The E-Commerce Takeover: Why Department Stores Are Struggling This Holiday Season
Fewer shoppers are visiting department stores during the holidays, favouring the convenience of purchasing products online instead. This leaves massive retail giants, such as Macy’s (whose stock has been down by 46.0% since the start of 2017), Kohl’s (down by 16.6%), Nordstrom (down by 19.2%) and JCPenney (down by 64.5%), suffering heavy losses, according to a November 2017 report by Market Realist. The Christmas season — usually the most lucrative time of year for retail — is not alleviating the strain on department stores and centrally located malls.
Analysts at DBRS have noticed declining sales in loans secured by department-store-anchored malls across North America, particularly ones with Macy’s. Analysts reported that Macy’s sales are below the chain’s national sales average in locations like Battlefield Mall (Springfield, Missouri); Gurnee Mills (Gurnee, Illinois); and Lakeside Shopping Center (New Orleans, Louisiana). The decline is well evidenced in the year-end revenue based on yearly sales per square foot reported by eight malls in DBRS-rated transactions (see table below).
Kohl’s and Sears have similarly reported struggling sales. Kohl’s exhibited three years of sales declines at Franklin Square III (securitized in WFCM 2016-C37) but had a very modest increase at Gurnee Mills (CD 2017-CD6). Sears experienced multiple losses in Park City Center (MSC 2011-C3), Queen Ka’ahumanu Center (GSMS 2014-GC26), Bangor Mall (MS 2007-IQ16) and Columbus Park Crossing (DBJPM 2016-C1) for an average decline of roughly 11.5%.
The classic commercial image of shoppers going from aisle to aisle in Christmas-decorated department stores is being switched out for web surfers scrolling through virtual deals on seasonally adorned web pages on Amazon, eBay and other e-commerce sites. While department store sales have been on a dramatic decline, e-commerce merchants across North America have seen their sales steadily increase — a trend that is expected to continue, according to Statista analysts.
Online shopping has wide appeal largely because of its convenience and lower prices than in-store locations. During the holiday season, especially, online shopping avoids the crowds and enables access to better deals. Gallup News reported that 65.0% of Americans are planning to shop online for the holiday season, up from 53.0% in 2013. While most forms of in-store shopping are decreasing in popularity, online shopping has been soaring over the past decade around Christmas time.
E-commerce is also popular for giving small vendors the ability to connect with a wider customer base, according to Harley Finkelstein, the Chief Operating Officer of Shopify, who spoke about the topic at length during a #RBCDisruptors event in November. Small businesses are able to leverage the success of major e-commerce companies, where they pay $39.99 per month, for example, Structured Finance: CMBS December 2017 The E-Commerce Takeover: Why Department Stores Are Struggling This Holiday Season DBRS.COM 3 to have their products featured on Amazon’s global platform. It also benefits consumers living in smaller, more remote locations. As Finkelstein states, “The Internet has now democratized distribution.” Like Amazon, Shopify is at the forefront of this movement, recruiting over 5,000 stores for its online shopping service.
In response to the increasing popularity of online shopping, department stores are accelerating their adoption of online and mobile models to make up for lost sales at their brick-and-mortar locations. Some companies, such as IKEA, are innovating even further: IKEA’s mobile app allows you to preview furniture by virtually placing it in your house using a cellphone camera and three-dimensional modelling — a feature that department stores simply cannot provide. However, Finkelstein does not believe that the rise of e-commerce spells the death of retail, as there is value that comes with the in-person shopping experience and staff’s specialized product knowledge. This is especially true in smaller markets where sales associates are more likely to have a rapport with customers. Regional malls are also pushing back against the e-commerce takeover by reinforcing their place in their own communities.
Nordstrom is a prime example of a department store that has not given up on the value of face-to-face selling. The company seeks to draw more customers in store by rolling out dry-cleaning and alteration services, allowing online product reservations for customers wanting to try on products in store and initiating a pilot project announced in October called Nordstrom Local, which started off as a small-scale store in West Hollywood, California, that offers personal stylists, manicures, a tailoring service and wine, beer, coffee and pressed juices. Kohl’s is also building up its physical retail presence with offers of specific Amazon products in store, like Amazon Smart Home. Similarly, Sears has partnered with Amazon on appliance products, which include Sears’s installation services. According to Ben Deutsch, Vice President of Consumer & Retail at DBRS, this could indicate that there is still a vital element to brick-and-mortar retail that corporate giants like Amazon could find useful.
One amenity inaccessible to online retail that malls and department stores are trying to push is entertainment. Regional malls, especially, have been doubling down on being the town’s community centre, with attractions like pop-up stores, escape rooms, technology-product-testing booths, indoor playgrounds, arcade games and live shows. In general, most markets are experiencing a change in consumer interests: Many people would rather buy an experience than products.
The West Edmonton Mall in Alberta, for example, is as much about entertainment amenities as it is about its many investment-grade tenants (i.e., Apple, LVMH, Sephora, etc.). Shoppers there can enjoy the view of a giant pirate ship in the middle of the mall complete with a miniature marine park featuring penguins, sea lions and sea turtles; a comedy club called The Comic Strip that features local acts; World Waterpark, a large indoor waterpark with a large wave pool; a miniature golf course; and Galaxyland, a large indoor amusement park. In the United States, the Mall of America (based in Bloomington, Minnesota) takes amusement seriously with its SEA LIFE Minnesota Aquarium, Moose Mountain Adventure Golf, oversized LEGO Store, Rick Bronson’s House of Comedy and Amazing Mirror Maze.
Nonetheless, malls are also employing technology to increase foot traffic. Practically all malls have an online presence of some kind and connect with their local communities through websites like Facebook, Twitter, Instagram, YouTube and Flickr. Some of the ways malls make the most of their online presence are flash sales, promotions you can get online and only use in store, etc. Some go viral with videos and social media campaigns (think of Wendy’s witty back and forth with Twitter users). Some retailers are also creating their own smartphone apps that offer store-specific lines of credit, promotions, coupons and specials, such as the JCPenney app that offers all these features in the hopes of boosting sales. Sears, Costco, Hudson’s Bay, Sephora, H&M, Zara, Hot Topic, Holister and IKEA are a few other department stores that have their own apps to reach their customer bases and possibly try to compete with online natives like Amazon.
Another tactic that malls are using that e-commerce cannot is the pop-up store. A mall will keep one or more of its retail spaces vacant so that a business (often one that operates online), event or promotion can set up shop for a few days in the building. The appeal to consumers is twofold: (1) Shoppers can sample a product before purchase and (2) visiting the pop-up store can be an event, showing that malls are selling experiences on top of products.
As for recent developments, last month the retail industry saw some surprising competition from Walmart on Black Friday, as the chain offered deals that were practically on par with the prices Amazon was able to provide. On average, Walmart’s online prices were only 0.3% higher than Amazon prices after years of being the significantly more expensive option, according to a Thomson Reuters Market Tracker study. Some of the products ranked considerably lower in terms of cost than Amazon as well. The retail giant was able to leverage its broad distribution, its buy-online-and-pick-up in-store option and its return-online-products in-store option. Walmart is also attempting to draw more customers in store with tactics like product demonstrations (165,000 to be held across locations during the holidays) and “Holiday Helpers,” employees assigned to help shoppers navigate the aisles, ideally making the retail experience much more pleasant during a very stressful time. Amazon is still taking over the market, however, having reported a solid third quarter that saw a 34.0% increase in sales for a total of $43.7 billion, according to its October 26, 2017, press release.
Still, with such above-mentioned tactics in place, malls may have a fighting chance to regain some of their previous retail dominance based on their communal and promotional value. While some malls will continue to struggle, others might survive if the smaller chains and local shops give way to a more sophisticated business model that adopts new marketing strategies. Lower sales and the pressure that e-commerce has placed on physical stores will change the face of malls, forcing them to innovate in order to reach more consumers.
This research is available on DBRS and Viewpoint.
Follow Stephanie Hughes on Twitter @StephHughes95.
