Despite struggles and general underperformance in 2013, most department stores aren’t going away anytime soon. According to London-based retail information specialist Verdict, the global department store market is expected to grow by 22.2% in the next five years, an increase equivalent to $100 billion.
And much of that growth will be owed to a 38.1% forecast rise in spending in China, which, in addition to other Asia-Pacific countries, will account for nearly half of the world’s $100 billion incremental spend.
According to a report released Thursday titled, “Global Department Store Retailing,” 30 percent of all department store sales will be made in China by 2019 due to rising affluence, increasing urbanization and expansion opportunities for domestic and overseas players in the Asian nation.
Kate Ormrod, a Verdict analyst and the report’s author said, “There are extensive growth opportunities in China; however, as overheads such as labour costs rise, we expect less profitable and weaker players to fall out of the market. Remaining players must further differentiate their offers through greater use of private label ranges, investment in in-store environment and brand exclusives to drive footfall and sales.”
The report looked at twelve of the top department stores worldwide and seven defined geographic regions to determine which markets would hold the most potential. The department stores surveyed include: six based in the U.S. including Macy’s, Sears, Kohl’s, Nordstrom, J.C. Penney and Dillards; two in Europe, UK-based Marks & Spencer and El Corte InglÃ©s in Spain; and four based in Japan including Isetan Mitsukoshi, Sogo & Seibu, Takashimaya and J Front Retailing.
Asia Pacific, Latin America, China, Middle East & Africa, North America, Europe and Japan were the seven defined regions.
Over the next five years, Asia Pacific is expected to dominate the market with a predicted 49.5% growth in expenditure followed by 40.9% growth in Latin America and China’s 38.1%. North America’s five-year expenditure growth is projected to be 12.6%, driven mostly by U.S. expenditure, but the major growth opportunity will be expansion into Canada.
During a phone interview with Sourcing Journal, Ormrod and fellow analyst Jessica Fioriti discussed opportunities for department store growth in Canada.
Fioriti said, “Canada is benefiting from premium players expanding. Nordstrom entered the market in late 2013 and Saks plans to launch up to seven stores in the country in 2014. We expect Canada’s consumer confidence to gradually improve and continue to drive department store expenditure into 2014, making it an attractive market for new players.” She added, “Sears [Canada] has had a difficult five years, closing five of its stores in major cities in H1 2014 and selling back store leases across eight malls — providing a perfect opportunity for potential new entrants such as Bloomingdale’s and Barneys to enter the market and capitalize on the market share Sears has lost.”
Sears Canada will soon close its flagship store in Toronto’s Eaton Centre this month and Nordstrom will be settled in its place by 2016.
It’s no secret that Sears and J.C. Penney (JCP) have been the weakest links among department stores. Based on the Verdict report, Sears and JCP were the greatest losers in terms of market share with Sears dipping 2.5% and JCP down 2.2%. Nordstrom and Macy’s were the only stores to grow market share over the five years from 2009 to 2014; Nordstrom was up 0.7% and Macy’s 0.3%.
Nordstrom is really the player to look at when it comes to success; the retailer is one of the biggest winners in the U.S. right now, Ormrod said. Known for supreme customer service, the Seattle-based chain took its second consecutive prize for North America’s favorite fashion retailer in a 2013 Market Force Information study.
“We expect the premium sector to continue to fare better than the core midmarket, with Saks and Nordstrom’s store expansion and strong customer appeal allowing them to grow their share of the market,” Ormrod said. “In the five years, we do expect to see a turnaround in J.C. Penney’s performance, though it will take time.”
While expansion into Canada is the prime growth opportunity for department stores in the next five years, in terms of expenditure the U.S. will still drive the North American market, according to Ormrod. “The growth in the US will be aided by a rebound in consumer spending as confidence returns and department store players better invest in multichannel and stores to lure shoppers in and encourage discretionary spending.”
But department stores, particularly those in the U.S., are going to have to invest in the consumer experience, Ormrod said. “They need more retail theater,” something the UK has so far done better than its American counterparts.
Ormrod said, “Department stores in the U.K. such as Selfridges are engaging consumers through the use of retail theatre and social entertainment to increase dwell time and encourage repeat visits and purchases. Selfridges is well known for its innovation in this area, having previously had a boating lake and mini golf course on its roof, and it is currently holding a Festival of Imagination, offering lectures, debates and workshops in its flagship London store. While I think Nordstrom’s engages shoppers in this way, there is room for improvement from the likes of Sears, J.C. Penney and Dillard’s if they are going to grow market share.”
The Verdict report did note a decline in global department store expenditure growth in 2013 as a result of a slower European market recovery and weak Japanese currency rates, but analysts forecast 2014 will see the market recover, growing by 3.5% as department stores invest in improving in-store services and multichannel offerings to encourage shopper spending.
Growth between now and 2019 will be driven by strong sales in the Asia Pacific region and improved growth in the U.S. Verdict notes that economies in Europe that suffered during the recession will recover and consumers will have increased discretionary spending.
In 2014, a sizeable 49% of department store expenditure will come from Asia Pacific followed by 26.4% in North America and 18.7% in Europe.
Verdict says Macy’s will lead the market in 2014 with 6.4% of the global market share and Sears is a surprising second with an expected share of 4.7%, followed closely by Kohl’s with 4.3%. Hopes for JCP are not high as the struggling retailer comes in last among the top department stores with a projected 2.4% market share.