How Department Stores' Complacency Killed Innovation and Sparked Decline

Department stores were once the innovative threat to smaller shops that Amazon and other ecommerce sellers have become to them.

Overexpansion, women in the workforce, an emphasis on speed and convenience, private equity deals that enriched financiers and executives but cut customer service have now rendered them uncompetitive. And the pandemic may be their death knell. JL

Suzanne Kapner reports in the Wall Street Journal:

Department stores were the leading edge of retailing, big, exciting places to shop, where consumers could find everything from the latest toaster to a dress and matching shoes. Now they're fighting for their lives. They sell name-brand items that can be found at competing retailers, making it easy for shoppers to price-shop online. They face competition from Amazon but also brands which have their own websites.“Things that made department stores great were amazing customer service and great merchandise that you couldn’t find elsewhere. It’s impossible to name a store that does that today.”

Lord & Taylor was one of the first retailers to allow employees to become stockholders, to introduce a lunch counter, to usher in the Christmas season with animated window displays and to take risks on new American designers.

That innovation stopped in the 1980s, former executives say, sending the once-grand department store chain on a long march toward bankruptcy that culminated Monday, when the 194-year old company’s lenders said it would liquidate if it can’t find a buyer by October.

Department stores were once on the leading edge of retailing—big, exciting places to shop, where consumers could find everything from the latest toaster to an evening dress and matching shoes. Now, they are fighting for their lives. In May, J.C. Penney Co., Neiman Marcus Group Ltd. and Stage Stores Inc. filed for bankruptcy, adding to the list of chains that have shrunk or disappeared in recent years.

Saving the department store—or at least salvaging it—isn’t impossible, but doing so will require a radical rethink of how stores operate and relate to shoppers, say veteran retail executives.

It would be easy to blame the rise of fast fashion, off-price chains like T.J. Maxx, the internet and, most recently, the Covid-19 pandemic for the demise of department stores. But rivals in Europe and Japan are healthier, even with those factors in play.

In the U.K., Harrods and Selfridges are renowned for their food halls, which provide a sensory experience not replicated online. In Japan, the department store Nihombashi Mitsukoshi has hosted exhibits where artisans make ceramics, weave fabrics and practice other traditional crafts, creating a sense of theater.

“The U.S. players haven’t been able to replicate the same type of excitement and pizazz,” said Craig Johnson, president of consulting firm Customer Growth Partners. “U.S. department stores are too stale and slow.”

Former industry executives date the problems to the 1980s, when a series of mergers and overexpansion led to bloat.

“The focus became more about how to take care of the corporate office, not the customer,” said Allen Questrom, the former CEO of Neiman Marcus, Barneys New York Inc., J.C. Penney and Federated Department Stores Inc., which later became Macy’s Inc.

Most of those chains were troubled when Mr. Questrom took over. He tried to get employees to spend more time in the stores to see what customers were buying.

“I was shocked at the lack of knowledge executives had about their customers,” Mr. Questrom said. “They spent too much time in the central office.”

The chains experienced a resurgence under Mr. Questrom, who retired from J.C. Penney in 2004. But more recently, they have faltered. Barneys filed for bankruptcy last year and has closed most of its stores. Macy’s is closing a fifth of its stores over the next three years and recently eliminated 3,900 corporate jobs, or 3% of its total workforce.

Department stores aren’t the only retailers struggling after the pandemic forced nonessential businesses to temporarily close in March and April. Even as stores reopened in May, many are in critical condition as shoppers curtail spending on clothing and nonessentials and avoid congregating indoors. Men’s Wearhouse parent Tailored Brands Inc. recently filed for bankruptcy and Victoria’s Secret parent L Brands Inc. is laying off about 15% of its home office staff.

Department stores have particularly thorny challenges. They sell name-brand items that can be found at competing retailers, making it easy for shoppers to price-shop online. They face growing competition not just from Amazon.com Inc. and other online players, but also the very brands they sell, which have opened their own boutiques and websites.

As sales have stalled, stores have cut costs, sometimes by eliminating salespeople, making for an unappealing shopping experience.

To save the stores, Stephen Sadove, the former CEO of Saks Inc., said leaders should experiment with a hybrid wholesale-retail model popularized in Europe by stores such as Galeries Lafayette. Some brands would control the merchandise, removing risk for the retailer, which could focus on managing the space and employees.

“Unless they dramatically change, it will be difficult for them to survive,” Mr. Sadove said.

Rachel Shechtman, who was Macy’s brand experience officer until she left in June, said department stores need to look to their past to chart a future.

“Two things that made department stores great were amazing customer service and great merchandise that you couldn’t find elsewhere,” Ms. Shechtman said. “It’s almost impossible to name a store that does that today.”

It’s hard to reverse decades of bad habits.

Industry executives trace Lord & Taylor’s decline to its 1986 acquisition by the May Department Stores Co., which later merged with Federated to form Macy’s. Lord & Taylor had thrived because it catered to an upscale, East Coast clientele. May, which sold less expensive clothes in the Midwest, replaced Lord & Taylor’s merchandise with lower priced twin sets and other generic fare. Then it opened too many Lord & Taylor stores in midtier malls, the former executives said.

By the time Lord & Taylor was sold last year to its current owner, Le Tote Inc., it was a shadow of the grand retailer it had once been. The pandemic made its bankruptcy filing—according to a former senior Lord & Taylor executive—inevitable.