Department Stores And Malls Will Have A More Difficult Time Bouncing Back From Coronavirus Closures

Department stores and malls are encumbered with large amounts of square footage, heavy investments in real estate and significant reliance on apparel products which will make recovery from coronavirus store closures a more challenging process. Long lease agreements and a variety of merchandise suppliers plague department stores. Many apparel tenants with varying degrees of lease arrangements and an abundance of unleased space are burdensome for malls. The change in consumer behavior will impact both department stores and malls. 

A step-change in consumer behavior may reduce traffic to department stores and malls

Consumer sentiment is a significant consideration as stores begin to reopen in a major way across the U.S. Even as the economy moves toward opening up more non-essential retail stores, shoppers may not be ready. Many customers have changed their purchasing behavior over the past six weeks to include more online shopping, curbside pickup and use of mobile devices for order ahead and pick-up in store.

Ulta Beauty
ULTA, a multi-branded store that offers a wide variety of beauty products across several price points, had a 2% increase in loyal customers in the first quarter when, for most of the quarter, all stores were closed. Many of the customers purchased online or used curbside pickup. Nordstrom
, which already had a strong online business pre-pandemic representing more than 25% of total sales, experienced a 50% growth in e-commerce customers.

Once customers change their purchasing behavior, a large percentage of those customers will not revert back to their previous shopping habits. In a recent McKinsey & Company survey, 40% to 60% of surveyed consumers who adopted these new purchasing methods intend to continue. Foot traffic to non-essential retail stores will be less than pre-pandemic levels, and the outlook for a return to those levels is uncertain. 

Department stores and malls are large environments with many people

Many consumers are comfortable with opening up the economy in small ways with fewer crowds, however, they are apprehensive about traveling to larger areas with more people. Smaller non-essential retail stores are more comfortable environments as customers can expedite shopping trips and interact with fewer people. Shoppers may be hesitant to venture out to department stores and enclosed malls which attract larger crowds and imply more lengthy excursions. The McKinsey & Company survey suggested a drop of 17% in mall traffic from participants regarding post-COVID-19 behaviors.

The department store business model is complex but showing signs of flexibility

The challenge with department stores is the heavy reliance on third party suppliers and the amount of inventory required to stock stores that are typically over 100,000 square feet. The complex business model does not allow for extreme flexibility and nimbleness. The supply chains require a six to nine-month planning cycle and the real estate cost commitment is significant and largely dependent on mall locations. However, the coronavirus pandemic has forced these companies to quickly respond to stores being closed due to government mandates and safety concerns, and department stores have begun to show a hint of flexibility.

Nordstrom in the recent first-quarter earnings call discussed the two key areas that management has focused on since stores were closed in March: inventory cutback and a reduction in the amount of cash being used. “We successfully strengthened our financial flexibility by increasing liquidity, lowering inventory by more than 25 percent from last year and significantly reducing our cash burn by more than 40 percent from March into April,” said Erik Nordstrom, CEO of Nordstrom. The company stated they were able to quickly cancel inventory orders by 80% in April. This action by the company stopped the flow of products coming into the stores for March and April and has allowed new products to be ordered for June which will be aligned with consumer demand. Macy’s
M was able to test, iterate and scale curbside pick up in nine weeks across 300 stores. The plan is to open all stores over a seven-week period beginning May 4.

 Digital investments pay-off but will not help foot traffic to the stores

Department stores are continuing to turn to digital in order to make up for the current decrease in store traffic. Initiatives include curbside pickup, expanded e-commerce, and order ahead, pick-up in store. Customers that interact with a retailer in a number of different shopping methods spend more money, become more loyal and are more profitable. Nordstrom customers that shop across three methods spend seven times more on average than customers that only shop in-store or through an online-only method.

When customers take advantage of shopping online and use curbside pick-up, foot traffic in stores is decreased, however, those customers tend to make more frequent purchases and spend more money with the retailer. Purchasing online helps with the discomfort of trying clothes on in the stores but may fuel a higher return rate.

Apparel retailers create safe fitting room protocols, but the shopper is not ready

Department stores have a large percentage of their sales in apparel. Macy’s annual report from last year shows women’s apparel at 22 % of sales. Nordstrom women’s apparel accounts for 31% of total sales. Apparel stores and department stores have challenges in terms of customer comfort levels including trying on apparel and dealing with customer returns.

While many department stores have established practices that may provide a safe shopping experience in fitting rooms including cleaning regimens and leaving apparel untouched for a period of time after being tried-on, many shoppers still remain uncomfortable with trying on clothes.  

Malls are heavily reliant on apparel and department stores

Malls typically have many apparel stores and are anchored by department stores. In a recent report from CNBC, the fourteen largest department store and apparel brands make up 25% of the U.S. mall space. Several brands that have recently filed for bankruptcy include apparel brands and department stores which have many mall locations such as Neiman Marcus, J.C. Penney, J.Crew and True Religion. Macy’s and J.C. Penney have the largest amount of mall space in the U.S. market.

Shoppers will eventually head back to department stores and malls but much of the physical space will be different than it was pre-pandemic. In the short term, social distancing, physical assets like plexiglass at check-outs, one-way aisles and face coverings will become the norm. Neiman Marcus, like many other retailers, is extending return policies.

The future of department stores and malls

In the long term, department stores will reduce footprints and minimize the number of fixtures on the floor to create more shopping space for customers, while also reducing the number of stores overall and shifting to more off-mall locations. In-store enhancements will include virtual try-on applications, new fitting room designs and contactless check-outs. Malls will continue to add additional services like kids clubs and dog sitting, more entertainment options and elements of outdoor spaces. 

In Macy’s first-quarter earnings call Jeff Gennette, CEO of Macy’s, discussed a future strategy that includes reducing both the number of stores, the number of brands within the store and purchasing off-mall locations. Macy’s will be focusing on private label and will continue to invest in online, mobile app, curbside pickup and buy-online, pick-up in store.

Consumers expect a longer-lasting impact on their routines and finances as the COVID-19 crisis continues. According to the McKinsey & Company survey, 41% of respondents said their income decreased from the impact of coronavirus. The reduced income will impact non-essential stores like apparel which rely on discretionary spending, inevitably affecting the bottom line of department stores and malls.

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