In March, Vince CEO Jill Granoff had the pleasure of presenting the results of the elevated-basics brand’s first fiscal year as a public company. I assume it was a pleasure because there was plenty to be happy about. Overall sales were up 18.1 percent to $340.4 million (from $288.2 million in 2013). Direct-to-consumer sales – aka clothes bought in Vince’s own stores -- were up 40 percent. What’s more, gross profits were up 25.4 percent to $166.8 million (from $133 million in 2013).
Those numbers might’ve been even better, though, if it weren’t for troubles in the wholesale business. In the fourth quarter of last year, wholesale channel numbers dipped. Vince is the no. 1 or no. 2 best-performing label in several of the department stores that carry it, but decreased shipments and increased give-backs brought the numbers down. (Give-backs, by the way, are when a store returns product that didn’t sell to the brand. Sometimes, that means that the brand must refund the retailer partially or fully for the unsold goods, but that all depends on the terms of the deal.)
When detailing her 2015 plans to shareholders, Granoff spent a good amount of time explaining why Vince is having a hard time with department stores. “They are reducing their upfront buys and placing greater emphasis on in-season reorders to achieve faster turns and better sell-throughs," she said. Makes sense. What’s more difficult for a fairly upscale brand like Vince, though, is that many of the department stores it's selling to are focused on opening more off-price -- aka outlet – locations. “While we will continue to generate a portion of our sales in the off-price channel, our plan is to reduce our off-price penetration and increase full-price selling for the long-term health of our brand,” she said.
Vince’s decision to stand strong against having too much product in its partners' outlet stores is indicative of the many challenges facing department stores today, from the low end to the high end. As it becomes easier for brands to directly communicate with consumers – both through the web and also through standalone outposts – the role of department stores is changing, and only those willing to recognize the need to transform will survive.
Department stores at the low end are probably worse off right now, mostly because they have the most competition. I remember my grandmother telling me that, in the middle of the last century, Sears or J.C. Penney was your first (and maybe only stop) if you needed cheap clothes and home goods. Those stores were at the bottom of the totem pole in terms of price, but also prestige. Then Walmart came to town, and later Target, and even later H&M. (The latter two were able to combine cheap with chic, which made them even more attractive to a certain set of buyers.)
These days, “Sears is no longer a department store, it's a zombie,” says analyst Brian Sozzi, CEO of Belus Capital Advisors. In its latest effort to pare down losses, Sears sold a bunch of its real estate to mall operator Simon in a joint venture valued at $228 million. “The apparel assortments never seem to be on point, and markdowns are perpetually high. To me, Sears is just existing, and will continue to lose massive apparel share to Macy's, J.C. Penney, Kohl's, and all of the fast fashion retailers," he said. While J.C. Penney is better off than Sears -- sales were $12.3 billion in 2014, up 3.4 percent from 2013 -- Kohl’s is the best positioned of the group. That’s because it has never relied on being a mall anchor. While there are actually still plenty of malls performing well, lovers of Deadmalls.com won’t be surprised to hear that almost one-fifth of U.S. malls have vacancies of 10 percent or higher, according to real-estate data provider the Costar Group.
Kohl’s instead leans on television advertising and fliers to drive traffic to its stores, which are often located near family restaurants and other big-box retailers like Target. “Not being a mall anchor used to be considered a disadvantage,” says Andrea Weiss, founding partner of the retail consultancy the O Alliance. “Now, that’s actually a pretty compelling model.” While Kohl’s 2014 annual sales of $19 billion were flat from the previous year, it’s the company’s double-digit e-commerce growth -- and investment in things like predictive analytics -- that is promising. Last fall, the company announced that it had developed 78 different algorithms to help personalize and improve in-store and online experiences. The internal team, led by Chief Customer Officer Michelle Glass, hopes to increase sales to $21 billion by 2017.
Unlike J.C. Penney or Kohl’s, Macy’s is a department store in the truest sense of the term. It’s a part of pop culture, thanks to the Thanksgiving Day Parade and "Miracle on 34 Street." And the company has spent the last two decades buying up regional department stores and rebranding them in its likeness. Macy’s is making many right moves to remain relevant.
In the past year, Macy's has worked hard to customize each store experience by offering “localized” product, using data to tailor the offerings to the needs of the community around each store. (Things like climate and culture are also taken into consideration.) There’s also a focus on a more seamless experience between e-commerce and physical stores, starting with the “Buy Online, Pick Up in Store” service it launched last year. Macy's also acquired Bluemercury, a multi-brand beauty retailer that could transform into legitimate competition for Sephora with the right guidance. On top of all those well-informed moves, Macy’s does an impressive job marketing and advertising its product.
However, the in-store experience can be more than lacking. Here’s a photo I took in February 2014 at a Macy’s in downtown Philadelphia:
To be fair, this was a sale section. But is that a good enough excuse? I can say that my experiences at Macy’s – in an out of sales season – are never as magical as the brand promises they will be. “[Macy’s] can get away with a mediocre in-store experience because they don’t have a ton of direct competition,” says retail vet Steven Dennis, president of SageBerry Consulting. “They’ve acquired just about everybody who is in that space.” And while Macy’s has a lot going for it, it’s also not a huge growth story – sales have crept up, but not jumped, over the past five years, to $28 billion. A better in-store experience might be the next step toward future success.
At the high (and highest) end, Nordstrom is the clear leader, and not just because it’s known for great customer service. “Nordstrom is better than everybody on a lot of levels,” Dennis says. Not only has the Seattle-based company invested heavily in outside e-commerce ventures – buying up flash sales site Hautelook in 2011, and men’s shopping service Trunk Club in 2014 – it has also worked hard to diversify the brands it sells in store. One of the biggest challenges facing department stores, from discount to luxury, is product differentiation. Post-recession, department stores became more conservative with their buys, not only by putting in smaller orders (as Vince noted) but also by making safer sartorial bets. Nordstrom did almost the opposite, hiring former Opening Ceremony buyer Olivia Kim as director of creative projects. Her monthly shop-in-shops, called “Pop-In@Nordstrom” offer a cool-kid assortment not typically seen at even the most upscale malls. Right now, you can buy Chromat bustier tops and Karen Kimmel notebooks in her festival-inspired pop-up.
To be sure, Kim’s projects only represent a small sliver of Nordstrom’s offerings, but other initiatives – including its design-your-own shoes kiosks, powered by e-tailer Shoes of Prey – give off a unique attitude. While some of Nordstrom’s more forward-thinking projects have not worked out – in February 2015, news broke that employees from its much-ballyhooed Innovation Lab had been reassigned – there’s no denying that it’s taking a “more holistic approach” to building a modern department store, says Weiss. Adds Sozzi, “Nordstrom has now become as much about what it offers in terms of merchandise, as what it does on the customer service front.” The company’s 2014 sales of $13 billion – an increase of nearly 8 percent from 2013 – beat expectations.
Nordstrom’s biggest competitors have made major changes in order to keep up. In September 2014, Neiman Marcus Group acquired Net-a-Porter competitor Mytheresa.com for an undisclosed sum, a move that signaled how serious the luxury department store is about its digital future. And Saks Fifth Avenue is in the midst of a major attempt at reinvention, which began with recently ousted Marigay McKee and will continue under new President Marc Metrick and Chief Merchant Tracy Margolies. Saks has done particularly well with its Off Fifth outlet stores, which saw a 15 percent increase in sales in 2014.
While every one of these retailers has its own set of problems, there are certain things that they all must consider. No matter the price point, the product needs to be unique. It also needs to be easily accessible across every channel. And the customer must be treated better, not only through great return policies and friendly salespeople but also through better-looking stores and more customized experiences. At the moment, retailers are spoiled for choice when it comes to the brands they can sell. But as more Internet-first, director-to-consumer labels start popping up – and turning a profit – that choice is destined to dwindle. Department stores need to make themselves attractive to brands, too.