If department stores survive this pandemic, July 1, 2020 will almost certainly mark the point where the format reached one of its darkest days. On both sides of the Atlantic, the news was nothing short of devastating for icons like the U.K.’s John Lewis – and, in the U.S., a veritable “who’s who” of retailing legends, including Macy’s, Nordstrom, JCPenney and Sears. All in one day.
Industry observers woke Wednesday morning (July 1) to the news that John Lewis, the U.K.’s biggest department store, was laying off corporate and store personnel and would soon start closing stores. According to data collected by the U.K.’s Centre for Retail Research, 2,123 stores operated by 38 large and medium-sized retailers – which employed 49,200 staff – fell into administration in the first six months of this year.
The news was followed just hours later by Macy’s admission that it lost $3.1 billion in Q1. Next up: Nordstrom announced it was cutting 6,000 jobs. Then to cap it off, Sears, which has become an afterthought in the pandemic retail nightmare, announced it is closing its iconic Hackensack, New Jersey location.
Not every bit of news has been as tragic. Kohl’s, which does not have the same breadth of inventory as its more well-heeled peers, is showing signs of life. According to The Motley Fool, in the period after the May 19 reopening of half its stores, the retailer has reported that those stores averaged 50 percent to 60 percent of their 2019 sales. And at a recent investor conference, Kohl’s showed some “Digital 3.0” muscle not consistently shown by other department stores: Its digital sales surged 90 percent year over year in May. Data points for the month of May suggest that sales may have dropped roughly 40 percent compared to last year. Kohl’s management also indicated that in-store sales rose notably in early June, while eCommerce activity remained strong.
Then there’s JCPenney. The retailer reported last week that sales plummeted 73.5 percent to just $266 million in May, and saw an eCommerce bounce of just 15.7 percent over 2019. “Lower digital sales penetration, a slower cadence of store reopenings, less agile management, and a continuing reluctance among many consumers to visit malls were all likely contributors to this dreadful sales performance,” said The Motley Fool.
What will be the fate of department stores? It has been a relevant question since the 2008 financial crisis. But the pandemic has flipped the odds tremendously against them. According to an early April assessment by S&P Global Market Intelligence, department store operators – including Macy’s and JCPenney – had the highest one-year probability of defaulting (42.1 percent) out of all business categories.
It’s easy to pile on when it comes to department stores, especially when the malls they anchor are just starting to reopen. But three pandemic developments are fighting aggressively against them. The first is the virus itself. With the U.S. in general and Southern states in particular unable to control the spread of COVID-19 at this point, the scenario of yet another retail shutdown looms. Or at the very least, the rise in new cases will keep shoppers home – which could put the lights out.
“I think the majority of retail is going to have a tough time surviving another major shutdown. … If the consumer becomes fearful again of going into a mall or being in an enclosed space, you’re going to see the reaction that we saw in Texas, with the sales moderating,” said SW Retail Advisors Founder Stacey Widlitz on Yahoo! Finance’s The First Trade. “Again, even if we don’t [shut down], there are a limited amount of bodies we’re allowed to have in stores going forward. It changes the dynamic of the holidays. So are we going to have Black Friday? Those big sales where people trample one another? I don’t think we can have that this year. It does change the dynamic of shopping, particularly for a name like Macy’s.”
The second development is the inability of department stores to develop meaningful eCommerce value propositions. Regardless of the percentage rise in online sales, department stores are discount outlets when they could be focused on exclusive collections or portals to high-priced, high-profit inventory. Nordstrom, for example, backed off the 70 percent discounts of just a few weeks ago, but it’s still leading with markdowns, including a 60 percent-off promise for its upcoming anniversary sale. When factoring in shipping and returns, it gets harder for revenue to count against overhead.
The third development is the success of other formats. TJ Maxx, Burlington, Kohl’s, Marshalls and Ross Dress For Less have no eCommerce capacity, but have managed to attract customers despite a loose affinity with CDC guidelines. Consumers will shop in stores, but they don’t seem to want to shop at broad inventory stores represented by the troubled group of Macy’s, Nordstrom and Neiman Marcus.
“There are also economic reasons for the aversion to eCommerce by TJX and other off-price retailers, such as Ross Stores Inc., which doesn’t sell online, and Burlington Stores Inc., which stopped doing so earlier this year, according to analysts,” per The Wall Street Journal. “It is hard for discount retailers to turn a profit when factoring in the cost of shipping and returns. Moreover, some brands that sell to discounters don’t want their items online, where shoppers can easily search for deals.”
So, whither department stores? It’s a more relevant question than ever, but there’s an even more relevant one, which is: Whither the virus? Until COVID-19 is a non-factor, those retailers might not be in control of their destinies.
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