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Tuesday, August 16, 2016

Macy’s to close 100 stores: Is the department store dying?

By Beverly Keith (Raleigh, NC)

With last week’s announcement from Macy’s that the company will close 100, or 15%, of its 675 stores in the first quarter of 2017, the commercial real estate industry and consumers are questioning whether the department store is dying.

On the heels of other 2016 announced closures by Walmart, Kmart, Sears, J.C. Penney and Bon-Ton, the Macy’s decision may be cause for real concern.

Dillard’s, J.C. Penney, Nordstrom and Kohl’s have all experienced declining revenue for six straight quarters. Furthermore, all have announced store closures and/or delays of expansion plans. Continuing missed revenue targets are also impacting REITs, such as General Growth Properties (GGP), Kimco Realty Corp (KIM) and Simon Property Group (SPG), which own many of Amerca’s malls, as they realize the impact of lagging retail sales on their slumping unit prices.

A question of relevance

Are department stores relevant in today’s retail environment? Specialty retailers consistently outperform department stores by offering a better merchandise mix, better prices, better shopping experiences and much better customer service. Moreover, specialty retailers owe their success largely to sales of mixed apparel, which represents department stores’ core product and majority of merchandise. Apparel has become a highly competitive category as more and more discounters also gain significant market share.

For stand-alone department stores in primary and secondary retail markets, the question becomes: What is the overall value of this site? The store-closure decision becomes much easier when redevelopment of the site yields a higher return on investment, or if a sell-off of the asset provides a significant cash infusion to a corporation’s bottom line.      

Anchors away?

With department stores being anchor tenants in virtually every enclosed mall, what should REITs and other owners do? Many mall owners and observers are asking whether department stores can transform to meet ever-changing consumer demands. Shoppers want an integrated retail shopping experience – a connection between the typical in-store experience and the information gained from online research. Shoppers are also experiencing a time crunch like never before.  Shopping in 2016 is a lot more purposeful and, therefore, involves a lot less browsing, because shoppers just don’t have the time. In-store purchase opportunities must provide the same ease as an online shopping experience and validate the choices shoppers made in researching items. Retailers must also ensure that products available online are in stock when customers physically walk into bricks-and-mortar stores.    
Department stores have been very slow to adapt to, and meet, increasing consumer demand for updated and remodeled physical stores that reflect evolving brands; embrace omni-channel retailing; offer e-commerce; and fulfill the increasing need for instant gratification. For example, Amazon Prime’s RaaS (retail as a service), providing same day or next day delivery, includes drone dropship to satisfy shopper’s need for instant gratification or what is being called immediate retail gratification. If past performance is the best indicator of future performance, mall landlords may need to revise their strategic plans and look for ways to backfill anchor spaces.

Malls repositioning themselves

But does the demise of the department store only spell bad news for the consumer? Maybe not. Malls all across America are repositioning themselves. Whereas once there were four anchor stores in an enclosed mall, you may now start to see only one. The large blocks of space traditionally reserved for department stores are being backfilled with more shopping experiences – primarily restaurants, expanded food courts, movie theaters and concert venues – which offer an assortment of leisure activities and social interaction in addition to shopping.

These changes support the ever-changing consumer shopping paradigm shift by building a better shopping experience – a trend which is a huge plus for the future of retail.

(Beverly Keith is a Senior Vice President, specializing in retail real estate brokerage, based in Avison Young’s Raleigh, NC office.)

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