Department store turnaround is staked on e-commerce

Dive Brief:

Department stores are outpacing wider retail in transacting 22% of their total sales online — compared with closer to 13% for the industry as a whole, according to a new report on the sector emailed to Retail Dive from Moody’s Investors Service.
Different department store retailers are taking different tacks to bolster digital sales, according to the report. For example, those with high average unit retail (like Nordstrom and Neiman Marcus) offer no-minimum free shipping and returns, while midpriced operators (like Kohl's and J.C. Penney) require higher basket sizes, Moody’s said.
These shifts are crucial but pricey, as the retailers face steep investments in their supply chains — Moody’s sees Nordstrom as the only one reaching an inflection point there — and in their mobile capabilities, according to the report.

Dive Insight:

Department stores are a 19th-century retail concept and have had to adjust to changing demographics and shopping patterns before. The sector now faces its latest major challenge, according to Moody’s Vice President, Christina Boni.

"After two years of bruising underperformance, department stores are in the midst of their next big transition, which is making shopping as seamless as possible for an increasingly exacting customer," she said in a statement. "To do so, companies are undertaking the expensive but necessary process of rolling different shopping platforms — online, brick and mortar, and smart phone apps — into one."

Last year, Moody's was telling a different story, as department stores leeched sales, especially to off-price rivals, relying on what Moody's analysts called outmoded formats and supply chains that weren't keeping pace with customer demand. Last year, Moody's also warned on margins, which are hammered by the higher costs of e-commerce. The analysts then pegged a 9.3% operating income decrease for the department store sector in 2017 and forecast another 2.7% decrease this year.

That's still a problem, Boni said, but noted that supply chain reforms were beginning to pay off for those, like Nordstrom, that made significant investments early on.

Helpful reforms aren't only in e-commerce, though. Department stores are "employing a range of strategies as they seek to satisfy customers spoiled for shopping choices," according to Boni. Some are using big data to build new loyalty programs, which Boni notes have become critical differentiators among stores. Macy's is among them, and executives have told analysts that its revamp, which now includes a way to corral non-members, began to gain traction early in the year.

Others are providing more detailed product and inventory information or are steering customers toward in-store returns, saving customers (and the retailers themselves) time and/or money, Boni noted. But all should be allocating capital spending to technology, she warned.

"Mobile applications are critical to remaining relevant, with shopping apps becoming the norm for many customers, allowing them to check prices, make payments, manage reward programs and track orders," according to the report. "At the same time, department stores can leverage their online capabilities to mitigate some of the challenges associated with managing large, mall-based stores."