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Department Stores Are Reemerging With a New Focus, Moody’s Says

After a long period struggling to cope with the e-commerce wave and shifting consumer buying patterns, U.S. department stores–those that are left–are emerging with a “leaner and more refined focus,” Moody’s Investors Service said in a new report.

While many still have a way to go in rebooting their approach to luring increasingly discerning and digitally oriented customers back to their stores, early indications are that the biggest companies are making progress.

“After two years of bruising underperformance, department stores are in the midst of their next big transition, which is making shopping as seamless as possible for an increasingly exacting customer,” Moody’s vice president Christina Boni said. “To do so, companies are undertaking the expensive but necessary process of rolling different shopping platforms–online, brick and mortar, and smart phone apps–into one.”

Online technology will continue to play a key role for retailers trying to stay relevant and competitive, according to Moody’s. The study estimates that department stores now transact more than 22 percent of overall sales online, which is well above the estimated 13 percent average penetration for the broader retail industry for fiscal 2018.

Department stores are using a range of strategies to satisfy customers that now have a wide range of shopping choices, Boni said. Some merchants are utilizing data analytics to build loyalty programs that have become critical differentiators, while others are using their websites to provide product and inventory information to customers.

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They are also trying to steer customers toward more cost-effective behavior, such as returning products purchased online to stores, where they could potentially make another purchase. Macy’s has quoted a 25 percent increase in sales to these customers and J.C. Penney has contended that nearly 40 percent of its dot com orders are picked up in the store, and while in the store, more than one-third of the customers make an additional purchase, Moody’s noted.

Department stores will need to continue allocating capital spending toward technology. Capital spending has remained relatively stable overall as a percentage of sales, despite the decline in new store development for the sector, with Moody’s estimating a 10.5% decline from 2014 to 2017. But the department store sector continues to outspend the overall retail space.

“Mobile applications are critical to remaining relevant, with shopping apps becoming the norm for many customers, allowing them to check prices, make payments, manage reward programs and track orders,” the study noted. “At the same time, department stores can leverage their online capabilities to mitigate some of the challenges associated with managing large, mall-based stores.”

According to Moody’s, Nordstrom and Kohl’s are good examples of companies that have shifted their spending toward technology and away from store expansion.

“We expect this shift to continue as more competitors embrace the importance of offering a frictionless experience between online and bricks and mortar, with the understanding that this is essential for engaging and retaining customers,” Moody’s said. “This seamless experience must take place on the front end to meet how customers want to shop.”

Retailers will also benefit as their supply chains improve.

“The focus on delivering an integrated front-end experience for the customer has forced companies to become more efficient with their supply chains,” Moody’s said. “But this transition has been costly, with companies in many instances carrying duplicative costs as they wait for their upfront investments to scale.”

Retailers’ investments in technology are expected to have a negative impact on profit margin, at least for the short term. Citing Nordstrom, “which has made considerable investments in the past five years,” Moody’s said the retailer is among those closer to a point of seeing easing profit margin pressures linked to such costs.