Are department stores still relevant?
Selfridges is set to join a series of luxury department stores co-owned by Thai retail conglomerate Central Group and Austrian real estate group Signa. Selfridges Group’s portfolio, which also includes Rinascente, Illum, Globus and KaDeWe, generated pro forma sales of $5.6 billion in 2019 and is expected to grow to over $7.9 billion by 2024.
However, a recent study by Bain & Altagamma predicts that department stores will lose nearly half their share of global luxury goods sales from 2019 to 2025 as they face stiff competition from online players, specialty retailers and brands’ own direct selling channels. What strategies are companies like Selfridges and its new owners pursuing to grow in a declining category?
Exclusivity instead of discount
In recent years, America’s department store sector has been in a race to the bottom as players try to retain customers through heavy discounts. The results were disastrous, not only angering brands but also bankrupting businesses.
Many department store operators, including Selfridges, have eschewed this strategy in favor of securing exclusivity with new brands or exclusive product offerings with existing and more widespread brands, giving shoppers a reason beyond price to visit their stores online and offline. A simple search of Selfridges’ website will reveal 1,129 exclusive items, and this is likely in addition to the brands for which Selfridges is the exclusive London or UK retailer.
But exclusivity has its limits. Barneys was known for nurturing new talent and bringing figures such as Comme des Garçons, Yohji Yamamoto, Martin Margiela, Dries Van Noten, Prada, Ann Demeulemeester, Rick Owens and Alexander Wang to the US market, often in exchange for exclusive distribution rights . This gave the chain an appeal to innovate, but often proved stifling for brands looking to do more than just get stuck in the starting block. Producing exclusive drops for individual stores can also be a challenge for brands, depending on how easy it is for them to customize production and meet minimum order requirements.
Reinvent store formats
Traditionally, department stores have sought expansion by introducing versions of their flagship format in secondary and tertiary cities, albeit often on a smaller scale. Before filing for bankruptcy in 2019, Barneys had 22 stores, including its flagship store on Madison Avenue. The company had also been testing different formats, including Barneys Warehouse and Barneys CO-OP, the latter to attract a younger and more fashionable but less affluent audience. Still, the department store operator stretched its balance sheet by expanding with formats that offered few differentiators. Along with a rent increase at his Madison Avenue flagship, one of the final nails in his coffin was an expensive investment in a downtown Chelsea outpost.
The problem with most high profile new format department stores is that their identity is so closely linked to their mother ship. This is particularly the case with Harrods and its Knightsbridge location. The company has made numerous attempts to open new locations, including one across the street called 102. The store, which has concessions like Krispy Kreme and Yo! Sushi, as well as florists, an herbalist, a massage therapist, and an oxygen spa opened in 2006 and closed in 2013. Expansion into Shanghai and Dubai was also considered, but nothing materialized. However, Harrods has opened cafes under franchise agreements in Japan and Thailand, as well as duty-free shops at Heathrow, Gatwick and Doha’s Hamad Airport.
But these are sideshows, relatively speaking. More interesting is the department store’s recent foray into specialty beauty retail with its H-Beauty format. The UK is one of the few markets in the world where Sephora hasn’t yet murdered the cosmetics section of department stores, and Harrods Knightsbridge is already the biggest seller of beauty products in the UK, with a 9.3 percent market share. However, the three locations selected so far lack inspiration. Will Harrods continue down this path or, like Harvey Nichols’ Liverpool Beauty Bazaar, will it be a dead end?
Concept stores are all the rage, with roots originally in fashion merchandising, exemplified by Dover Street Market and Colette. Dover Street Market also likes to throw in some curveballs in terms of store design, such as: B. Corrugated iron and plasterboard partitions, using reclaimed shipping containers to build shop-in-shops and changing rooms from Portaloos. It all creates massive amounts of hype as well as a cult following. Whether the approach is always worthwhile for store operators or brands is another question.
Galeries Lafayette threw its hat into that ring with the opening of a concept store on the Champs Elysées in 2019, with mixed results. The store found success with millennials — the average customer is just 31, younger than the typical online shopper in France — attracting them with sleek designs, lavish pop-up installations and weekly events.
Downtown duty-free made a brief comeback before international travel was halted by the spread of Covid-19. The concept was widespread in Asia, particularly South Korea, Hong Kong and Macau, but struggled to gain a foothold in Europe and North America. Still, DFS has opened two stunning locations in Europe: Fondaco dei Tedeschi in Venice (2016) and La Samaritaine in Paris (2021), the latter aiming to go beyond the traditional duty-free format and attract a fashionable local crowd around it to give the seal of approval for attracting international tourists.
Battle against online giants
Multi-brand online retailers like Net-a-Porter, Farfetch, Yoox and even Amazon have inflicted life-threatening wounds on the department store industry by offering the same breadth and depth of selection from the comfort of the customer’s armchair. The use of AI tools will likely up the ante for online gamers who will be able to identify and meet customer demand with ever-increasing speed and accuracy.
Department store groups have invested heavily in online, especially since the pandemic forced them to close their doors, but they’re catching up. Selfridges.com was launched in 2010 with the primary purpose of supporting the in-store experience, such as by offering to book appointments at some of the store’s concessions (e.g. Dior) who are still reluctant to sell online through the store.
The pandemic has changed that dynamic somewhat, and Selfridges saw online sales increase nearly 50 percent in the year to February 2021. The proportion of Selfridges customers who shopped online has more than doubled from 19 percent to 45 percent in 2020, and the company expects this to remain at 32 percent in 2021, even with stores open. Assuming Selfridges’ sales recover to around 2019 levels (c. £850m), that would translate to around £270m in e-commerce sales. In comparison, Farfetch’s 2020 gross merchandise value was over $3 billion.
The challenges facing department store operators looking to compete in the digital space are the reluctance of some luxury brands to take this route to go-to-market with them, the significant investment in technology required to make their sites stand out, and the logistical headaches involved international pricing and settlement . Harrods took the bold step of outsourcing its dot-com business to Farfetch, bypassing two of those challenges.
But ultimately, experiential retail and superior customer service are the means to maintain an edge over ecommerce platforms. Selfridges has experiential retail in its DNA. The department store caused a scandal in 1913 when it displayed the debris from a failed attempt at a transatlantic flight on its roof. That spirit is still alive and kicking today, thanks in part to Vittorio Radice’s radical transformation of the department store in the 1990s (Radice to be reunited with Selfridges under the Central Group/Sigma umbrella). Selfridges customers can have lunch, watch a movie, skateboard, and even get married, as well as shop, shop, shop. The department store also has two personal shopping lounges, but this is no longer a major differentiator to online players and their own VIP services.
Nordstrom uses a different strategy to fend off online competitors. The US department store group offers online shoppers the opportunity to browse through products that they can pick up at their local store on the same day. Launched in 2017, the Nordstrom Local program has met with some success and is being rolled out with the group, which is banking on the non-stock locations to provide customers with the convenience of pickups, returns, alterations and other offers such as free return services at other online retailers. The group also launched a resale store, allowing customers not only to buy second-hand products but also to monetize their wardrobe, a service likely to appeal to money- and ethics-conscious Gen-Z’ers.
Alive, but at what cost?
Conclusion: department stores with their own perspective and unique offer are here to stay. However, this comes with a hefty price tag. Harrods has reportedly spent £200m on its beauty hall in Knightsbridge. Selfridges spent $415 million on its new accessories hall; and it looks like the new owners will be pouring a lot more money into the Selfridges group, as evidenced by the statement from Signa’s CEO: “Together we will work with the world’s leading architects to redesign the businesses at each site and transform these iconic travel destinations into sustainable, energy-efficient, modern spaces while staying true to their architectural and cultural heritage.” Anyone hear the sound of a cash register ringing?
The Savigny Luxury Index (“SLI”) gained over 2.5 percent in December, broadly in line with the MSCI’s 2.8 percent gain for the month.
- Ferragamo gained nearly 12 percent in December, most likely fueled by anticipation of Marco Gobbetti’s arrival in January.
- Estée Lauder also posted gains of nearly 12 percent last month on multiple buy ratings and consensus estimates of double-digit quarterly sales growth.
- Likewise, Capri Holdings benefited from broker upgrades and ended December up 10 percent.
- After being included in the Euro STOXX 50 Index, Hermès came from its November high: the share price ended December down 7 percent.
- Tod’s fell 3 percent last month on broker downgrades.
Something to see
Digital streaming services are the new frontier in retail, a mix of brand monetization and awareness building. Rihanna’s Savage x Fenty shows on Amazon Prime are breaking the internet; Lifestyle brand and retailer Goop has a documentary series on Netflix, and Pat McGrath Labs recently announced a collaboration with hit Netflix show Bridgerton. Department stores such as Selfridges, Harrods and Berdgorf Goodman have not yet jumped on this bandwagon. How long before they do?