A Christmas horror story for department store retailing

STEPHEN BARTHOLOMEUSZ
January 10, 2017
The Australian
Business columnistMelbourne
The Australian department store and general merchandise retailers would have looked at the Christmas experience of their US counterparts with some uneasiness.
Macy’s and Sears last week announced about 250 store closures between them, with Macy’s flagging 10,000 job loses, as their sales continue to decline. Another retailer, The Limited, which sells womenswear, shut down all 250 of its stores and laid off 4000 employees in an abrupt transition to a pure online business.
Macy’s comparable store sales in November and December were down 2.1 per cent and are on track to be between 2.5 per cent and three per cent lower for the full 2016 year, after falling by more than $US1 billion in 2015. Sears’ same store sales (which include the US Kmart brand) in the first two months of the final quarter last year were down more than 12 per cent.
Of the two, Macy’s is the one that Australian department stores will probably be most interested in. Macy’s is the US retailer most often cited as a model for the omni-channel fusion of physical and online retailing that most of the major Australian retailers are now pursuing.
The US group’s guidance of falling sales and earnings for 2016 came despite “double digit” sales growth in its digital businesses, macys.com and bloomingdales.com. In other words, strong growth in the online channels wasn’t sufficient to offset the declines in the store networks.
The experience of Macy’s and Sears isn’t unique. Most of the major US retailers with bricks and mortar networks, other than discount and fast fashion retailers, appear to have had a difficult Christmas season.
Amazon, usually and rightly blamed for much of the stress that retailers have been experiencing, had a merry Christmas. Online sales in the US were up 11 per cent to $UDS91.7bn ($125bn), according to Adobe, with Amazon at times grabbing nearly 40 per cent of the online purchases.
While it hasn’t provided any fourth-quarter update, Amazon’s third quarter sales in 2016 were 29 per cent higher than the same period in 2015.
Amazon isn’t, of course, the only big online retailer or marketplace. EBay apparently also had a good Christmas.
Amazon is, however, the heavyweight in online general merchandise and fashion — with a growing presence in food in the US and UK — and the experience of US retailers in trying to deal with the structural shift occurring towards online purchases provides a preview of what’s likely to develop in this market as consumers continue to shift their spending online.
The much-anticipated and perhaps imminent arrival of a wider Amazon local offering here — beyond books and e-books — has the potential to be quite disruptive if it can replicate the leading-edge fulfilment capabilities it has developed in the US.
Whether we see the Amazon grocery and fresh produce offer here this year or next, its general merchandise offer would by itself have a significant impact on a sector already experience structural change in an era of relatively modest growth in retail sales.
As Myer, David Jones, Target, Big W and other retail chains have found in the post-crisis era — and as Macy’s and Sears and the other big traditional retailers have demonstrated — legacy strategies not only don’t work but are counter-productive in the new retail environment, where they are facing increased competition from different types of competitors in markets that are fragmenting.
The growth in online retail, the emergence of fast fashion retailers and the increasing number of global brands developing their own international retail networks poses a particular challenge for department stores.
The complicated and multifaceted “new Myer” model being pursued by Richard Umbers does appear to gaining some traction for the group, at least in the flagship and premium stores where it has initially been rolled out.
Myer has also made a sensible decision to shrink its store network and selling space, turning its back on the old retail model of driving network growth to generate sales growth at incremental cost.
There may be tougher decision on optimum network sizes ahead for Myer and other big retailers.
If a retailer isn’t competing purely on price and generating big volumes — the Kmart model in Australia — it has to provide retail theatre, which is expensive and probably prohibitively so outside the major catchment areas.
Big W and Target are obviously struggling to find relevance and new positioning in the discount department store segment where, with the exception of Kmart, successes are hard to find. That segment has been severely disrupted by Kmart, online retailers and the fast fashion brands even before Amazon has launched a local platform.
It may be that, with the benefit of the preview provided by the experience of their US counterparts, the bigger Australian retailers have to accelerate the downsizing/right-sizing of their store networks while ramping up their online offerings even more aggressively to pre-empt Amazon’s launch and the probable “halo” effect it will have on online retailing generally.
What’s apparent from the US experience is that just having an omni-channel offer, however sophisticated (and most Australian retailers’ websites aren’t particularly sophisticated at this point), isn’t by itself sufficient to offset the impact of the rising tide of pure e-tailing on traditional bricks and mortar retailers.
Whether Myer has its detail right or not, it is on the right path in trying to rethink and remake its retail model, what it presents to a more narrowly-defined core group of customers and where it presents it.
Target, under Guy Russo (who oversaw the transformation of Kmart) is undergoing a period of deep introspection, similar to the one Myer experienced before it started to roll out its new strategies.
Big W’s very future is in doubt — Woolworths would probably offload it or just shut it down if it weren’t for the onerous lease liabilities — and there are a range of smaller retailers under increasing pressure from their inability to offer anything that differentiates them, whether it’s price or product, in an increasingly crowded and virtual retail environment.
In the US, there’s talk of 2017 being the watershed year in the contest between the upstart pure online retailers, led by Amazon, and traditional retailers. With hindsight, perhaps 2016 might have been.
In any event, the pace and extent of the digital disruption to traditional retailing that is now so clearly evident in the performance of the major US retailers ought to be disconcerting for retailers here, who know what’s coming to their market all too soon.