The End of the Department Store

Some might say that 2004 was the end of the department store era. After a century of dominance, department stores were outpaced by online retail sales. Since then, the moat has widened even more as online sales continue to surpass department stores at an accelerating rate.

According to research from the St. Louis Federal Reserve, online e-commerce sales have increased 1,400 percent since 2000 and over 100 percent since 2010. The Census Bureau has further determined that online retail sales have tripled as a percent of total retail sales since 2005, and the current growth rate shows no signs of slowing down.

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With a 50 percent decline in oil and gas prices since the summer, the Wall Street Journal has predicted that lower gas prices will translate into over $50 a month in savings for consumers. Even though consumers have extra cash in their pockets, a quick view of the retail sector looks pretty dull. Retail sales have been lackluster over the past three months, and even declined 0.9 percent in December. Nevertheless, by examining the commerce report data in closer detail, online retail sales have averaged over 15 percent for the last five quarters (as a percent change from the same quarter a year ago).

In order to address the changing landscape, retailers have been forced to respond. Although this trend should have been expected back in 2004, the last four months have been a turning point. Chains across the nation have begun shutting down stores, firing workers, and restructuring their corporations to focus on an e-commerce presence.

On January 8th, Macy’s Inc. released a surprise press release announcing the closure of fourteen stores across the nation. Furthermore, they hope to decrease their payrolls by letting go of two to three associates in each of the 830 Macy’s and Bloomingdales stores they run across the nation. Macy’s predicts this will account for a staff reduction of around 2,200 sales associates. While Macy’s has continued to exceed analyst estimates in comparable sales and earnings, their business model is changing. The fourteen stores Macy’s is closing accounts for $130 million in annual sales but the restructuring program is expected to generate over $140 million in savings per year. Macy’s has announced that the savings will be reinvested into technology and growth initiatives focusing on an enhanced shopping experience for online and mobile customers.

The company explicitly mentioned how it hopes to reinvest savings from merchandising and store initiatives into digital retailing and an improvement in the customer experience on macys.com. The chief executive officer of Macy’s, Terry Lundgren, explained that the retail business is “rapidly evolving in response to changes in the way customers are shopping across stores, desktops, tablets and smartphones. We must continue to invest in our business to focus on where the customer is headed – to prepare for what’s next.” In January, Macy’s told investors that it would increase its digital technology group by hiring more than 150 workers.

Macy’s is not alone in closing department stores. On the same day that Macy’s announced its restructuring program, J.C. Penney informed investors that it would be closing approximately 39 stores, which will decrease the company’s workforce by 2,250 employees. The cost-saving measures are expected to allow the company to focus on future growth, especially in online sales.

Target is in the same boat. Since November, Target has announced plans to close 144 stores by the end of 2015. Even though the majority of these store closures will occur in Canada, the company will let go of over 18,000 employees across Canada and the United States. The business picture is prettier online. Target’s online sales grew 30 percent in the third quarter and the company is projecting around 40 percent online sales growth for the fourth quarter of 2014. Even though online sales are a small portion of Target’s revenue, they are increasingly refocusing towards e-commerce.

Across the sector, more and more retailers are cutting jobs and closing stores. Sears announced a total of 235 store closings in 2014, and the layoffs are expected to be around 8,000 employees. Abercrombie announced plans to close 150 stores in 2015, and Aeropostale over the past two months has told investors that it will close 75 stores over the quarter. As the economy continues to recover from the depths of the recession, department stores are currently moving in the opposite direction, and the pace has picked up dramatically in the last four months. Although many executives have reorganized to focus on online growth, the real loser is the storefront.

Retail employment has still not recovered from its 2007 – 2008 peak, and its growth rate is slowing. The growth of the economy since 2007 might portray the retail sector labor market as recovering. However, when you graph the percent of the workforce composed of clothing and accessories retail workers as a percent of the total workforce, the proportion is dropping fast. Research from the Economic Policy Institute has also demonstrated that most retail workers have lower real earnings today than they did 35 years ago.

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The decline in retail sales associates can also be viewed from an efficiency standpoint. Dividing a company’s total sales by the number of employees, many department stores have a sales-per-employee ratio of around $100,000 to $200,000. Although Amazon has a different structure than department stores, the company’s sales-per-employee ratio is over $600,000. Amazon is not just the biggest e-retailer; its web revenues are larger than the next nine biggest companies’ sales combined.  Department store chains have revolved rapidly in the last four months by shrinking square footage, but companies still need to substantially improve their online presence.

Following the infamously grueling midterm weeks at Dartmouth College, I try to relax by spending time outside. However, when I invited my friend to come along, he insisted that he was going to celebrate instead by shopping. Yet, to do this my friend had no plans of leaving his bed. He was going to shop online, where he can search for anything he may be looking for without ever having to visit a department store.