Department Store: Dinosaur or Opportunity?

The Washington Post has two good pieces on this topic, Steve Pearlstein's business column, and Annys Shin's article about the major difference between May and Federated--a focus on price versus a focus on core customer segments.

Pearlstein's column, "Stores Should Look Back To Find Future" reminds us once again that department stores started the whole retail as entertainment and spectacle trend more than one hundred years before retail and real estate consultants coined the term.

He says the decline "...is part of the larger story of the fragmentation of mass markets that is driven by changing technology, consumer tastes and new and better ways of doing business.
The irony is that the department store turns out to have been unwittingly complicit in its own undoing. When developers first offered them sweetheart deals to serve as 'anchors' at the early shopping centers and malls, it seemed like a no-brainer -- an easy way to follow their customers to the suburbs while getting the other retailers in the mall to subsidize it. But in time, the Darwinian competition of the mall produced stronger specialty stores with national scale that were able to provide a wider array of more interesting products in more inviting settings. The rest of the mall, in effect, became the department store, leaving the 'anchor' to compete with discounters and new big-box retailers at the next highway interchange."

To compete successfully "The trick here isn't to beat Wal-Mart at the price game -- it's to lure back customers with the kinds of merchandise and shopping experiences they'll remember fondly 50 years from now, the way some of us remember blueberry muffins and eau de toilette." Just like Whole Foods market in the previous blog entry.

Shin's piece, "Comparison: Shoppers -- Knowledge of Its Customer Types Guides Federated" points out that while May Company focuses almost completely on price promotions, discount coupons, and the like--which attracts bargain hunters not brand and store loyalists--Federated has segmented its focus on four different types (really eight--4 men, 4 women) of core customers:

traditional--the J. Crew type;
neo-traditional--embraces change, works hard, the men wear suits;
contemporary--fashion-conscious, technologically adept; and
fashion--trend and fashion conscious "New York City"-types.

Federated has named each of the men and women that represent these categories (Julie and William, no Keishas or Fidels by the way) to better focus their buyers' attention. There is a good graphic that summarizes the difference between the companies. There are close similarities, but key differences--Federated has a younger and wealthier demographic.

As a fluke, yesterday I came across a book by Cecil Hoge, called The First Hundred Years are the Toughest about the competition between Sears and Montgomery Ward. Published in 1988, it predates the death of Wards. Sears kept focusing on the market, and Ward's didn't, and they couldn't compete. Perhaps the failure of these mass-market chains presaged the difficulties that most department stores (except for Nordstroms and Neiman-Marcus and I suppose Federated) have today.

Skimming the book, I was surprised to learn that some of Sears most revered executives came from Ward's. They left because the top executive, first Theodore Merseles, then Sewell Avery, refused to listen. (Avery is famous for expecting a post-WWII depression, because that was what happened after WWI, and postponing investment in new stores. Meanwhile Sears expanded with the growth of the suburbs.)

One of the most fascinating points in the book is how Robert Wood gradually refined his ideas for a chain department store. Remember that traditional downtown department stores (the original stores, like Wanamakers) focused on women and the carriage trade. (There is an excellent chapter on the history of women and shopping in the book Harvard Design School: Guide to Shopping.)

"Wood wanted to attract men. The bread and butter items would be those sold by hardware stores but at a lower price... Wood wanted to be on the outskirts of big cities, not downtown"
"He wanted to emphasize hard goods rather than soft goods. He wanted to go after blue-collar workers...expand automotive products for the new army of auto owners, appliances and home supplies for the new owners of homes, as well as radio accessories. Essentially he wanted Sears to become a hard-goods discounter (but with Sears' private brands) to workers and home owners, many of whom could not afford such products except at Sears' low prices." (p. 94) Wood gave Sears a store development program, while Ward's continued to focus on mail order.

Ward's refused to okay moving forward with Wood's plan for opening stores (1925), so he just went over to Sears. (Note that the first Sears store in the Washington, DC region opened at Bladensburg and Benning Roads in 1927, 2.6 miles from downtown--a short trolley ride away at the time--and it was one of the first 20-30 "A" Sears department stores to open nationally). Wards continued to be excellent at mail order sales.

There is so much good stuff in this book. Sears pioneered COD. Sears discovered that packaging reduced theft and increased sales. In the mail order business, both Sears and Wards figured out that "multiple offers of two or more items, normally bought one at a time even with the slightest savings jumped catalog sales per square inch. Sears applied this to store selling...with paint, shirts, work clothes" etc. (p. 169)

Of course, we know that Sears hasn't been able to make the transition to the new retail world, and is merging with Kmart while of late, we hear that JCPenney is resurging--certainly they had a lot of hot advertisements during the Academy Awards broadcast, which is highly watched by women attracted to the "soft goods" focus of JCP. Interestingly enough, perhaps the new Sears Grand concept brings Sears back more to the roots of the store development program pioneered by General Wood.

Hoge summarizes his book thusly:

"Why had Sears passed Ward in sales and grown over 10 times as big? Why had Sears led all competition? Why did Sears continue to confound the doom-and-gloom Sears watchers?

1. An outpouring of entrepreneurship and driving energy with:
a. shrewd selection and exciting presentation by Richard Sears of needed items at lowest prices.
b. his use of the newest most effective marketing methods, starting with COD, the greatest use of magazine advertising, and the most intensive distribution of catalogs.
2. The three-pronged drive of Julius Rosenwald for:
a. maximum efficiency of service
b. solid financing by public issues
c. highest ethical standards
3. More management strength in greater depth--better selected, trained, motivated, and disciplined
4. The analysis of the most probable future changes in marketing and the adaptations to them started by Robert Wood with:
a. the drive to open Sears stores which was begun in 1925
b. the launch of Allstate Insurance in 1931
c. the race to open Sears suburban stores and then shopping-center stores after WWII
5. More dialogue with customers and greater research and market testing of more items, services and selling methods in more unique combinations of ways--such as:
a. far more mail order tests by means of catalogs or ads in every logical mediaum
b. the most store tests of product, packaging, display and advertising
c. more direct marketing tests to open charge accounts and to sell credit cards, financial services, travel, car rentals and other services
d. more research of what customers wanted in a product and were not getting, and research of customer willingness to buy products and services not traditionally offered by Sears
6. Management, confidence and determination with
a. strong backing of executives
b. the ability to plan and persevere long term where needed
7. Constant appraisal of lagging problems and potential dangers:
a. often before critics pointed them out
b. with quick drastic steps to cut and avoid losses
c. and by retesting and often succeeding with better timing later
8. Competitive spirit:
a. to succeed in entirely new fields
b. to hold the lead in general merchandise retailing.

Ward fell behind because of four serious and early errors:
1. Continuing loss of highly talented and trained executives
2. Failure of the Board of Directors to accept the proposed plan by Robert Wood to go into retail stores
3. Failure of Board of Directors to replace Sewell Avery
4. The reluctance after Avery left to take steps drastic enough, widely enough and rapidly enough to stop losing operations and thus incur big initial losses.

"Sears changed as its customers did, but kept its basic philospohy, such as centralized buying and decentralized selling by the stores." (pages 255-257)

There's a lot to think about as far as traditional shopping districts are concerned.