In order to be successful again, department stores need to return to their origins: large flagship stores that amaze the shopper with an unrivaled assortment, flawless service and a unique experience. “The average doesn’t work for department stores.”
For 26 years, Maarten de Groot van Embden was secretary-general and general manager of IADS, the International Association of Department Stores. It is the oldest association of department stores, with members from 25 countries, who exchange knowledge and experiences. “Because these members are no direct competitors of each other, they can speak freely.” From this position our interlocutor has an extensive network and a unique knowledge of the department store industry, worldwide. Few people are therefore better placed to give us more insight into the trends and evolutions that characterize this sector in motion.
Transport and tourism
“Department stores were the first organized form of retail. They arose in the mid-19th century, in France, Great Britain, the US… Initially they were still quite small according to our standards, around 2,000 square meters, but they quickly grew bigger and they started to sell more different product categories.”
There is a lot of discussion on the question which department store was first. Maybe it was A.T. Stewart on Broadway in New York, in 1848. That shop was also called the ‘marble palace’. Bainbridge’s opened in British Newcastle in 1849. And Le Bon Marché in Paris dates back to 1852. From the early years, the importance of an ambitious architecture was significant. That had everything to do with the industrial developments at that time. The electricity and the escalator made their appearance. New steel constructions made it possible to construct large buildings. In Mexico City, for example, the five-story department store ‘Palacio de Hierro’, literally ‘palace of steel’, opened in 1891. Department stores were often built near train stations. “Transport is still an important factor today. I still see enormous opportunities for shopping malls at airports, for example. Tourism is and remains an important source of income for department stores. At Galeries Lafayette, 60% of the turnover comes from foreigners.”
National identity
“Worldwide, you can see significant differences in the positioning of department stores today. In most Western European countries, for example, department stores are positioned upscale, like Le Bon Marché or Selfridges. But that is certainly not the only option. In some countries in Asia and South America, for example, you see that they are cheaper and more accessible in the market. And that was originally true in Europe as well: the first British and French players were also cheap. Thanks to their economies of scale, they were able to purchase larger volumes and sell the products at lower prices. In growth markets you see the same process now taking place.”
In countries such as India, the Philippines or China, larger department stores are appearing, reaching more than 100,000 square meters, which combine goods and services – sometimes they even have a church in the store. “You see very different situations in the world. A department store always has a national identity, so the concept is difficult to export or internationalize.”
Competition
In the US and other countries, several department stores have a hard time today. Macy’s, Lord & Taylor and JCPenney, for example, have to close or sell a number of stores. What went wrong? “They have put too much emphasis on expansion, in an urge to increase sales. But it is ultimately the profit that counts. They have opened too many stores in small cities, on too small surfaces. Department stores ate each other and lost their unique identity. But the average does not work for department stores. The average person has one testicle and one breast, you see… ”
The industry is now suffering from strong competition, both from cheap ‘category killers’ and from online. This forces department stores to narrow their supply and to adopt a premium market strategy. But the luxury brands are increasing the pressure… In Europe, these retailers are fighting to keep their market share. “In growth markets, on the other hand, they try to occupy the market as quickly as possible. In China, for example, many new stores are now being opened. Gradually they move higher up in the market. Eventually only a few will survive.”
Social function
Does Maarten himself cherish specific memories, thinking of department stores? What image from his childhood does he still hold dear? “I remember that we were going to buy clothes at Le Printemps in Versailles. I was impressed with the size of the store. Later I also saw the exceptional Christmas displays at Le Printemps Hausmann, near the Gare Saint-Lazare. I still think that Le Printemps has the most beautiful shop windows in Paris. When I was in Manchester around eighteen, I became acquainted with Lewis’s. They had a real ballroom on the top floor, with a dance floor. There you could have a drink and dance. Department stores have always fulfilled a social function.”
Choosing one favorite department store is difficult, according to our interlocutor. After all, they are all so different. “Selfridges remains exceptional, they are very creative and innovative. John Lewis is the best online, Kaufhof has strong logistics. Galeries Lafayette is the department store with the highest turnover in one store: more than 1.4 billion euros. In El Corte Inglés I admire the assortment, they sell everything. Swiss Globus is strong in visual merchandising. In the United States I admire Nordstrom with its strong focus on household and decoration. An impressive example of a more recent department store is SKP in Beijing. The largest department store chain in South America is Falabella, which expanded from Chile to Argentina, Peru and Colombia. At SM in the Philippines you can see ten people behind each cash register. In India, Landmark is an exciting player…”
Success factors
“In any case: the department store is bigger than life. It’s all about identity, passion, emotion and empathy. To lead a department store you need a typical personality. You can’t have the CEO of a hypermarket run a department store, because you don’t do that from a financial logic. You must have a passion for sales. Because in the end you do not sell anything that people really need. That passion for the customer is essential.”
Department stores should therefore not try to win the price battle. “There is always someone cheaper. Some have tried it – think of Kaufhof – but it does not work.” In the end, department stores make the difference with their offer, thinks Maarten de Groot of Embden. That was already the case in the early years. “The first department stores surprised their customers with products they did not yet know and that came from afar. That is still the case today. Sell something new, something that others are not selling yet. You must always be on the lookout to discover new products. Too many retailers sell the same brands.”
A second success factor is customer service and experience. “Create an atmosphere, make people enthusiastic. The department store is a theater, with the sales associates as actors.” Finally, there is the importance of a flawless execution. “Retail is detail. A department store is a complex business, in a large building with as many as three million sku’s in many different categories. Managing such a company can be compared to solving a Rubik’s cube.”
Opportunities online
Is online a threat to the industry? “As a result of internationalization and digitization, retail risks to become a low-margin industry. Boundaries between formats disappear, everyone sells everything, you compete with the whole world. The question is whether department stores can continue to distinguish themselves, because the breadth of their offer can now also be found online.” Nevertheless, e-commerce can also be an asset. Some players realize up to 30% of their turnover online. The pioneers did the same at the time, but then with mail order. “In the end, that’s about the same phenomenon. Sears started in the US as a catalog, and later also opened stores. Just like Amazon, that opens physical stores now. The remarkable thing is that those traditional mail order companies have failed to become online platforms. It is apparently hard for companies to reinvent themselves.”
Are there department stores that do well online? “The online percentage is highest in the UK, the US, South Korea and Chile. Amongst others Debenhams and John Lewis are doing well, just like Neiman Marcus, which has successfully switched from mail order to online. The point is that online requires large investments and that the shift in sales jeopardizes the profitability of the physical stores. Both channels must feed each other. A ‘pick up in store’ concept is a good idea. This also means that department stores will have to abandon the traditional ‘turnover per square meter’ parameter, and have to look at net profit per customer as a new benchmark.”
Back to the roots
What does the future bring? “The market share of department stores has continued to fall since the end of the 1970s, and it continues to do so today. At least as far as the developed markets are concerned, because elsewhere there is growth. We are seeing an increasing concentration in the sector. Asian holding companies now also invest in Europe.” Many department store groups have been investing too heavily in expansion, and have to cut back to a realistic scale, thinks Maarten. “Selfridges still has four stores, Le Bon Marché only one. Galeries Lafayette must concentrate on Paris. Department stores should return to the original concept: fewer but larger flagship stores in the most important cities. The merger between Kaufhof and Karstadt will also lead to fewer but better stores, with less competition as well. So I think that’s a good move for the next ten to fifteen years. Ultimately, there is only a slight difference between ‘ordinary’ and ‘extraordinary’…”
Erik Van Heuven and Stefan Van Rompaey
– photo: retailDetail –
The department store is a theater, with the sales associates as actors