The Macy's store in downtown Minneapolis doesn't look or smell like a retail boneyard. Live people walk its floors. Some are even buying things.
What gives? For the past decade we've been assured that department stores, if not already dead, were slouching toward extinction as their customers abandoned them for hipper, cheaper or more convenient specialty stores, big-box retailers, discounters and online outlets.
Those forecasts apparently did not reach Cincinnati, home of Macy's, the nation's biggest department store operator. In May, sales at Macy's stores open at least a year -- a key retailing metric known as same-store sales -- surged 7.4 percent. Last year, same-store sales rose 4.6 percent -- Macy's best annual gain in at least 15 years and one of the highest among all large retailers.
That's surprising, given that high unemployment and general economic uncertainty would seem to favor the fortunes of discount-oriented merchants. But Wal-Mart Stores saw sales fall 1.1 percent at its namesake stores during the first three months of 2011, while Minneapolis-based Target posted a weak 2 percent gain in same-store sales.
To be fair, the dire forecast for department stores wasn't concocted out of thin air. David Brennan, co-director of the Institute for Retailing Excellence at the University of St. Thomas, points to U.S. economic census data showing that only 2 percent of retail spending occurred in department stores in 2007. The sector's market share had plunged almost 50 percent since 1997.
The institutional decline of the local department store can be seen in the demise of Minneapolis' once-magisterial Dayton's chain. First it suffered the indignity of having the name of its longtime Chicago rival, Marshall Field's, imposed upon it. Then it was sold downriver, and down market, to St. Louis-based May Department Stores Co. Less than a year later it was sold again, to Macy's, which eventually brought another name change.
These gyrations generated a fair amount of trumped-up nostalgia. Sure, today's department store may lack a certain grandeur or seem somewhat generic, but merchants had begun ripping out the dark paneling and pushing their own private labels long before Macy's came to town. It may be "too bad" that you can't buy toys at a department store today, but that's something consumers inflicted on department stores, not vice versa.
Macy's stumbled in its early efforts to unite a collection of regional stores into a national chain, but a turning point of sorts came with the My Macy's initiative. Piloted in Minnesota and since rolled out nationally, the localization measure allows buyers to tailor some product selections to specific market needs and wants. In the beginning, salespeople gathered customer input via a notepad and pen kept next to the cash register. Now it's a software program available on all terminals.
Similarly, Macy's has embraced technology and an "omnichannel" strategy that tightly integrates its physical and virtual stores. If a product is out of stock in one store, a clerk can order it online and send it directly to the customer's home. If customers want to know more about spring fashion trends, they can use a smartphone in the store to scan a barcode and access Macy's Backstage Pass to watch 30-second videos from fashion designers. Online sales for Macy's rose 38.3 percent in the first quarter and accounted for 1.3 percentage points of same-store sales.
One big challenge facing the department store sector is where future growth will come from. Most of the department store operators have experienced declining or flat sales since 2008. The number of stores is also flat or down, and the options for opening new ones are somewhat limited. Nobody is building regional malls anymore, and most stores are too large and thus ill-suited for the faux main street developments that have replaced malls.
Then again, discount retailers and mass merchants are facing many of the same issues. A slow economy has forced many to curtail new store development, experiment with smaller formats or focus expansion efforts in Canada or Europe.
Brennan remains skeptical of the long-term prospects for department store chains such as Macy's. "They'll have a position in retailing, but they'll become less relevant," he said.
For now, investors are jumping aboard the department store bandwagon. Since November 2008, the low point for many retail stocks, Target's share price has climbed 16 percent or so, and Wal-Mart's has fallen 4 percent.
For the same 30-month period, shares of Dillard's Inc., a regional chain based in Arkansas, are up more than 1,400 percent. Shares of Bon-Ton Stores Inc., the Seattle-based owner of Carson Pirie Scott, Herberger's and other regional chains, have climbed 271 percent. And Macy's stock price has more than doubled, to $28 and change.
Not dead yet, apparently.
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