Tips to Reinvent the Department Store

The world of multi-category retailing—much better known to customers of Filene's, Macy's, and Hecht's as simply "department stores"—has been under assault for what seems like ages. How can big retailers not just survive but also thrive?
by Julie Jette

Here's a snapshot of department stores today: Regional brands have all but disappeared; larger players like Federated and May are merging their multi-brand companies, and consolidation continues. Meanwhile, all sorts of retailers from single-brand stores to big-box discounters have worked to win consumers who used to be loyal department store customers.

"I think department stores are in the process of significant change," said Pat Chadwick, senior vice president of northeast regional stores for Bloomingdale's, at a Multi-Category Retailing panel, held as part of the student-run HBS Retail and Luxury Goods Conference on April 3.

Chadwick noted that while department stores used to be where shoppers went for everything from baby clothes to furniture to power tools, many stores have now limited their assortment and edited out many of the categories of goods they once offered. "I think we are at a crossroads in terms of what exactly we do want to represent to our consumers," she said.

The very variety that department stores offer, and the fact that they carry multiple brands that sometimes overlap across chains, has made some customers complain that essentially these stores are all the same.

At Bloomingdale's, Chadwick said, "we have spent the last five years rebranding ourselves and separating ourselves from what we call the department store, because we thought that we were going down the road of becoming much too homogeneous."

Department stores are looking to become what they want to be—as opposed to a series of vendor shops.
— Pat Chadwick, Bloomingdale's

Alan Barnett, senior vice president of merchandise planning and information systems for Barneys New York, noted that "the department stores have been said to be dying probably three or four times over the last hundred years they've been in existence." But he said they still offer customers a variety that many value.

"It's hard to find a store today in the country where you can go in and buy multiple brands focused on certain lifestyles," he said. "I think department stores will once again redefine themselves."

David Overton, vice president and director of strategic planning and research for JC Penney, said, "Our biggest competitors are no longer the other department stores." Many of the chain's customers buy home products and other items at Penney's, but will only buy clothing at specialty stores.

Sören Petsch, finance manager at Sears, Roebuck & Co., said encouraging customers who buy from one category at their stores to buy from more departments is a key challenge for department stores. "I think the mixed concept still works," he said, "[but] as department stores, we should be encouraging cross-shopping."

Panel moderator Walter J. Salmon, the Stanley Roth, Sr., Professor of Retailing, Emeritus, at HBS, asked whether the continuing consolidation in the department store industry is likely to redefine the balance of power between stores and vendors who provide them with merchandise.

"I think obviously the power should be shifting to the retailer," Petsch answered. He believes that with the pricing leverage already being exercised by Wal-Mart and other discount stores, the department store mergers are likely to put more pressure on vendors. "You'll see, ultimately, a shakeout in consolidation on the vendors' side," he said.

"I think it will complicate life on the vendors' side," Barnett said of the mergers. "The vendors are now being forced to design lines for each chain."

Petsch agreed. "At Sears, we have an increasing number of proprietary brands," Petsch said.

Overton said the mergers will have a major effect on the suppliers of department stores' real estate—the malls. JC Penney, for example, is not necessarily happy to see a competitor like Filene's exit its space when such a departure can mean fewer customers driving to the mall.

Brand Power And Private Labels

Salmon noted that for years, vendor brands have had a great deal of control over how their merchandise was displayed in department stores. He asked the panelists whether allowing brand names to be so dominant in department stores is still an idea that should be reconsidered.

Chadwick said that Bloomingdale's had reconsidered the concept—and was moving away from it. New Bloomingdale's stores do not have separate spaces for separate brands, she noted. It was not a change that was necessarily welcomed by the store's vendors, but she said it was a key part of the store's work to reemphasize its own brand.

"It actually lets us be who we want to be," she said. "Department stores are looking to become what they want to be—as opposed to a series of vendor shops."

Barnett said Barneys has shied away from the "store within a store" concept where brands control their display space. "At Barneys we've always done that," he said, "and it worked well for us; it's worked very well."

Department stores are also pushing even further away from vendor control by introducing their own private-label brands where possible. "We're very private-label focused," at Sears, Petsch said. Lately, the company has been trying to consolidate some of its many private-label brands to create fewer lines with stronger identities.

"If you have fifteen brands in the men's department, it's not really a brand, it's a name," he said.

Barnett said about 16 percent of Barneys merchandise is private-label, with those items often filling in the gaps in its vendors' lines.

The panelists were divided on whether it helps or hurts when their vendors have their own stores, particularly in the same mall. According to Chadwick, "I do think it serves as a branding opportunity for the vendor and for us" when the vendor has its own stores.

But Barnett said, "I think it's a double-edged sword. Barneys will take a designer's line and pick from it the point of view we want to represent," while a vendor's own store will typically offer an entire line of products. "[But] there are certain commodity items. A Prada handbag is a Prada handbag, and we will feel it if they open [near] a Barney's store," he said.

As the first conference in what is planned to be an annual event, the HBS Retail and Luxury Goods Conference on April 3 was organized by two HBS student clubs, the Retail & Apparel Club and the Luxury Goods & Design Business Club. This year's conference theme was "The Fight for Your Disposable Income: Strategies from Mass to Luxury."

About the Author

Julie Jette has been a business reporter for eight years.