When JCPenney left the Florence Mall in Florence, S.C., in 1992, mall owner Edens & Avant didn't scramble to find another department store to fill the anchor slot. Instead it quickly struck a deal with a restaurateur to fill the space. Some 10 years later, the “de-malled” center is welcoming discounters T.J. Maxx and Ross Stores as part of a $10 million expansion.
In Atlanta's 31-year-old Perimeter Mall, the same circumstances — the closing of the JCPenney store — have produced a grimmer outcome. The 200,000-sq.-ft. store, which had been one of three anchors in the 1.5 million-sq.-ft. center, remains an empty eyesore 14 months after the retailer pried its logo off the front. The Rouse Co., which owns Perimeter, has been courting a long list of department stores for the center in the North Atlanta neighborhood. A potential deal with Federated Department Stores' Bloomingdale's fell through in April; the mall already has two Federated anchors, Rich's and Macy's. Talks with Dillard's continue, according to Michael Bryant, a Rouse vice president.
For more than 30 years, the mall industry has depended on department stores. They have been the most valued partners in developing new centers and are the tenants with the biggest stores that pay the most rent and, traditionally, have drawn the most traffic. But the department store business continues to struggle, having lost half its share of the retail industry to discounters and specialty stores over the past two decades. In the first five months of 2002, while discount store sales nationwide shot up 20.1%, department stores recorded a 2.6% decline. In May alone, department store sales slipped 6.2%, according to the International Council of Shopping Centers.
Nowhere are the losses more apparent than in the apparel category, where department stores derive most of their income. And it's easy to see where the sales have gone — to those discount stores down the road and to all those inline specialty stores in the mall.
That raises an intriguing question: Has the mall made the traditional department store obsolete? Does the collection of specialty stores, apparel and housewares chains and restaurants duplicate what used to be inside the department stores of decades past?
“The mall has really picked up a lot of energy and a lot of the tricks of the trade that the department store once dominated,” says R. Webber Hudson, president of leasing at Chicago-based Urban Retail Properties, the nation's largest third-party manager of retail space. “Like the great merchandisers who ran department stores 30 or 40 years ago, the mall operators are assembling an appealing array of goods and services — all under one roof, if not in one store. We and our colleagues have filled that void that the merchants abandoned in the late-60s and early-70s when the families of these great merchants began to consolidate among themselves and become merchant brands,” says Hudson. And he should know. He is one of the Hudsons, the Detroit family that founded Hudson's department stores in 1881.
So, can the shopping center industry live without them? The answer is no — or at least not yet and not for conventional malls. However, new mall formats are cropping up around the country that don't depend so heavily on department store anchors (see box on p. 19).
“Department stores have rapidly lost their role as the primary driver of shopper traffic,” says David Fick, an analyst covering mall real estate investment trusts (REITs) at Legg Mason Wood Walker in Baltimore. “They are still necessary elements for individual mall success, but the future of malls depends in greater respect on the quality of fashion in-line tenants.”
So, property owners are faced with a difficult issue — they can't rely on department stores as heavily as they have, but they also can't afford to give up on their biggest tenants. “All of our leasing starts with the department store anchors,” says Nathan Forbes, partner in Southfield, Mich.-based The Forbes Co. Forbes is building The Mall at Millenia in Orlando with The Taubman Co. The 1.2 million-sq.-ft. mall opens on October 18, 2002, with new-to-the-market anchors Macy's, Bloomingdale's and Neiman-Marcus. “They are still the draw for the inline stores.”
That makes the evolution of the department store a vital development for owners, developers and investors to follow. After all, nobody wants to be stuck with empty anchor stores and the chances of that continue to rise thanks to bankruptcies and consolidation.
In just the past three years, the American Retail Group closed all 75 stores in its Upton's division in seven Mid-Atlantic and Southeastern states; Montgomery Ward ended its 103-year run in 2001; and the 452-unit Ames Department Stores chain went under in August 2001, but is operating under a $775 million debtor in possession plan assembled by GE Capital and Kimco Realty Corp.
In 2002, even though consumer spending has held up better than many economists had predicted, the department store shakeout continued. The big blow came in January when Kmart filed for Chapter 11 protection and announced plans to shutter 284 stores as it reorganizes. The same month, 134-year-old, 23-unit Jacobson Stores Inc. filed Chapter 11.
Plotting a comeback
The surviving chains, even those that are benefiting from the economies of scale they have gained from consolidation, are all looking at ways to adapt. Department store execs are burning the midnight oil, grinding out productivity improvements and boosting gross margins, and even reinventing their stores to bring back the shoppers. Efforts to revitalize the department store concept range from revamping interior layouts to remerchandising to borrowing whatever seems to be working elsewhere. Some stores, for example, are following the lead of Kohl's Corp., a successful department/discount store hybrid, in using centralized checkout.
There are lots of ideas, but no magic bullets. “They don't have a clear-cut answer,” says Hudson. “They've lost such an edge to the mall in terms of being the collection point. But from a financial point of view, they're becoming sharper, again on value and assortments, in an effort to drive the traffic back through the doors to reclaim the piece of the pie that they once had, which today is about half what it used to be.”
Picking clear-cut winners and losers in the fray is still a crapshoot. You can get odds either way on Sears, once the No. 1 retailer in the U.S. and now No. 2.
Sears' $1.9 billion purchase of Land's End in June came out of the blue to most industry observers, but could be just the thing to revive Sears' own softline sales. Sears' strategy is to integrate Land's End merchandise into its stores by this November, in time for the holiday shopping season. At the same time, it is also launching its new Covington private-label line of men's, women's and children's clothing.
While many analysts cheer the softlines strategy, others continue to question whether Sears can combine hardlines with softlines under one roof. They'd prefer to see the company focus exclusively on its well-performing hardware and appliance lines. But CEO Alan Lacy reiterated his commitment to the broadlines strategy in a July investor conference call.
The buzz on Wall Street for JCPenney has been growing more favorable. The No. 5 retailer has been threatening its own comeback for several years now. With noted turnaround artist Allen Questrom occupying the CEO slot, the threat has greater credibility. Penney is well into the second year of his five-year revitalization plan. Questrom has cut Penney's store count down to 1,075 from 1,203 in 1998, and centralized the company's merchandising, buying and pricing operation under new president and COO of stores Ken Hicks and CEO of stores Vanessa Castagna. Hicks spent 11 years at May Department Stores and Castagna is a Wal-Mart veteran.
“Management continues to behave conservatively, pursuing a multi-year financial liquidity plan,” says Bernard Sosnick, a retail analyst with Fahnestock & Co. in New York. “Management has been wisely guarding against the possibility of a worst-case scenario in the financial markets.”
Nordstrom Inc., a leading fashion specialty retailer with 133 stores in 26 states, is ironing out a few new wrinkles in its store formats, but has been a leader among its brethren in testing out new ideas. In March, the company opened its 82nd store, not in a traditional mall, but in The Grove, a $100 million open-air center in downtown Los Angeles next to the popular Farmers Market. The 122,000-sq.-ft. street-front-format store is smaller than the typical 190,000-sq.-ft. plan, and features an expanded fashion component and designer division at the expense of its usual gift gallery.
The nation's two largest department store chains — Federated Department Stores and May Department Stores — are now figuring out how to use their built-in economies of scale and their individual brands' identities to boost them ahead of their discount competitors.
Federated, which owns the nation's largest collection of department store brands including Bloomingdale's, Macy's and Rich's, is banking on new store designs to bolster its turnaround.
“We continue to explore a range of new store concepts that will work within a variety of retail development formats,” notes James Zimmerman, Federated's chairman and CEO. “We recognize that to maintain our position as the industry leader we must continue to introduce innovative ideas that make shopping at Federated's stores a memorable experience. One is simplifying the shopping experience to make it more convenient for customers.”
May Department Stores, whose stable includes Lord & Taylor, Robinsons-May and Hecht's, continues to struggle with weaker sales while squeezing more efficiencies from its operations. This month, it is combining its Kaufmann's, Filene's and Meier & Frank divisions within Robinsons-May, based in Los Angeles, hoping to save $60 million annually.
“These two combinations are an important strategic initiative that will enable us to streamline our operations, better serve our customers, provide operating efficiencies and reduce costs,” says Gene S. Kahn, May's chairman and CEO.
Perhaps Kohl's, which continues on its winning streak, will be a model. The chain, which is adding more than 90 stores this year and 80 in 2003, reported a 14.8% jump in June same-store sales.
“Although the Kohl's format is not that of a traditional department store, it sells many of the same categories as today's department stores,” says Elaine Francolino, vice president and senior credit officer at Moody's Investors Service in New York. “Kohl's has proven that the department store format is not obsolete. Kohl's offers brand name merchandise at a good price, has an understandable pricing policy, and provides easy, off-mall shopping and checkout experiences. We should expect to see other department stores adopt some of Kohl's tactics.”
Already, many department stores like Sears are once again looking to private-label apparel to differentiate from discounters and squeeze extra profits out of discount-happy shoppers.
“For most merchants, that's not what is going to make them succeed in this environment,” says Hudson. “What makes them succeed is assortments, having the right goods at the right time in every color and every size and in complementary ways. You need to carry a theme through the store that differentiates you from the competition. Private label is more of an economic stabilizer, but the lead times on private label are so long, you can't have the view over the horizon to stay contemporary and relevant. Once you get stale you're toast for a few seasons. Once you get behind the curve of being relevant or contemporary, your customer is going to move on and it takes time to win back that trust.”
More consolidation ahead?
There is likely to be more consolidation ahead, both of companies and of store names. Target Corp., (formerly known as Dayton-Hudson Corp.) has recently done some streamlining of its department store brands, consolidating its Dayton's and Hudson's brands under the Marshall Field's name in January 2001. Dayton's, Hudson's and Marshall Field's were founded in the same manner — with single flagship downtown stores in Minneapolis (1902), Detroit (1881) and Chicago (1852), respectively. In fact, the Dayton Co. opened the first enclosed, two-level mall — Southdale Plaza in suburban Minneapolis — in 1956.
As to corporate combinations, there are still deals to be done. Earlier this year, the industry rumor mill was buzzing about a possible mega-merger between Federated and May. “There has already been significant consolidation in the department store industry, from more than 20 national chains 25 years ago, to about seven today,” says Fick. “I hesitate to predict which chains will consolidate, but it will likely include some of the regionals, plus companies with distressed or outdated concepts, such as Saks, Nordstrom and Penney. We also wonder where Sears is ultimately headed.”
Given the consolidation forecast, more mall anchors can expect to go dark, which puts the onus on mall owners to create flexible alternatives. “We have too much obsolete retail space in this country,” says Geoffrey Booth, director of retail development at the Urban Land Institute in Washington, D.C.
Meanwhile, it pays to watch for signs of which companies are adapting best to a retail environment that may never put them back at the top of the food chain. “While we expect that traditional department stores will continue to evolve, we do not expect them to disappear,” says Francolino. “The best operators will survive and prosper.”
Life Beyond The Mall
Since the hey-day of malls in the 1980s, surviving department store anchors have witnessed the obsolescense of their surroundings. More malls are converting into or adding on open-air formats to support their existing anchors, but also to attract more street-front-centric retailers.
Case in point — Triangle Town Center in Raleigh, N.C. This 1.3 million-sq.-ft. enclosed regional hybrid features the typical department store anchors — Dillard's, Hecht's, Hudson Belk, Sears and the first Saks Fifth Avenue in North Carolina — but also an adjacent outdoor component with a collection of shops and restaurants called Triangle Town Commons.
“With these centers, people are demanding a different format and better choice,” says Geoffrey Booth, director of retail development at the Urban Land Institute in Washington, D.C. “We're using shops to define who we are,” says Booth. “Sears and JCPenney are no longer who we are. That formula is changing. People use places to define themselves.”