Can Department Stores Save Themselves?

0:07Hello and welcome to the debrief from the business of fashion where each week we delve into our most popular BOF professional stories with the correspondents who created them. I'm senior correspondent Sheena Butler-Young. For decades, department stores from JCPenney to Macy's to Nordstrom and Saks Fifth Avenue were at the heart of American retail, the ultimate symbol of consumer culture. But today, many are struggling to stay relevant as consumer shopping habits evolve and the online competitors gain ground. In just the past few months, Nordstrom's founding family has made yet another attempt to take the company private.

0:44Saks and Neiman Marcus joined forces in a billion dollar deal, and Macy's embarked on its plans to close 150 stores, hoping to right size its business. Joining me today to discuss how department stores are attempting a comeback and whether the odds are in their favor is BOF's retail editor, Kathleen Chen. Hi Kat, welcome to the Debrief podcast. Hey Sheena, thanks for having me. So first I want to zoom out a bit. Kat, do you remember the last time you went to a department store and what you were there looking to buy? Yes, I do, Sheena, because it happens so infrequently. I love this question. I was in Nordstrom a couple months ago hoping to buy some presents for my family ahead of my trip to China in the summer.

1:28And I had a wonderful experience, actually. Nordstrom is known for their customer service. I went to their Manhattan store on 57th Street. They have a beautiful beauty hall. And yeah, it was great. I was able to walk out pretty quickly and they gave me a lot of free samples too on top of the things that I purchased. And yeah, overall, nine out of ten. I love that. I actually go to department stores quite frequently. I'm a suburban girl and I'm also a millennial that was a mall rat back in my day. So I still have an appreciation and a fondness for department stores. I have to say it's been fine for me.

2:06It's been fine. But obviously, all is not fine. Department stores have contended with claims of existential crisis for decades. And I love how you opened one of your articles on the department store saga, which is you spoke about former Macy's chief executive Terry Lundgren, who told you this anecdote about his college roommate. I would imagine this is 30 or so years ago, who told Terry that he shouldn't take his first out of college job at Macy's because catalogs were about to put department stores out of business. Now, we know that didn't happen, but this is sort of a theme with the department store sector.

2:45What would you say is so different about this latest existential threat to department stores that's happening right now? And is this the last one? Is this the ultimate threat? I don't really think of it as different iterations of problems at different times in history. I think it's been just a rolling wave of problems that department stores have not been able to figure out. There are more and more new threats. And honestly, the confluence of challenging external factors as well as competitors that department stores face today really aren't new. And they've been around for the past 10 years. We're talking about fast fashion.

3:36We're talking about online shopping. We're talking about brands investing in their own direct-to-consumer channels and enticing people away from shopping multi-brand. All of these challenges existed 10 years ago. And the problem that we have today is that it's getting later and later and more and more desperate for these department stores. and time is running out and they still haven't figured out the solution. And the difference today is that there is a new level of urgency. And I would say that looking beyond the factors that I just outlined, online shopping, fast fashion, et cetera, I would say the real trouble began for department stores in the nineties as consolidation happened and as malls proliferated department stores expanded at a really, really, really fast pace.

4:34And what we're seeing now is that there are more department stores than there is demand for it, which is why you've seen Macy's and other department stores really cut back on their footprints. In some ways, real estate can be an advantage, right, relative to a pure play. Are they not using the real estate that they have to their benefit? That's a great question. I think it's a little bit of two shortcomings regarding real estate. On one hand, department stores do have these great stores. Stores are billboards for customers. Stores are really convenient for people who want to go into a store, pick up blush or pick up a present day of really quickly.

5:21But the problem is a lot of these stores are just not great stores. They've not been updated in years. The merchandising is bland. There's no localization. They're just lacking energy, lacking just compelling features for people to feel good when they walk into these spaces. And then on the other hand, there are too many stores. The real estate bit is also interesting because Because Kohl's and Macy's are two of the department stores that have caught the attention of these activist investors, these stakeholders that want to come in and influence how a company is being run. And one thing they've zeroed in on is the share amount of real estate that department stores have and maybe using that a different way.

6:06Talk to me about what's going on with activist investors that have approached Kohl's and Macy's, where that landed and what they were after. The investors that have targeted Macy's and Kohl's in the past couple of years, this is a recurring theme, tend to be hedge funds that are not at all interested in the retail business. they see an opportunity to monetize the real estate that these department stores own, which is also why again and again, when they're targeted, Macy's and Kohl's, they really go into this defensive mode. They don't want to cede the business to these real estate-focused investors who would no doubt strip these companies for parts and essentially make money from the real estate.

6:57This is something that happened to Sears with Eddie Lampert. Annie Lampert spun out Sears real estate into a REIT, a real estate investment trust called Seritage. And so basically, Sears, the department store, was paying rent to Seritage, the real estate investment trust. And it was a situation that left Sears, the department store, in a really vulnerable spot. And we saw how that entire saga ended, right? Like Sears went out of business. It's a very, very pivotal point in the history of department stores. And it went on for a really, really long time. Sears was unalive without being dead for many, many years.

7:43And you're seeing JCPenney sort of in the same spot. I'm not really sure what's going on with their real estate situation, but They're partially owned by a landlord. And so there's flexibility in what they can do with these big anchor spaces. But I would say the sentiment in the industry is that if these companies were bought out by these activist investors, hedge funds that are focused on real estate, it would not be a good sign for the health of these department stores. And there wouldn't be sort of a long term strategy for maintaining the health of these department stores. Absolutely. I, too, have followed that very contentious relationship between the industry and then purely financial investors and then versus a strategic that actually understands the retail model.

8:35You mentioned Sears, which went away and you mentioned JCPenney, which has sort of pared down, hasn't been doing very well or is not very relevant for a long time. Then you have Macy's that's sort of been fledgling, but also hanging on. Nordstrom seems to be the most ahead in terms of that group, but also not in the best shape. What now separates the bad from the worst? What would you say? Well, it's hard to say because JCPenney is now no longer public. Both Sacks and Neiman Marcus are no longer public. Nordstrom is wanting to go private as well. And so it's going to become harder and harder to assess the health of these companies.

9:20I think, though, you can tell as a consumer. When JCPenney was sort of in its last regs as a public company before it was bought out by Simon Property Group and Brookfield, I think you could tell. I don't know if you had been in a JCPenney store in the last 10 years versus 10 years before that, but my mom used to take me as a kid. There was one. I think that it's still open at my local mall in Pittsburgh. And every time you go into that store, it's just in worse and worse shape. These stores can get on this death spiral where things are bad, but at the same time, things are so bad that the department store needs to cut costs.

10:10So they're not investing in the stores. You know, they're not investing light bulbs. They're not investing in modern fixtures and they're not investing in training their sales associates. So then the store gets worse and then the sales decelerate even further. And it becomes this situation that gets harder and harder and harder to reverse. And we're seeing Macy's on that same trajectory, but Macy's was always in better health than JCPenney. But it's not in a position of strength today. And that's what new CEO Tony Spring is working on. They've introduced a turnaround strategy earlier this year.

10:54It's not entirely radical, but I do think that the success will be in the little details. the success will be in the execution of this plan to improve stores, to improve product. And by the way, they are closing a significant number of stores as well, which speaks to this theme of maybe there are just too many department stores. Absolutely. I love that the devil is in the details that it can come down to a light bulb. I too have witnessed going into a store and it's just bad fluorescent lighting. And that just takes the shopping experience all the way down. I want to pivot a little bit to sort of the higher end, the luxury side.

11:34So two of the biggest names, Sachs and Neiman Marcus, are finding strength in numbers or at least trying to. In July, Sachs owner Hudson's Bay Company inked a long awaited deal to absorb Neiman Marcus Group in a transaction valued at around two point six five billion dollars. Should it happen, it would mark the most dramatic change to the American department store landscape since the formation of Macy's two decades ago. So whether that will be enough to put a dent in the sector's challenges remain to be seen. I'm leaning towards probably no based on what we've discussed so far. But I want to start with what was the industry reaction to this deal?

12:10This deal was highly anticipated. Sachs has been interested in purchasing Neiman Marcus for a number of years. And it was just sort of swirling, you know, rumors that it's being put together, hurdles, gaining momentum again. And then finally, over 4th of July weekend, or right before 4th of July, the news happened. I was not happy about the timing. But it's great that you mentioned Macy's. Because when I think about Macy's current problem, I do think that the conception of Macy's in the aughts was the start of it all. Macy's was formed when Federated Stores, Macy's Stores, and Marshall Fields, which are department stores that are regional in the Midwest, when they all consolidated.

13:12And at the time, a lot of Marshall Fields customers were really upset that their local beloved department store was rebranded into Macy's Stores. And I do think that in that kind of consolidation, in that kind of rapid expansion of putting together synergies and creating this large, large, very corporate entity, a lot of the nice things about retail was lost. You know, the localization, the way that sales associates and store managers can create relationships with the local clientele, you know, local merchandising and local buying teams that understands the preferences of their particular geography.

14:01And I think that's a very important lesson that we haven't talked about in a while with Macy's because, you know, the big things that we've focused on have been online shopping, fast fashion. In the wake of the Great Recession in 2008, there was a lot of talk about the disintegration of the middle class that led to this decline of department stores. Lately, though, personally, I've been not as much convinced on that narrative as it is just years and years of mismanagement and missteps and not sort of playing into what makes good retail so wonderful. And that's something that I think department stores overall have just lost as they've become more corporate in the past couple of decades.

14:53Absolutely. You bring up a great point around also the loss of culture and localization when companies merge. There's a history of things becoming too transactional, too corporate in these deals. But I want to talk about or see if there's something good that can come of this. Is there something that either Neiman Marcus or Sachs stands to gain most if they could make this work well? They would have the benefit of scale. They would have the negotiation power with vendors. This deal is something that scares brands very much because they'll have more negotiation power. they'll be able to combine backend capabilities.

15:38This is the case with any sort of M &A in a sector, finance, legal, marketing, technology. They'll be able to save a lot of cash by combining. Is savings enough to make their business model more relevant? The answer to that is a resounding no. I hear you in that there's a merchandising problem that sometimes to the earlier point, these transactions focus on things that are not at the heart of the issue sometimes. But I see your point there. The other interesting wild card is Amazon's involvement in this potential tie up. Talk to us a little bit about how they come into play and can they maybe help improve digital innovation on either side of this equation?

16:31So both Amazon and Salesforce are now minority investors in the entity that is the result of the merger. From my understanding, talking to people in the industry is that Amazon and Salesforce won't be very active in dictating what this entity will look like. What I've heard, this is not something that Sachs or Neiman has said explicitly, but what I've heard is that Amazon is more of a passive investor. And I do think that this deal and the scope of the learnings that investors behind this new entity will be able to receive is sort of the value for Amazon, right? All of Sachs and Neiman Marcus's customer transaction data will help Amazon inform its efforts in fashion, which this is a whole other topic for another day, but Amazon has been trying to break into fashion for more than 10 years and it really hasn't in a meaningful way yet.

17:44And so I do think that by being an investor in the combined Sachs-Neiman entity that it will be able to obtain a bigger understanding of this luxury fashion world that they've not been able to penetrate. Absolutely. By the way, so this combined entity, should it happen, would be called Saks Global. Do you think the FTC will allow this deal to go through? That's one of the big questions. We've seen this a lot recently in the fashion space, these big billion dollar proposed transactions that don't always see their ways through. How is it looking on that side of the conversation from where you sit?

18:22The current FTC is very adversarial in these antitrust plays. You see this with Capri and Tapestry right now. So the Tapestry-Capri deal is being challenged. I would say there's a lot of potential for this one to be challenged as well. But on the other hand, it's not like we have these huge luxury fashion behemoths coming together, right? Like it's a$2.65 billion deal. It's not close to$3 billion. If you look at the market caps of the luxury giants, right? There's no comparison. So Sacks and Neiman, culturally, they occupy a lot of recognition in the minds of consumers. But if you look at how much business they actually do, they're not major players in luxury fashion.

19:22Like the brands are the ones that are in a position of power with the consumer because they've done a really great job at enticing shoppers to go into their boutiques rather than go to their local department stores. And this is going to be a problem for Saxon Eamon, even with their combined leverage. So I take your point. Another interesting deal that may or may not be in the works is happening with the Nordstrom family. The family has been trying to take the business private for nearly a decade. A$8.4 billion offer by the family in 2017 was rejected by the Nordstrom board as being too low. Today, Chief Executive Eric Nordstrom and his brother, Executive Vice President Pete Nordstrom, are trying again.

20:10They recently submitted a plan to take the company private at$23 a share or$3.8 billion. That potential bid values Nordstrom at less than half of its perceived value just seven years ago. I want to talk about that halving of the value, but I want to start with why the Nordstrom family is so fixated on going private, Kat. I think that it's just easier to invest in the long-term health of your company if you are not under quarterly scrutiny from your public shareholders. Public companies are very much incentivized to chase top-line growth and consistent top-line growth. But any retail operator will tell you that the real investments that will yield long-term results will require a sacrifice of these short-term results, right?

21:08Like if you're spending$500 million on a store renovation, how is that going to look on your balance sheet? How is that going to look on your income statement? Not great. It's not going to look great to your public shareholders. And so public companies are always incentivized to chase these short-term gains, which is why you see discounting is so rampant in the department store sector. This is something that Saks has realized. Saks used to be public under Hudson's Bay Company based in Canada, and now it is no longer public. It's something that a lot of e-commerce brands are also seeing after a wave of very unsuccessful IPOs in the past couple of years.

21:55And so I think the Nordstrom family is really set on making some maybe radical changes, transformative changes to Nordstrom that they just can't make as a public entity. Absolutely. And so about today's bid,$3.8 billion, half of the perceived value seven years ago. What does that tell you about the state of the business and where are their problems strongest, right? They're always known for service. Is that changing? Is it product? Where's the issues coming in now? Yeah, I think the value having is just a great demonstration of how the sector overall has fared since 2018, right? It's not just Nordstrom that has seen its market cap totally eviscerated in the past couple of years.

22:50It's other department stores as well. Well, Nordstrom was very strong on innovation a couple years ago. They invested in small format stores. They invested in stores where, not even stores, but these hubs where you can pick up your online order and get them tailored. And that was a really exciting, exciting chapter for Nordstrom. However, I do not think that these investments have yielded a big shift in the trajectory of their business, which has been stagnant for a number of years. Nordstrom now is investing a lot in Nordstrom Rack, which is their off-price segment. That has performed really well.

23:36Off-price overall has been outperforming the industry in the past couple of years, probably in the past decade. So several problems there. Does the deal have a shot of success? Can this Nordstrom family take this company private? Oh, absolutely. Nordstrom has a great foundation for success. The sort of personal buy-in from their founding family, the Nordstrom family, it's not just profit and returns for them. This is their namesake legacy. Nordstrom is known for its exceptional customer service. I experienced that customer service recently, and it was definitely enough for me to keep on going back.

24:17Nordstrom was an early adopter of experiential retail and hosting these really fun shop and shops or conceptual little corridors in their stores. I think they had a pop-up for Skims recently. I think that if Nordstrom could reinvest in these fun, special elements of retail, reinvest in customer service, reinvest in their online shopping experience, that they really do have a shot in convincing their shoppers to go back to those stores instead of shopping with brands directly. For sure. So hope for Nordstrom. I too experienced their customer service on the shoe floor a couple of weeks ago and I bought a pair of boots.

25:01So Nordstrom, there's hope there. Department stores more broadly, where do they go from here, Kat? I personally see so much value in them, whether as a mall anchor or a place that you can browse and discover and be inspired. And I sure hope they can get it right. Is all hope lost? How do you see this playing out? I totally agree with you, Sheena. I think that department stores have a great value proposition. You're seeing a lot of data about young consumers who are shopping actually more in person than millennials. Gen Z shops more in person than millennials. This is a data point that I've seen again and again.

25:37Department stores are purveyors of discovery, the kind of discovery that we don't get from Instagram or TikTok, right? Shopping is fun. Shopping is social. Look at department stores in Europe. Look at Selfridges. Look at Le Bon Marche. People love spending time in those stores. Tourists, but also locals. And those stores are so beautiful. I always go to Selfridges when I go to London. Those stores, I think, provide such a great blueprint for what department stores could be like in the U.S. There are fewer of them. Every store, every big European department store is treated like a flagship. These companies invest in the layout of the store.

26:29They bring on high-end architectural firms to do the interior design of the stores, down to the little details, the fixtures, the carpeting, the lighting. All of these details matter. And European department stores have done a great job in making it happen. And they're also private, right? They're not public entities. And we don't know the year-to-year health of these stores. And they're not under the spotlight all the time, whether they're growing or not. They're long-term plays. And so I think, you know, there is a proof of concept just in that proof of concept just isn't in America. But but it's also, you know, look at Bloomingdale's Bloomingdale's named a new CEO about 10 months ago.

27:20and he comes from Asian department stores, this department store chain in Thailand and Galleries Lafayette in France. And so his view on how department stores can thrive very much draws from his international experience. And I think what he will be able to introduce at Bloomingdale's will be interesting and we'll see how that plays out. But I personally think it's very promising. Absolutely. I love that we're ending here on a positive note that there is proof of concept, that there's devil in the details, even a light bulb investment in store design and merchandising and even going private, getting away from that shareholder gaze or that investor gaze.

28:03If you can. Kat, thank you so much for joining us today. It was my pleasure, Sheena. This was so fun. So much fun. please be sure to check out Kat's articles why Nordstrom's founding family wants to take the retailer private and can Saks, Neiman Marcus and Amazon save the American department store at businessoffashion.com these and other stories are available to BOF professional subscribers only and you can find the links in the episode notes you've been listening to The Debrief produced and edited by Olivia Davies mixed and mastered by Eric Bria I'm Sheena Butler-Young we'll be back next week with a new episode Thanks so much for joining us and be sure to follow us wherever you get your podcasts.