DEAD MEN WALKING

We have recently witnessed the demise of British Home Stores (BHS) in the United Kingdom. For those of you from outside the UK, this is a well-known department store which has been on the high street for around eighty years and, at the time of its demise, had 164 stores and employed 8,000 people directly within its store portfolio.

While currently there is much debate about the behaviour of its owners and previous owners in terms of how they generally ran the business and how one in particular, Sir Philip Green sold on the operation to an individual of dubious business background, it is possibly more interesting to enter into some general discussion on the relevance and role of department stores in modern-day retailing.

Department stores have been a constant feature since the early part of the19th century and emerged shortly after the industrial revolution as a response to rising prosperity. Essentially they are typically large stores which sell a wide range of merchandise which are categorised into different “departments” within the store and allow the shopper to carry out a multitude of purchases. Over the years the product categories have increased across a wide range of categories: clothing to jewellery; stationary to electrical goods and so on.

However in the current retail climate of online retailing, backed up by mobile channels and social media, many commentators have questioned the relevance of such a concept.

To be clear, department stores vary in terms of their product offerings and value propositions. Some are at the low end in terms of price and relative quality. Primark for instance might fall into this category. Other retailers such as John Lewis Partnership (in the UK), Macy’s and Nordstrom (in the US market) have pursued a more focused strategy on quality and innovation. All of them have been to a greater or lesser extent successful in terms of building sales and customers.

A Verdict retail review of BHS in 2015 criticised the retailer on the ground that it had made a number of strategic mistakes which ultimately caused its present downfall.

They cited the concept of the “squeezed middle”: a term used by politicians to describe the economic situation which in their view has prevailed in the UK for the past decade or so. This theory is built around the notion that the middle income earners inevitably pick up a disproportional part of the taxes and expenditure (when compared to low and high income citizens) and that their disposable income has declined in real terms as a result. When applying this concept to retailing, it suggests that such individual caught in this “trap” inevitably see greater value or as the American say “more bang for their buck”. This puts pressure on retailers who sit in the middle: offering no point of differentiation on price (at the low end) or quality (at the high end).

Retailers such as Debenhams and Marks and Spencer have tried to reinvigorate their product ranges and offerings with some limited success. What has BHS done over the past few years by way of response? Very little according to Verdict research. They cite the experience of BHS with its ability to convert visitors to its website to a sale: (28%). This compares to Debenhams (42%) and M&S (52%).

With regard to its physical stores, we also have witnessed little by way of inspiration also. The facia of its stores is tired and dated. The same could be said of its merchandise within the stores. This inability to adapt and change is in sharp contrast to department stores such as Macys and Nordstrom in the US. Macys over the past few years has quickly introduced an integrated and focused omni-channel strategy. Nordstrom has also increased its overall profitability due to investment in its e-commerce and mobile platforms. They have also introduced a number of high end retailers and brands into its stores via its “shop-in-shop” programmes. This initiative arguably goes to the heart of what a successful department store is all about. Think about it for a minute. The typical department store has a large space to fill. The onus is on it to keep its target audience interested and excited. The best way to do this is to consistently refresh its offerings. This can be done effectively when new brands are introduced in the concession areas. Over time this leads shoppers to expect choice and variety which translates into value. End result? They keep coming back for more. Id department stores successfully maintain and refresh their own brands also, they can provide in theory, an even more interesting mix of product for its shoppers.

When we reflect on the woes and perils of BHS, it is very difficult to suggest that it has come anywhere near meeting these requirements for continued success in the modern retail market-place. Arguably the change of ownership over the years has impeded the need for change and progress. Combined with high rents to be paid on their portfolio of stores, the retailer became very unsustainable and the writing was on the wall a long time before its demise in May 2016.

The fact that the population of over forties is growing in the UK in theory should have provided BHS with opportunities to regain some ground; given that this is their core market. However even this segment did not respond with any enthusiasm to the value proposition of BHS.

Let us go back to the general question as to the role of the department store in the future.

Some commentators argue that it can still play a significant role as an anchor tenant in major shopping malls. In Asia in particular the number of middle income earners is project to grow significantly over the next decade. Retailer-anchored shopping centres have not taken off to the same extent as in Europe but this is likely to change.

Japan is perhaps the most advanced in terms of retail development in this area. Most of the expansion with respect to department stores occurs at the high end. For instance the Isetan department stores in Japan regularly introduce designers and specialty shops to address the ever-increasing expectations of the Japanese shopper. A Thai-based retailer; Central, also is expanding in Asian markets and follows a similar approach by supplementing its store business with franchise brands such as Muji and Nike.

We see some commonality here when we compare Asia with the US and European experiences. The successful department stores consistently refresh and change their product offerings and also invest in a more integrated omni-channel strategy. The lesson here is to continually look for opportunities to partner with brands either through store-in-store programmes or franchised brands.

Potentially there is a line of argument to suggest that department store will not disappear off the high street or shopping malls. We shall see!

 

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