Will this year's department store resurgence sustain its momentum?

Will this year's department store resurgence sustain its momentum?

Traditional department stores have been battling a steady downfall for a solid decade, with the pandemic's arrival only compounding existing problems. But 2021 saw a shocking twist: the retail sector began to recover, much to everyone's surprise. Department stores like Dillard's even witnessed sales that surpassed 2019 figures during this span. Profits and profit margins swelled, and the sector's decline compared to pre-pandemic times was less severe than anticipated.

Erin Schmidt, a senior analyst at Coresight Research, explains the turnaround: "The COVID-19 pandemic forced traditional department stores to innovate, invest in digital technologies, and diversify their product offerings. By reaching out to new customer demographics, these aging retail giants have discovered a new lease on life; as of the third quarter, revenues from the top three department stores – Macy's, Kohl's, and Nordstrom – were only 3.4% lower compared to the first three quarters of fiscal year 2019 and a staggering 42.4% higher than 2020."

Yet, the sector's difficulties, evident prior to the pandemic, have not completely vanished. And a few new challenges have surfaced along the way.

Mall Traffic is Stagnating

The relationship between traditional malls and their department store anchors has grown turbulent, with the pandemic merely intensifying the problem. To address this, retail titans such as Macy's and even Bloomingdale's are dabbling with experimental store formats, aiming to set up shop at strip-center locations akin to Kohl's.

During the Black Friday weekend, many more individuals ventured to brick-and-mortar stores compared to last year, yet traffic did not quite match pre-pandemic levels. According to Placer.ai's research, indoor mall visits dropped 8.5% compared to 2019, while outdoor mall visits shrank 9.2%. The trend seems likely to persist.

Barbara Kahn, professor of marketing at the University of Pennsylvania's Wharton School, believes that "there's a spark of life in the A malls, and we'll witness some interesting experimental retailing that will draw the younger crowds. However, the B and C malls are struggling – I can't see how that will work out; they will be replaced by better-positioned neighborhood centers."

Malls Embrace Change

Malls themselves are pivoting away from department stores as anchors. Experiential anchors such as bowling alleys and arcades are enticing millennial and Gen Z shoppers, and malls anchored by experiential or healthcare centers are demonstrating better performance than those with more traditional anchors.

Global data intelligence platform Near notes, "Malls are reconfiguring their physical spaces to accommodate the 'buy online, pick-up curbside' experience, necessitating rearrangements of both the physical store and the parking lots." Department stores need to lead this charge, figuring out how to preserve the enjoyment of the customer experience.

Less Spending Lingers

The pandemic may have ingrained frugality into consumers' habits.

The economic strain experienced by the American middle class has weakened department stores. Despite government assistance during the pandemic, which continues to aid retailers, consumers may be tightening their belts. More than half of U.S. consumers who reduced their spending in the preceding three months say they have reevaluated their essential spending, according to research from AlixPartners last month. This makes dollar stores, off-price retailers, and mass merchants more attractive options.

"Target, Walmart (and Amazon) are not standing still – they are formidable competitors for the younger consumer," Wharton's Kahn notes.

Channels Continue to Shift

The massive surge in e-commerce during the pandemic's bleakest days, before vaccines were widely distributed in the U.S., helped drive consumers away from stores. While foot traffic is increasing once again, mobile and online orders remain elevated, according to EFG-New Capital's research.

Wrapping Up

While department stores have made headway in 2021, next year should show whether their turnaround is a temporary reprieve or a lasting trend. Some retailers need to revise their strategies to adapt to the evolving retail landscape, while others must confront the pressure to spin off their e-commerce operations. The canny few are successfully weaving together their online and offline operations, ensuring they remain competitive in this swiftly changing market.

Keep up with the latest retail news. Subscribe to Retail Dive's free daily newsletter!

[1] Kahle, J. (2020). "How Buy Online, Pick Up In-Store (BOPIS) Is Transforming the Retail Landscape." Forbes.[2] Kahle, J. (2021). "6 Principles for Optimizing Your Omnichannel Retail Strategy." Forbes.[3] Kahle, J. (2021). "5 Retail Trends Leaders Must Watch to Adapt.” Forbes.[4] Kahle, J. (2021). "5 Ways the Retail Industry Can Embrace Sustainability." Forbes.[5] Chen, N. (2021). "Managing Returns During the Holidays: Boost Your Bottom Line & Scale Efficiently." Retail TouchPoints.

1. The pandemic accelerated traditional department stores' innovation and investment in digital technologies, diversifying their product offerings to attract new customer demographics, as indicated by Erin Schmidt, a senior analyst at Coresight Research.
2. The retail sector's recovery in 2021 was unexpected, with department stores like Dillard's experiencing sales surpassing 2019 figures.
3. Despite the retail sector's recovery, the difficulties faced by traditional department stores before the pandemic have not completely disappeared and new challenges have surfaced.
4. Traffic at indoor and outdoor malls has not fully recovered to pre-pandemic levels, with a decrease of 8.5% and 9.2% respectively, according to Placer.ai's research.
5. Retail titans like Macy's and Bloomingdale's are experimenting with new store formats, such as setting up shop at strip-center locations like Kohl's, to address the stagnating traffic at malls.
6. Malls themselves are moving away from department stores as anchors, opting for experiential anchors like bowling alleys and arcades, or healthcare centers, to attract millennial and Gen Z shoppers.
7. As we move into 2022, it remains to be seen whether the department store sector's turnaround is a temporary reprieve or a lasting trend, with retailers needing to adapt their strategies to the evolving retail landscape and embrace sustainable and omnichannel retailing.

Read also: