Data Shows Department Stores Struggle In Digital-First Economy

Now that the holiday shopping season is over and the returns season has begun, the department store doomsayers are back. With Mastercard’s holiday spending report released Monday (Dec. 28), the numbers for the sector stand in stark contrast to the rest of the retail industry. Overall sales were up 3 percent; department stores were down 10 percent. eCommerce was up 49 percent for the season; department stores squeezed out a 3 percent bump. It’s enough to turn a pessimist about the sector into a complete nihilist. Just ask Columbia Business School Professor and Director of Retail Studies Mark Cohen, who before the season even kicked off called department stores “toast.” Now he has singled out Macy’s in its list of “losers” for the holiday season.

Specifically, Cohen called out Macy’s inability to get in sync with consumer demand, which turned out to be related to the stay-at-home economy. Macy’s, and other department stores, did not pivot fast enough not capitalize on the consumer changes.

“Their [Macy’s] web business, which is not insubstantial, really simply reflected whatever it was that was on sale each week, rather than telling an effective story, which is something that Target, Walmart, Costco and certainly Amazon devoted themselves to,” Cohen said. “So losing is not only losing volume, but failing to reflect on the change in the world and the fact that that change is likely to be somewhat lasting.”

Cohen adds his voice to the most concerning thing about the underachieving results filed by department stores. Despite their best efforts they did not capture the digital-first economy. Time, and most likely the Q4 earnings reports, will quantify the magnitude of that effort. And the numbers reported may actually show double-digit increases for eCommerce compared to 2019. But they won’t quantify the return on investment (or lack thereof) that leading department stores, including Macy’s, saw for centering their marketing and operations around a digital full-court press for 2020, which in most cases was accelerated with the arrival of the pandemic.

The three department stores that have received the most attention, and in turn made the most dramatic digital-first pivots, were Macy’s, Nordstrom and Neiman Marcus. Neiman has adopted a digital-first strategy for two years now. This year it moved toward more digital-first options including virtual gift finders and gift advisors, and even threw in Santa as a curbside pickup ploy. Nordstrom centered its anniversary sale around its eCommerce site. Macy’s announced before the pandemic that its Polaris strategy would center on digital technology and the online customer experience. For Q3 all three of these retailers announced double-digit online sales increases. Now the jury is out as to whether that success extended to the holiday season, which was extended into one long Black Friday by the retailers that have stolen market share from department stores since well before the pandemic started: Amazon, Walmart and Target.

Now the jury seems to be hung between doom and gloom and tempered optimism. Cohen is certainly in the doom and gloom category as are recent reports on department stores from several sources. For example, there are currently about 6,000 department stores in the U.S., according to market research firm IBISWorld, and that number is expected to decline by about another 2,000 in the next five years. And that estimate could be very conservative.

“As we near the end of 2020, the prognosis for the American department store is grimmer than it’s ever been,” said a report in Recode. “The reasons extend far beyond Covid-19 or even the continued rise of online shopping, and have more to do with trends in the American economy that have been shrinking the middle class while enriching the already wealthy. That’s why the decline of these retail giants is something to pay attention to. They employ hundreds of thousands of people and occupy an outsize space in our communities; their gradual disappearance, as well as what is replacing them, tells us something about where we’re headed.”

If where the sector is headed is doom and gloom, someone forgot to tell Wall Street. Macy’s and Nordstrom, for example, have seen a stock price rally over the past few weeks. Nordstrom is up 12.7 percent in December. Macy’s has come off its 52-week low point of $4.38 to trade at $11 as of Dec. 29. What Wall Street likes has nothing to do with the underperforming digital business for department stores and has everything to do with financial and inventory management, which has been the sector’s strong suit during the pandemic.

Commenting on Nordstrom’s prospects, Zacks Equity Research complimented business operations even while admitting that its short-term revenue prospects are bleak. “The company expects to sustain the strong momentum in fourth-quarter fiscal 2020 and beyond,” it said. “Moreover, it is optimistic about its inventory levels, which are current and on-trend. With stores back in operation and potential healthy demand for the holiday season, management foresees positive EBIT and solid cash flow for the fourth quarter. However, EBIT margin is likely to decline on a sequential basis due to higher promotions and elevated shipping costs.”

But back to reality. As a category, department stores are running on their management ability while they’re waiting for the pandemic to end and for people to feel safe in stores. Wall Street likes the strategy. But by the numbers, department stores are doing their level best to capture the digital-first economy and the Mastercard report said it failed during a crucial time for the survival of any retailer. Q4 may have generated enough revenue for the category to get through a crisis. But if department stores want to meet the changing consumer, they will need to thrive in the digital-first economy.