear, and shopping dollars spent at department stores, have been declining.
Sales at Australian department stores have also fallen to a record-low share of total retail spending. While department stores still occupy a prominent spot in retailing, their share of real (inflation-adjusted) retail trade has fallen to 7.5 per cent. This compares to a 10 per cent share during the 1990s. David Jones in particular has been impacted by the volatility in share markets and white-collar job losses that primarily affect its higher-end clientele.
One of the major issues for department stores has been the heavy seasonal discounting. In late 2011 discounting began even earlier than usual, starting at the beginning of December, before retailers slashed prices further after Christmas for the traditional sales period.
Consumers have been conditioned to expect discounts and are reluctant to make non-essential purchases until an item is on sale. This cult of discount will be difficult for retailers to unwind in 2012, and is expected to impact turnover levels in department stores during the first half of the year.
Department stores have also been losing sales to specialty stores over the past decade, one of the primary reasons being the lack of customer service and in-store experience. This will need to be an area of focus for both chains if they are to lure shoppers back through their doors. Both chains are expanding the range of in-store services offered with the introduction of personal shopping, free breast cancer screening clinics, pre-season international and Australian designer previews and a range of health and beauty treatments available onsite. Department stores are also extending their trading hours to enable customers to shop when they want.
Both retailers have been continually updating their brand portfolios. They are increasing their store exclusive brands, focusing on lines which are unique to them, and where they can be competitive on range and pricing. There is also a push for more branded installations or concept areas within department stores, which helps refresh and increase brand awareness. They have also been putting pressure on international brand suppliers to reduce wholesale prices, which can be substantially higher in Australia then they are in the US and UK.
Another issue will be scaling back the level of discounting that has plagued the retail environment over the past few years
Myer and David Jones have been aggressive in the implementation of their digital marketing strategies and social media campaigns, with customer engagement through Facebook and Twitter forming an integral part of that strategy. Establishing their online stores and increasing the product range available online is also a priority. US department store chain Nordstrom has managed to successfully combine its physical stores with a strong online presence. Nordstrom’s virtual store accounts for about 10 per cent of its annual sales and around 20 per cent of total earnings. Although, it is imperative that department stores keep prices on a par with brands’ direct online sales.
It is expected that department stores will seek shorter lease terms on renewal, and will downsize some stores due to supply chain and productivity gains, reflecting better selling space utilisation. Following the model adopted in the US, department stores in Australia will evolve into places to pick-up merchandise bought online (click-and-collect) and also exchange products. A further rationalisation of categories stocked is also expected to occur as the range of furniture, electrical items, white goods, DVDs and CDs is reduced or phased out.
Are department stores still the shopping centre drawcard they once were? While there is the potential for both department store chains to close underperforming stores and shrink others in response to the two-speed economy and online shopping, department stores aren’t dead yet. But their future success will depend on their ability to think strategically and reinvent themselves. This is not just an issue for Australian department stores, but one being experienced in markets around the world.
Consumers have been critical of the service levels and in-store experience of department store shopping, but they still like the concept. Nonetheless, the department store model is particularly at risk from global fashion brands and online retailing. Having said that, chains in the US and UK are providing stellar examples of reinvention by tailoring location and store size strategies and through the localisation of in-store merchandising. Globally we are seeing a heavy focus on e-commerce channels, store design and in-store concessions, as well as greater focus on the youth market. Department stores overseas have been investing heavily in store renovation, remodelling and product range revitalisation. Australian department stores will need to follow suit to stay competitive and relevant to the modern shopper.
Nora Farren is director of research at Colliers International. www.colliers.com.au