The retail real estate market is experiencing a resurgence, yet department stores are struggling to keep pace. Once the undisputed anchors of shopping malls, these retail giants are now being outmaneuvered by discounters and specialty stores, leading to an increasing number of closures.
At Legacy West, a shopping development in Plano, Texas, the owners faced a pivotal decision. Should they add a department store to attract visitors and luxury retailers? Instead, Prism Places and its partners opted for a lavish food hall. Since its opening in 2017, the food hall has been a resounding success, drawing 30,000 visitors a week and attracting luxury brands like Louis Vuitton, Tiffany, and Gucci.
"We said, ‘Instead of going after a department store, let’s do something that’s more fun and more interesting and that will drive a lot of traffic,’” said Mark Masinter, a partner on the project. This strategic pivot reflects a broader trend: landlords no longer view department stores as essential to driving foot traffic.
The Decline of Department Stores
Department stores are hemorrhaging customers. Discounters are underpricing them, specialty stores are outmaneuvering them, and luxury brands are bypassing them to open their shops. In response, surviving operators are making significant moves to stay afloat. Saks Fifth Avenue’s parent company is acquiring Neiman Marcus, Nordstrom is exploring privatization, and Macy’s new CEO is closing stores to focus on enhancing the shopping experience at its remaining locations.
Despite these efforts, the long-term decline of department stores seems irreversible. Sales peaked just before the turn of the century and have been declining ever since, according to U.S. Census data. “Young customers aren’t shopping at malls and they aren’t shopping department stores in the same way they used to,” said Stenn Parton, Prism’s chief executive.
Historical Context and Market Shifts
The seeds of department stores' decline were planted in the 1960s, following a Supreme Court ruling that enabled discounting across retail. This ruling paved the way for the rise of specialty and discount stores like Walmart and Toys ‘R’ Us, which gradually eroded department stores’ customer base. Department stores, which once sold everything from household appliances to toothpaste, evolved into fashion-based stores but continued to lose market share.
The advent of online shopping further exacerbated their decline. Consumers can now order directly from retail brands, bypassing department stores and increasing retailers' profit margins. Retailers are also opening their stores, seeking to control the entire customer experience, from product display to store ambiance.
Current Market Dynamics
Department stores now occupy less than half of all anchor spaces in enclosed shopping malls. There are roughly 500 vacant department-store spaces nationwide, with more closures on the horizon as Macy’s plans to shutter 150 underperforming stores over the next three years. This decline is a significant reason why regional malls continue to struggle, even as other retail real estate sectors report record-low vacancy rates.
Department stores, once powerful drivers of mall traffic, are now among the weakest. Visits to these retailers have declined significantly compared to 2019. The sector’s sales fell last year and remained flat in the first five months of 2024.
Innovations and Adaptations
Despite the grim outlook, some department stores are finding ways to adapt. Macy’s new chief executive, Tony Spring, emphasizes improving the shopping experience, particularly in the shoe department. Investments in product assortment and service levels have boosted sales and customer satisfaction at initial test locations.
There are also bright spots. Some brands, like Nike, have reversed decisions to scale back their wholesale contracts. The family-run chain Dillard’s has found success by focusing on merchandising and customer service.
Transforming Retail Spaces
Mall owners are now better equipped to repurpose vacant department stores. At Tysons Galleria near Washington, D.C., Brookfield spent $126 million redeveloping a former Macy’s. The new wing, housing home-furnishing and entertainment retailers generates over $100 million in annual sales, more than four times what Macy’s was doing in the space.
“Landlords now feel that they have options for anchor locations,” said retail analyst Dana Telsey, founder of Telsey Advisory Group. “That’s different than in the past.”
Summary
The decline of department stores underscores a significant shift in the retail real estate landscape. While department stores struggle to retain relevance, discounters, specialty stores, and innovative concepts like food halls are thriving. For investors, understanding these dynamics is crucial. The retail market is evolving, and those who adapt to the changing preferences and behaviors of consumers are likely to emerge as winners in this new retail era.
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