The survival of the department store in the 21st century

Once the darlings of the investment market world-wide, department stores have become everyone’s favourite punching bag of late. However, far from being at death’s door, there is a strong argument to suggest that department stores are merely struggling to cope with their mid-life crisis. A crisis that many believe will deliver the clever department store operators a golden future.

To understand where they are going, one first has to understand where they have come from and how they matured into their current malaise.

It can be argued that the seeds of the department store were laid down in 687BC in the town of Lydia in Asia-minor. It was in Lydia that we have the first record of coins, permanent retail shops and the marketplace. The marketplace was the beginning of the department store as it brought together carefully selected merchandise from the far-flung corners of the known world and used clever display techniques and salesmanship to convince customers to part with their hard earned coin.

Our contemporary model of a department store was really only pioneered in 1855 with the opening the Le Bon Marche in Paris. Here, for the first time under one roof, a single store brought the integral elements of the marketplace together and undercover. A broad array of merchandise, entertainment, a sense of occasion, food, a meeting place. These were all important ingredients of the emporium.

It wasn’t until the early 20th century that the department store matured from its simple beginnings to emerge as the powerhouse it was to become. Led by entrepreneurial owner-operators like Gordon Selfridge, the fundamental disciplines of retail were laid down.

Shopping or sightseeing

“Shopping or sightseeing, everyone is welcome. Entry is free. Every item is priced and ready to take. And if you are not completely happy, yo are free to return the goods and have your money refunded without question” said Gordon Selfridge in one of the advertisements for the opening of Selfrigdes on Oxford Street. These were revolutionary statements when the store opened on March 15 1909.

Retail owes much to the early pioneering of department stores such as Marshall Field (where Gordon Selfridge became Managing Director prior to his departure for London), Le Bon Marche, Harrods and Selfridges among many others as these institutions turned retail into a respected industry and laid the foundations for visual merchandising theory, merchandise management, staff training and customer service.

But the rightful place for department stores began to unravel with the birth of the suburban shopping mall on April 21 1950 in Seattle (Northgate Shopping Mall). And with it came two simultaneous attacks. Firstly, the suburban mall was in effect a giant department store – with a relatively scaled down department store attached. And secondly, as developers began to exploit the model, department stores began to rapidly expand their geographic coverage as mall owners sought the department store “brands” as magnetic attraction to both investors and customers.

From the 1970’s the department stores radically developed from a downtown emporium to a locally accessible shops for families as malls spread across the world – notably in the USA. Eventually the “law of diminishing returns” caught up with them. As did the new competitive threat – discount department stores. From their height of power in 1982 in the USA to their position in 2004, the average decline in retail category dominance for department stores was more than 50% (see chart below).

Today the dominant position in retail in the USA – notably in the suburbs – is occupied by discount department stores and one in particular… Wal-Mart.

The mid-life crisis for department stores has seen them develop the retail equivalent of “love handles and crows feet”. Too much square metreage in territories where they are uncompetitive and diminishing returns from a historical merchandise structure that had failed to keep up with the shift in purchase behaviour in the suburbs.

So to survival…

For many, survival of a mid-life crisis leads to plastic surgery and the quest for a younger model. The same can be said of the department store model. There are many things that can be lifted and repaired and some that need to be cut-off and thrown away.

The department store has and always will be a CBD concept – a focal point concept of defining and being “the special place”.

The 21st century CBD model requires:

  1. high differentiation – being different and special
  2. high ground – choosing the categories worth winning
  3. high street – blending the best of the high street in a better browsing option
  4. high service – delivering customised solutions and personal recognition
  5. high theatre – creating immersion, engagement, entertainment
  6. high energy target customer – living and breathing aspirational appeal

This model does not translate successfully to the suburbs or to small scale footprints.

The 21st century suburban model is all about profit through volume:

  1. foot traffic
  2. transactions
  3. gross profit dollars (not percent)

It thrives on concepts like “Masstige” (the Harvard Business Review term for merchandise that blends prestige allure with mass volume pricing), cheap chic and disposible fashion. In the suburbs the balance is one between the shopping malls width of offer and the individual stores focus. In the CBD, the department store covers both under one roof and many departments.

Department stores have always been a property play. Most of the great department stores continue to own their CBD flagship stores. These locations are as much their strategic asset as anything else in their armoury. Where they have lost control of these assets and the asset has been re-developed, much of the firepower of the department store has been eroded.

Today the world’s best department stores – Bergdorf Goodman, Selfridges Oxford Street, Harrods, Le Bon Marche and many others – own their CBD property, focus on CBD locations and create an experiential shopping destination which – far from competing on price – delivers unparalleled service, personal recognition and shopping immersion as tangible differentiators for a selected clientele.

This is what will allow the department store to survive in the 21st century and beyond. It will also leave the discount department stores to fight in the suburbs….at least until the internet beats them on price and convenience.