Department Stores, Once Mall Anchors, Become Millstones In Ecommerce Era

Differentiate or die. JL

Sapna Maheshwari reports in the New York Times:

“Brick-and-mortar is not necessarily dead, but you need fewer stores to achieve the same amount of sales volume. A lot of retailers need to shrink their store base, and that is tied to everything that’s happened with digital and changing shopping patterns.” New rivalries are particularly painful for physical stores that fall in between selling heavily discounted goods and luxury products.

For decades, a corner spot at the mall was a sure path to success for big American department stores like Macy’s. Not anymore.

Those stores have been outmaneuvered by online retailers like Amazon and discount retailers like T. J. Maxx. And now the pace of change is accelerating, transforming the retail industry faster than expected.

The results? A rude awakening for some of the country’s biggest retailers. And for malls, a reshaping that, in many ways, mirrors a growing economic divide.

Macy’s said this week that it would cut more than 10,000 jobs as part of a previously announced plan to close 100 stores and cut other costs. And the long-struggling Sears Holdings said Thursday that it would close 150 more stores and that it had sold its nearly century-old Craftsman brand to Stanley Black & Decker. They are the latest in a slow bleed of similar announcements in the past two years from rivals including J. C. Penney.

These changes are “happening at a tremendous speed,” said Bernard Sosnick, a retail analyst at Madison Global Partners.

“It’s putting pressure on all stores, best and worst, but the worst just don’t have a place in retailing anymore as sales decrease,” Mr. Sosnick said. “It’s necessary to sacrifice them, shutter them, to help the others survive and stabilize sales.”

The exits highlight the growing dichotomy between America’s highest-end shopping centers, the type with Tesla dealerships and Apple stores, and those on the lower end of the spectrum, which are struggling to fill space and attract national brands. The stores being closed by Sears are not profitable. And Macy’s chief executive, Terry J. Lundgren, said many of the stores it was closing were “no longer robust shopping destinations.”

Green Street Advisors, which tracks the mall industry, said in a report last year that more department store closures “should ultimately result in a larger number of malls becoming irrelevant retail destinations.”

Even among more successful malls, it is clear that department stores are far less important than they once were as they attract fewer customers.

While mall owners once relied on four or five department stores to serve as so-called anchor tenants, offering them cheap rent in exchange for reliable foot traffic, they may now simply need one or two department stores and otherwise seek anchors in off-price chains like T. J. Maxx, restaurants and movie theaters, Green Street Advisors said.

“Ten or 15 years ago, if a department store left a mall, it was really a problem for the developer,” Les Wexner, the longtime chief executive of L Brands, which owns Victoria’s Secret, told analysts and investors in November. “Now, many of the developers are trying to buy back the space from the department stores because they’re an economic detriment and they can recycle that space.”

The business of department stores has been attacked from all sides in recent years. Online, consumers can purchase directly from brands or on Amazon, which has invested heavily in fashion.

Offline, the chains have had to contend with discount retailers like TJX, the owner of T. J. Maxx, Marshalls and Home Goods, which compete hard on price and brand names, as well as fast-fashion sellers like H&M and outlet centers. Department stores also face competition from beauty chains like Sephora and Ulta.

The new rivalries are particularly painful for those physical stores that fall in between selling heavily discounted goods and luxury products. The competition has really struck at the heart of some of the biggest department stores: Macy’s made 61 percent of its sales from women’s apparel, shoes, cosmetics and accessories in 2015.

“Everyone is carving away at different parts of the business,” said Liz Dunn, the chief executive of Talmage Advisors, a retail consulting firm. “It’s sad that these retailers that have this rent advantage can’t seem to make it worth it.”

Nowhere is this shift more evident than in apparel. Two years ago, annual sales at TJX eclipsed those of Macy’s for the first time, as the company drew consumers to its relatively smaller stores with a treasure-hunt-like experience and brand-name discounts. TJX posted $29 billion in sales for the year that ended Jan. 31, 2015, while Macy’s revenue was $28 billion, a gap that has widened since then.

Some of the money Macy’s will save with its closures and job cuts will be diverted to its own version of T. J. Maxx, called Macy’s Backstage, an effort akin to off-price chains like Nordstrom Rack and Saks Off 5th. Macy’s, which operated 22 of the Backstage stores at the end of October, said it will open 50 more in the next two years. Many will be within current Macy’s locations.

Other funds will go toward Macy’s e-commerce efforts, which have been growing but struggle to make up for the pace at which physical stores have been tailing off — a common story among its rivals. The big chains are also working to make their better-performing locations more appealing. J. C. Penney recently teamed with InStyle magazine for salons, and Macy’s has added spa treatments to stores and merchandise from mall chains like Finish Line, the shoe seller.

Still, the stores remain exposed to changing conditions. The real estate industry ranks malls with letter grades like report cards, assigning “A++” to the highest-end locations that make nearly $1,000 in sales per square feet and a “C” to those that generate one-third or less of that and are at risk of closing. Sears, Macy’s and J. C. Penney, the biggest mall anchors, are also the most exposed to C malls, according to Green Street Advisors.

“The recognition now is that you can’t have this long dragging tail and you’ve got to cut it off right now so you can concentrate on the best stores,” Mr. Sosnick said. “These are the

retailers that went into the earliest shopping malls, and so have stores in malls that have been degraded tremendously over time, and that’s what you see being closed today.”

By the time Macy’s finishes closing its stores, it will have shuttered nearly 200 locations since 2010. Today, it has 730 stores. At the end of October, J. C. Penney had 1,014 stores, 90 fewer than five years ago, while Sears, which also owns Kmart, had 676 full-line stores with its name, a 192-location drop in the same period.

“Brick-and-mortar is not necessarily dead, but you need fewer stores to achieve the same amount of sales volume,” Ms. Dunn said. “A lot of retailers need to shrink their store base, and that is tied to everything that’s happened with digital and changing shopping patterns.”