The Return of Department Stores

Nov. 1, 2006 — -- As the holiday shopping season ramps up in the weeks ahead, shoppers will open their wallets and spend money on hot items like flat-screen TVs, so-called "skinny" pants, and T.M.X. Elmo.

And according to retail experts, a fair number of those shoppers will return to what has been an uncommon destination in recent years -- the department store.

"Those who have survived the huge competitive onslaught over the last few years from mass merchandisers at the low end and specialty stores at the high end, are much, much stronger on a lot of fronts," said Wendy Liebmann, president of the New York-based consulting firm WSL Strategic Retail.

After years of losing market share to smaller niche stores like American Eagle Outfitters and big-box retailers like Wal-Mart, department stores have experienced a bit of a renaissance recently.

Sales were considerably higher in September for many of the nation's largest department stores.

Sectorwide, department store sales rose 6.2 percent compared to the same time a year ago, according to the International Council on Shopping Centers. In September, that figure was up 8.4 percent compared to a year earlier.

That marked represented the strongest monthly gain since January 1997.

Call it the retail equivalent of "Survival of the Fittest."

Despite that improvement, the all-important November and December holiday shopping months will be a telling period for the industry.

Consolidation Leads to Less Clutter

Industry analysts and consultants point to various reasons why shoppers have recently returned to department stores.

One important development has been the increasing consolidation in a sector that had been characterized by a large number and a wide variety of different stores, many offering the same products for sale.

The clearest example is Federated Department Stores, owner of Macy's and Bloomingdale's, which purchased May Department Stores Co. last year.

After the acquisition, Federated closed many locations and brought others under the Macy's nameplate, including the well-known Chicago store Marshall Fields.

Now with a nationwide department-store chain located in 45 states, Macy's has launched a national marketing campaign, including an estimated $100 million TV and direct marketing blitz in September.

Technology Helps Sales

Taking a page from Wal-Mart, many department stores also embraced the need for greater efficiency.

Stores like Kohl's and J.C. Penney implemented technologies that enable them to better manage inventory and determine when and how much to reduce prices.

As a result, department stores have fewer items left on the sales floor at bargain basement prices. This has reduced store clutter and the buyers' sense that everything is or will eventually be marked down.

Improving efficiency, Liebmann said, "all comes out of understanding who your core shopper is and tailoring the mix of items more appropriately."

It's All About the Merchandise

Many department stores lost sight of the "core shopper" concept when they tried to compete directly with mass merchandisers like Target and Wal-Mart during the last decade, offering large price reductions and trying to generate sales from any possible shopper.

"What that did was take the marketing eye off who the really good customers were," Liebmann said. "So while they were selling their soul with discounting, they started to lose a lot of their core customers."

J.C. Penney said its core consumer was what it called, "Middle America": primarily women from households with incomes between $35,000 and $85,000.

"We have done a better job of focusing on that customer and on the fundamentals of the business, so we are delivering merchandise people want when they want it," said Tim Lyons, a spokesman for J.C. Penney.

And focus on reclaiming those customers and keeping them may be vital to the long-term recovery of the department-store industry.

"If they lose the core of who their customer really is, if they are tempted away from that, they will be like cheap dates and they will lose what they have rebuilt," Liebmann said.

Brand Names and Private Labels

Federated spokesman Jim Sluzewski put it succinctly: "It all comes down to the merchandise."

Department stores have been trying to court customers by aggressively negotiating exclusive deals with trendy designers.

Kohl's signed an agreement with Vera Wang -- more commonly known to design high-end bridal dresses -- to offer a line of clothing starting next year.

J.C. Penney has an ongoing arrangement with New York designer Nicole Miller. And Federated has a new line of clothing called "O" coming in February created by Oscar de la Renta.

Department stores have also invested money in their own private labels, which now represent a substantial part of overall sales.

The I.N.C. and Alfani labels at Macy's accounted for 18 percent of the store's sales last year and now are the fastest growing part of the business.

J.C. Penney's in-store labels account for more than 40 percent of its business, and Kohl's private labels made up 25 percent to 30 percent of sales

Strong Sales Growth

In October, Kohl's reported a 4.2 percent gain in same-store sales (stores opened for more than a year) after a whopping 16.3 percent increase in September.

Luxury department store Nordstrom reported a same-store gain of 10.7 percent, and J.C. Penney had an increase of 8.1 percent. Federated, owner of Macy's and Bloomingdale's, reported growth of 7.7 percent in same-store sales.

Mike Niemira, chief economist at the International Council of Shopping Centers, said, "Department stores are where the action is this year."

Despite the positive signs and strong sales figures, department stores have reason to be concerned about the trend continuing.

Retail analysts point out that September's healthy numbers were high compared to a year ago because shoppers didn't spend as much after Hurricane Katrina devastated the Gulf Coast.

Holiday Forecast: Strong Sales

The outlook for the holidays has some department stores in a jolly mood.

The National Retail Federation found that nearly 62 percent of shoppers this holiday season said they planned to shop at department stores, up from just 53 percent three years ago.

The research, conducted by BIGresearch for the retail trade group, also found that 79 percent of shoppers between the ages of 18 and 24 said they would do some holiday shopping at a department store, a big jump compared to just 66 percent two years ago.

Marshal Cohen, chief industry analyst with the New York-based NPD Group, believes that in the absence of must-have consumer electronics other than flat-screen televisions, this year's holiday season could play to the strengths of department stores: apparel and home furnishings.

Department stores are hoping that their recovery continues and that this year, shoppers will find it fashionable to shop with them once again.