Old clichés such as “bigger is better” are being swept under the rug as dozens of America’s largest department stores begin a process of drastically downsizing their businesses.

The shift from traditional brick-and-mortar shopping to e-commerce has posed a challenge for major department stores such as Macy’s, Neiman Marcus and Sears. As each company struggles to maintain an edge over its competitors, troubling business decisions have come in the form of layoffs, store closures and redistributions of funds.

For example, in response to a 4.7 percent drop in holiday sales and a 47 percent stock plunge in the past year, Macy’s announced over 36 store closures and a substantial wave of layoffs.

By the end of fiscal year 2016, the Neiman Marcus Group had $4.6 billion in debt and faced a loss of $470 million.

Sears, the former monarch of the catalog business sector, risks falling under the weight of their substantial real estate portfolio. Its revenue has nearly halved in the last decade, exhibiting no growth since 2005.

So what is the primary catalyst for this deterioration? Experts point their finger at the increasing preference for online shopping over traditional brick-and-mortar stores. E-retailers are driving the majority of growth in sales of consumer goods, and many traditional retailers are rapidly closing physical stores and shifting resources to e-commerce.

“We are dramatically overstored. And that’s why we’re going to close tens of thousands of our stores,” Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, warned in a Bloomberg BusinessWeek interview. “We are overstored and the fastest growing area is online. In a battle for market share… you go after every dollar and only the strong survive.”

However, the problem is not a reluctance to invest in e-commerce but the inability to turn around profit. To compete with e-retailers such as Amazon and Net-a-Porter, many physical retailers have already heavily invested in e-commerce. In recent years, Neiman Marcus bought MyTheresa, Nordstrom acquired Trunk Club and HBC (owner of Saks Fifth Avenue) bought Gilt Groupe. While these ventures have boosted revenue, they have not always increased profits since these websites sell products at very low margins. Nordstrom, for example, took a $197 million write-down on Trunk Club because it was unable to generate sufficient profits.

Additionally, in the past, the success of traditional retail had hinged on achieving economies of scale and driving revenue through quantity. But in today’s age of high digital output, customers that do make the trip to physical business locations are seeking more of an experience. According to Brendan Witcher, an analyst at Forrester Research, there is little differentiation in the shopping experiences of major department stores with large physical footprints.

“They’re trying to be good at everything,” Witcher told Business of Fashion. “It’s about creating unique customer experiences.” 

Struggling department stores should look towards the retail strategies of nimble brands that have heavily invested in in-store experiences. Retailers, such as TOMS, Martin Margiela and Nespresso, have created interactive or themed physical locations to help differentiate their brands and boost their value propositions. While department stores have the unique challenge of designing shopper experiences for large open spaces, they need to better persuade shoppers to shop in-store in order to compete with online retailers. One possible solution is to down-size and increase the revenue per square foot by enhancing the in-store experience.

“With the rise of e-commerce and mobile shopping, and as consumer preferences change, retailers are finding that they no longer require the large spaces that were effective just years ago,” David Berliner, Business Partner for consumer products at BDO USA, said. He describes the process as “right-sizing” stores from ultra-sized spaces.

Unfortunately for department stores, though, e-retailers are not the only businesses taking away market share. Off-price retailers are also siphoning customers away with their impressive discounts.

In today’s fast-paced fashion world, styles rapidly fall out of favor before retailers can effectively turn around profit. Popular goods are ordered in mass, but when styles are changing so rapidly, department stores are often left with large stocks of products that are no longer in demand, further contributing to the overuse of space.

Off-price retailers often buy unbought designer goods and re-sell them for a significant discount. With off-price retailers such as TJ Maxx and Marshalls generating $147 more per square foot than Macy’s, it is unsurprising that major specialty stores are keen to participate in the chase.

Facing a 42 percent stock drop from a year ago, Nordstrom is hoping to capitalize on its off-price chain, Nordstrom Rack, to help supplement its struggling department stores. Due to the resounding success of Nordstrom Rack, the company expects to have 300 Nordstrom Rack stores by 2020. As Nordstrom has done, department stores can potentially re-organize their brand architecture to offer off-price products and better compete with off-price retailers and fast fashion stores.

Finally, with the structural technological shifts that have occurred in the last decade, department stores have no choice but to invest in keeping up with the constant evolution of digital enhancements.

Owing to the prevalence of smartphones, the consumer’s shopping experience is becoming more personal. New features include touchscreen purchasing, virtual sizing and virtual fitting in dressing rooms. Proximity marketing, which allows customers to zero in on location-based promotions via Bluetooth, is gaining popularity. Struggling physical retailers can adopt these relatively low-effort changes to draw shoppers to their physical locations.

Moreover, it is imperative that department stores utilize technology to capture young shoppers. Given that 72 percent of millennials prefer paying for experiences over physical objects, according to a poll conducted by Harris, it appears likely that there will be a structural demographic shift that hurts department stores. Already, the average age of shoppers at major department stores is rising. Eventually, department stores will need to replace baby boomer shoppers that are aging out, and integrating technology can help attract young consumers.

Indeed, the rapid deterioration of the country’s major department stores is alarming. However, based on the successes of the few physical retailers that have managed to fend off e-retailers, best practices for struggling department stores include improving in-store shopping experiences, investing in technology, expanding omni-channel distribution and tapping into the off-price retail sector.

Admittedly, these are not bullet-proof solutions, but the cost of doing nothing seems to be too high for America’s department stores.

“Did you just bring up the A-word?” FitForCommerce CEO ’90 asked me in a playfully disgusted voice. My mention of Amazon was enough to cause a visceral reaction.

As the founder and CEO of FitForCommerce, a boutique consulting firm that helps retailers develop e-commerce channels and digital implementations, Wu is an expert in retail. She has partnered with over 100 companies, including apparel heavyweights like Calvin Klein, Levi’s and Gucci. She is also one of many to recognize the existence of a huge threat to brick-and-mortar profits: a computerized monster known as the e-retailer.

It is no secret that the meteoric rise of e-retailers has eaten into the successes of physical retailers that have long relied on the “in-store customer experience.” Money’s Brad Tuttle reports that one such e-retailer, Amazon, dominated this holiday season at the expense of many department stores: Amazon increased holiday sales by 11 percent compared to 2015’s numbers and was responsible for nearly 40 percent of all online purchases. E-commerce in general had a widely successful holiday season with total web sales exceeding $1 billion almost every other day from Cyber Monday until Christmas Eve.

Large brick-and-mortar department stores, however, suffered greatly this past December. Tuttle reports both Macy’s and Kohl’s have announced plans to close over 100 department stores each. Moreover, Amazon’s success story over the past decade has had a spillover effect on other e-retailers. Companies such as Rakuten, Newegg, and China’s Alibaba are reaping the reward of increased online shopping activity, causing even more competition for physical stores.

According to Kanaru Fukushima, a consultant at FitForCommerce, the issue for traditional retailers is the extent of online and mobile retailing’s popularity, which has contributed to declining figures of in-store revenues. During 2016’s Cyber Five (a nickname for the five-day period of Thanksgiving, Black Friday, Small Business Saturday, Super Sunday and Cyber Monday), consumers spent 15 percent more money online than in 2015 according to a November press release by Adobe. Ana Smith of the National Retail Federation reported that five million more people shopped online compared to 2015, while the number of in-store shoppers decreased by a whopping three million.

Yet should physical retailers completely ditch their brick-and-mortar efforts given the decrease in sales? Wu thinks the answer is no, instead arguing that physical stores can still provide a level of customer experience that e-commerce can never achieve. Mike Cassidy, a Vice President at Google, points out that “in an information era…when e-commerce sites are approaching the limit on how fast they can get a package to a consumer’s home, experience is one of the few places a retailer can stand out.” Wu believes that there is one major area in particular that stores must develop to compete with e-retailers: personalization through technology.

Part of the in-store experience involves a sales associate helping a potential customer find a product based on their individual preferences and needs. Wu believes optimizing this aspect of the in-store experience will make customers willing to shop at a physical store rather than online.
It is also worth pointing out that Amazon and other e-retailers have already made use of personalized online advertisements, which use one’s search history to advertise specific products tailored towards a shopper’s buying habits and previous searches. Wu believes that physical stores must meet, and exceed, this level of technological personalization. Furthermore, it is easy to ignore online advertisements. The same cannot be said for in-store personalized advice, which allows the store associate to directly communicate with a potential buyer.

Wu also recommends a whole slew of technological tools to her clients that can help personalize their physical stores. She recommends that stores use cookies on their websites, so companies better understand which pages have received the most traffic and modify their physical stores accordingly.

“If I were a shoe company and I saw moccasins were getting the most views online, guess what I’m stocking my store with?” Wu said.

As for customer behavior within physical stores, she recommends a mobile tracking software called iBeacon, which uses Bluetooth Low Energy Technology to track in-store consumers’ mobile devices. iBeacon records which areas of the store get the most foot traffic and sends tailored promotions and newsletters directly to shoppers’ phones. Fukushima also recommends all stores record customer emails whenever possible, in order to send repeat buyers personalized online newsletters based on their purchase histories.

At the National Retail Federation’s (NRF’s) Big Show for 2017, Wu delivered a presentation on how technology can help sales associates personalize the in-store experience. She asserts that today’s customer expects the sales associate to already know them, since the instant-gratification of technology has made the shopper much more impatient. According to NRF figures, 63 percent of retailers allow associates to look up unavailable items online, 61 percent of retailers offer “buy in store and ship anywhere” programs and 32 percent of retailers offer the option to buy online and pick up in-store. Wu believes everyone should be doing these three things in order to compete with the technological convenience of e-retailers, as well as to create a more personalized experience for shoppers.

Also speaking at the NRF Big Show, Dominique Essig, Chief Experience Officer of apparel company, Bonobos advocated for the integration of a cloud-based mobile platform named Tulip Retail. This software allows store associates to perform important functions while on the job by using an iPad. Tulip includes services to record and store the emails and buying preferences of clientele, to have the entire store’s catalog on demand and even an option to checkout items. This optimized technology not only allows associates to enhance personalization by tracking every in-store and online purchase, but also lets customers “forget about the transaction…and focus on the personal relationship” that differentiates physical stores. After piloting this new technology in January 2016, Bonobos saw a 12 percent increase in average order value, and a 4.7 percent increase in units per transaction.

Other companies have also been implementing different technologies into their brick-and-mortar stores. Emily Bezzant, head analyst at retail technology platform EDITED, advocates that retailers use artificial intelligence to track customers’ shopping histories, social media profiles and interests. Bezzant points out that The North Face and 1-800-Flowers have both implemented artificial intelligence with success. Aubrie Pagano, founder of online women’s clothing boutique Bow & Drape, has used technology to allow customers to design their own items.
“People are looking to be part of the [design] process,” Pagano explained. “For millennials, expression is such a core value…of what we purchase.”

Are the days of the brick-and-mortar department store a thing of the past? Maybe not. A Moody’s report in mid-December still projects that total retail sales in 2017 will be stable with a growth of six to eight percent. While further improvements towards online infrastructure and e-commerce are necessary, physical stores can still thrive by optimizing personalization via technology solutions. Wu also notes that there is a historical silver lining for retailers with nearly-empty stores: online-only retailers, such as Warby Parker, Bonobos and Etsy, have often developed physical plants once they have become successful enough to afford the overhead costs of doing so.

What is almost certain is that traditional stores will need to change their game plans to better compete with e-retailers. While fighting fire with fire may seem counterproductive, retailers must fight technology with technology if they wish to avoid going up in flames.