Department Store Rebound?

Lynne Kiesling

For those of us interested in the economics of things like “mass customization”, the department store is a fascinating phenomenon. A retail business model originating in the late 19th century, the department store for decades epitomized elegance, convenience, ubiquity of options. Then in the 1990s the department store fell on hard times as nimble, smaller retailers struck better production and/or procurement contracts, had more direct contact with the preferences of consumers, or were able to offer niche products to enable consumers to craft their own, individual, modern images.

Now Grant McCracken tells us that the department store is back. He cites J.C. Penney’s success in the mid-market range, which is correct. Here’s his summary of why the specialty store has been succeeding for the past 15 years:

The usual explanations for this decline are vanishing sales staff, badly organized stores, and fashion insensitivity. I think there was another explanation that didn’t get enough attention. The specialty retailer was a better meaning manager.

We can chart the decline of the department store against the rise of the national brand. As branding got better, and marketers became more skilled, the department store became more punishing. It was so uninviting, so unorganized, and so aesthetically unforgiving, even the best brands began to wilt.

A response was inevitable. Ralph Lauren said, “leave this to us,” and build little boutiques into the department store. These boutiques out-earned the rest of the floor because they continued to build the brand. Mr. Lauren’s store was a bastion of privilege in what was otherwise biggish, boxish and artless. I heard, but never confirmed, that Mr. Lauren had a full time staff member to search out those “rowing team” photos that gave the store it’s preppy feel. The boutique could do meaning management that the department store hadn’t known since in it’s golden palace hey day.

Yes, department stores are doing better financially now, as they streamline their supply chains through merger (Macy’s) and correct some of their recent missteps (Saks). Nordstrom and Bloomingdale’s have been more steady and have not suffered some of the setbacks that drove stores like Bonwit’s and B. Altman out of business.

Grant thinks the department store may even be able to do the specialty stores one better:

Ah, this is interesting. The specialty store could go deep. It could cultivate the brand carefully and well. But in a hyperactive marketplace, where consumer taste change often and shifts suddenly, the real challenge is remains current. And it is easy to do this with many brands supplied by other players than one perfectly managed brand of one’s own. Retail, a river runs through it! This is it’s adaptive advantage. Potentially, the department store can be a complex adaptive system.

But I’m not convinced that the department store is back. I still think the specialty store does a better job of managing meaning and selling image. I am not convinced that the large department store that is managing many brands and a national image can be more nimble than a specialty store, and nimbleness is what a department store will require to become a successful complex adaptive system. I don’t think traditional retail management will be willing to tolerate distributed control, which is what you need to have a successful complex adaptive system.