Michelle ThompsonMacy’s recent announcement of its plan to shutter 150 stores, equating to nearly a third of its total locations, underscores the ongoing decline of the once-dominant department store industry in America.
Multiple factors have contributed to the gradual downfall of American department stores. These include fierce competition from large-scale retailers, the increasing preference for online shopping, and the influence of activist shareholders vying for control of corporate boards.
An additional significant issue is the bifurcation of the retail landscape due to inflationary pressures. This has resulted in success for brands like Walmart, which cater to budget-conscious consumers, as well as for luxury brands targeting affluent clientele. However, department stores, which traditionally served the middle-class demographic, have struggled to maintain relevance.
According to Neil Saunders, a retail analyst at GlobalData, the core problem facing Macy’s and other struggling department store chains is a lack of adaptability in their business models. Saunders argues that these companies failed to modernize their offerings to effectively compete with emerging rivals over time.
“In essence, many of them became complacent, neglecting to heed the evolving demands of their customer base,” Saunders remarked. “While online retail and big-box stores have undoubtedly impacted their market share, the primary issue lies in their failure to innovate and evolve.”
Diminishing titans
Once dominant figures in American retail, department stores like Macy’s, Sears, and JC Penney were revered for their wide array of products and shopping convenience, fundamentally altering consumer habits and retail landscapes. These behemoths not only reshaped how Americans purchased everything from clothing to appliances to electronics but also overshadowed smaller, locally-owned stores in downtown shopping districts, which bore the brunt of changing consumer preferences.
However, the glory days of department stores are long gone. They have been eclipsed by formidable competitors such as Walmart and Target, which offer comparable products and often at lower prices, along with the added convenience of groceries. Moreover, the surge in online shopping has further eroded the relevance of department stores, exacerbating their decline.
The closure of numerous department stores, once mall anchors across suburban America, has contributed to the decline of many shopping centers, leaving remaining department stores struggling with significantly reduced foot traffic.
Given these ongoing challenges, Macy’s recent announcement of plans to shutter around 150, or 30%, of its remaining store locations hardly comes as a surprise. It’s merely the latest in a series of closures within the sector, with more likely to follow. Neil Saunders, a retail analyst at GlobalData, predicts that this downward trend will persist, leading to even fewer department stores in the future.
Shoppers browse the aisles of a JCPenney department store in 2023.
According to Saunders’ statistics, department stores’ share of US retail sales plummeted from 14.1% in 1993 to 9.8% a decade later, further dropping to 5.7% in 2013, and reaching a mere 2.6% last year. Projections from Coresight Research, an analytics firm specializing in the retail sector, anticipate total sales by US department stores to decrease from $103 billion in 2018 to just $81 billion by 2026.
While acknowledging the inevitable decline, Saunders remains optimistic, stating, “Decline is inevitable. But I don’t think extinction is inevitable.”
Continuing to experience the repercussions of the pandemic
The department store sector faced several challenges during the pandemic, including the closure of enclosed malls due to stay-at-home orders, while big box competitors remained open by providing essential groceries. This situation granted these already-thriving rivals access to a broader customer base they might not have previously reached.
Furthermore, a lingering issue post-pandemic was the widespread adoption of curbside pickup options, which many shoppers became accustomed to at Walmart or Target. However, this convenient service was often unavailable for numerous mall-based department stores, exacerbating their struggle to compete.
In March 2020, an empty parking lot sat outside a Macy’s department store. Malls and certain shopping centers were temporarily closed in compliance with New York State’s directive, which mandated the closure of indoor mall areas due to the coronavirus pandemic.
Furthermore, the transition of numerous office workers to remote work, either partially or entirely, diminished the demand for dress attire, a core product category for department stores, as highlighted by Sunny Zheng, a research analyst at Coresight. Additionally, Zheng noted that certain clothing brands began to prioritize direct-to-consumer sales during the pandemic.
Zheng remarked, “There are certainly structural challenges that emerged during this time.”
Challenges faced by Macy’s
Macy’s announced on Tuesday its latest restructuring initiative aimed at adapting to changing market dynamics by reallocating resources towards its more successful stores and upscale brands like Bloomingdale’s. Tony Spring, the new CEO, acknowledged the findings from customer surveys, stating, “it became increasingly clear that the needs are not being fully met.” He assured investors of a heightened level of accountability within the company to better align with evolving customer preferences.
However, Spring faces the challenge of navigating a takeover attempt by a group of activist investors, who previously sought to privatize the company but were rebuffed. Historically, such takeover endeavors have had mixed success in the retail sector. Many once-iconic brands, including Lord & Taylor, RadioShack, Toys ‘R’ Us, and Payless Shoes, succumbed to bankruptcy and closure due to excessive debt burdens imposed by private equity owners.
A notice displayed in the windows of Lord & Taylor, promoting a clearance sale due to store closure, seen in 2020.
Sears, once hailed as the largest and most influential retailer globally, has nearly vanished under the ownership of hedge fund manager Eddie Lambert.
Saunders highlighted one of Macy’s primary challenges, pointing out that its parent company, previously known as Federated Department Stores, directed much of its resources towards acquiring other department store brands like May’s Department Stores and Filene’s, rather than investing in its existing stores.
Michael Brown from consulting firm Kearney noted the necessity for a reduction in the number of department stores to enable some brands to survive and prosper. “We had an oversaturation of department stores,” Brown remarked. “During their peak, people frequented them for their unique offerings, but they eventually became generic, lacking distinctiveness.”
Brown expressed optimism regarding Macy’s plans, seeing potential for success in their strategic shift towards catering to their desired clientele and adapting their formats to attract them. He emphasized that meeting this challenge is crucial for Macy’s to thrive.
However, Brown cautioned that not all remaining department store chains will survive the evolving retail landscape. He predicted that while some will emerge as winners, others will inevitably face difficulties in the years ahead.
