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Battling screens, department stores change tactics to attract shoppers

November 23, 2016 12:00 PM
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(Bloomberg)—The beleaguered department-store industry, facing declining mall traffic and mounting online competition, will need more than Santa Claus to get customers in the door this year.

Retailers such as Macy’s Inc., No. 6 in the Internet Retailer 2016 Top 500 Guide, and J.C. Penney Co. (No. 33) are preparing for the holidays by offering more exclusive products, store-in-store showrooms and—in some cases—cash rewards.

Though department stores like Macy’s were once synonymous with Christmas shopping, the chains are struggling to rekindle excitement heading into Black Friday, the traditional kickoff to the holiday season. The industry hit an unsettling inflection point last year, when more Americans shopped online than in physical stores during the four-day weekend, according to the National Retail Federation.

“The problem is there’s no silver bullet,” said Ed Yruma, a retail analyst at Keybanc Capital Markets Inc. “What we’re increasingly seeing is a consumer for a holiday season that’s shopping off a list, and there’s no better way to shop off a list than on your computer.”

The biggest piece of department stores’ strategy is offering merchandise you can’t find anywhere else. But they’re also trying to create more of an experience for shoppers—something that goes beyond the typical window displays, Christmas decorations and a Santa taking requests from kids.

Macy’s, the largest department-store company, is emphasizing products that are only available at the store, including exclusive apparel and fragrances. J.C. Penney rolled out appliance showrooms in 500 stores, aiming to take advantage of the holiday season. The chain also is pushing beyond its mainstay in apparel and housewares by expanding into toys. “Our consumers have said they want us to be in this business,” Penney’s CEO Marvin Ellison said in an interview.

Belk Inc. (No. 97), a department-store chain concentrated in the South, is offering a new promotion called “Christmas Cash.” The company, owned by private equity firm Sycamore Partners, is giving customers $10 to spend in the store for every $100 in purchases they make during Thanksgiving and Black Friday. More upscale chains also are adding new enticements. Nordstrom Inc. (No. 18) teamed up with J. Crew Group Inc. (No. 49) in August to start selling an assortment of the brand’s apparel at its department stores. Neiman Marcus (No. 36), meanwhile, is devoting floor space to e-commerce startup Rent the Runway Inc. (No. 236), which lets women rent out gowns and accessories.

Sluggish sales also have prompted department stores to close stores and do more with their often-valuable real estate. Macy’s is shutting 100 locations and looking for partners that could help redevelop its flagship properties— deals that could let the stores stay open as part of a bigger project. That includes its Herald Square site, the setting for the Christmas movie “Miracle on 34th Street.”

Another source of pressure this season: Department stores can’t rely as much on tourist spending. The strong dollar has deterred many foreign visitors from descending on major U.S. cities. And even domestic shoppers are increasingly interested in services, rather than buying physical goods.

That’s contributed to a decline in average mall traffic by 3-8%, according to  Craig Johnson, head of research firm Customer Growth Partners.

‘Old school’

“Part of the problem is because the model itself remains old-school: Department stores haven’t materially changed from when R.H. Macy opened his doors in New York,” Johnson said. “So any kind of marketing gimmick or anything like that doesn’t make a huge difference.”

There’s money to be made this holiday season if stores can get the formula right. U.S. consumer purchases will increase 3.6% to $655.8 billion in November and December, excluding autos, gas and restaurant sales, the NRF estimates. Online retail sales are projected to grow 10%,  and the long Thanksgiving weekend accounts for about 15% of holiday sales, according to the trade group.

The vast majority of everyday products are still purchased at physical stores, but holiday-gift shopping is shifting to the web more rapidly. About 56% of consumers want to purchase gifts at online-only retailers, according to a Kantar Retail survey. And more than 50% plan to go specifically to Amazon.com Inc. (No. 1 in the Top 500).

Macy’s president Jeff Gennette isn’t worried about having enough people browse the chain’s merchandise. It’s more about getting the sale, he said.

Converting traffic

“The key will be for us to convert—we’ll get the traffic,” he said in an interview this month. Gennette will take over as CEO in the first quarter of 2017.

J.C. Penney is offering its earliest shoppers the most extreme discounts. Customers arriving at 3 p.m. on Thanksgiving—when the store reopens that day—will have the chance to win coupons for as much as $500 off a purchase of $500 or more.

“When a customer walks into J.C. Penney, they’re looking for a value,” Ellison said. “Otherwise, they’d go somewhere else.”

Specialty shops also have become a bigger threat, upsetting the traditional shopping hierarchy. Department stores once accounted for as much as 50% of the retail economy, Johnson said. A generation ago, they made up about 10%. Now, they control just 2.7% of retail spending, he said.

“They’re just not as relevant to today’s shoppers as they were to their mothers and grandmothers,” he said. “And yet, there can be a place for them—if you reinvent them from the customer side in.”

 

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