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Why American Department Stores Are ‘Broken’

Struggling American department stores still place the biggest orders, but increasingly rely on markdowns to drive foot traffic and sales, resulting in a vicious cycle with ramifications across the industry.
Macy's flagship store in Herald Square, New York | Source: Shutterstock
By
  • BoF Team

On March 3rd, the Council of Fashion Designers of America (CFDA) and the Boston Consulting Group released a 12-page study on how to fix the "broken" fashion system. The study covered the much-discussed misalignment of the industry's runway and retail cycles. But equally interesting were its findings on "early" retail deliveries, which are increasingly out of sync with the physical seasons and result in markdowns during what should be peak selling periods, hurting full-price sales potential. "As it stands, Pre-Fall clothes are delivered from April through July, while Autumn/Winter clothes are delivered from July through October," BoF reported in March. "Heavier items like outerwear and knits are often deeply discounted in January when cold weather finally hits."

Perhaps the guiltiest parties of all are large American department stores, which — according to frank conversations with brand executives and designers, as well as retail analysts and consultants — push early deliveries more than any other entity in the fashion ecosystem. While these retailers still often place the biggest orders, they have suffered enormous setbacks in recent years.

Indeed, the latest round of financial results weren't encouraging: Macy's saw a 5.6 percent drop in comparable store sales in the first fiscal quarter of 2016; at Saks Fifth Avenue, they were down 5.7 percent in the same period. Even Nordstrom, which has been praised for its forward thinking among its peers, saw comparable sales drop 1.7 percent in its first quarter.

Weak performances such as these have compelled retailers to increasingly rely on markdowns to drive foot traffic and sales, resulting in a vicious cycle with ramifications across the industry.

For decades, being carried by a major, world-renowned department store could transform a brand from interesting upstart to global player. But much has changed.

Brands and designers also complain that many American department stores demand multi-season exclusives from smaller labels, which limit their ability to grow. What’s more, stores sometimes charge brands for not meeting specific shipping guidelines, while many also ask for discounts on large orders. If they can’t sell the goods, some term sheets even require the seller to buy back the product, something brands that utilise bridge loans to float their businesses from season to season simply can’t afford.

For decades, being carried by a major, world-renowned department store could transform a brand from interesting upstart to global player. Sometimes that’s still the case. But much has changed.

The underlying woes of American department stores are manifold. For one, during the 2008 recession, rampant discounting by American retailers led shoppers to see sales as the new normal. Department stores also face a number of new competitors, from increasingly sophisticated e-commerce players to brands themselves, which have significantly expanded their direct-to-consumer sales channels. As one American designer with more than $100 million in annual revenue told BoF, “Ten years ago, you needed a major department store to be successful. Now, you need Instagram.”

What’s more, unlike department stores in Europe and Asia, which are largely composed of brand-operated shop-in-shops and act more like landlords than retailers, generating revenue via rental income and sales commissions, American department stores mostly operate a traditional wholesale model, which exposes them to enormous inventory risk. As a result, buys can often be watered down, leading to a lack of differentiation and personality, eroding their position in the marketplace. Designers often complain that department stores encourage them to create product similar to what is working elsewhere for other brands, further leading to a sense of homogenisation.

American department stores are doing what they can to regain their relevance. Exclusives, while not always beneficial to brands, can create buzz. Some retailers, including Saks Fifth Avenue, Nordstrom and Neiman Marcus, are also investing heavily in the off-price market in order to supplant lagging sales of in-season goods. Pressured by activist investors, Macy's recently hired a senior vice president of real estate with the hopes that the public company can yield greater returns on its real estate holdings, which are thought to be worth billions of dollars. Of course, department stores can also scale down their square footage (Macy's is shuttering 36 outposts) and focus on developing multi-channel strategies that seamlessly link a more playful and discovery-oriented retail experience to e-commerce.

And for retailers that fear becoming simple landlords by following the concession model, they need look no further than their most successful counterparts abroad, some of which insist upon determining the way they buy merchandise, so as to maintain the store’s overall personality (something, it must be said, many American department stores lack in the first place).

But what about simply offering clothes that people want to buy at the time they actually need them? Selling clothes in-season — capitalising on consumers’ increasing desire to wear something immediately after it is bought — would also mean higher full-price sell-throughs for both stores and designers. To make the shift, large retailers would need to “take a hit” for at least one cycle. It wouldn’t be easy to stomach, especially for publicly traded companies, but the long-term payoff could be a boon to the industry as a whole.

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