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UK Department Stores – reasons to be fearful

David Rogers

The department store was once the king of the high street. From the mid-19th century, long before the advent of the internet, they were the original one-stop shop. They prospered as the cornerstone of many a high street or shopping centre. Such was the pull of a department store, there have even been instances of major department stores receiving lease concessions for acting as ‘anchor tenants’ in new shopping complexes. However, BHS’s administration in 2016 was a warning to other companies. 2018 has seen profit warnings, redundancies and store closures for the UK’s other major department store chains, providing clear evidence that times have changed.

After making losses for five of the last six years, House of Fraser announced in early June that, as part of a rescue deal, plans to close over half of its stores (31 of 59), which is expected to lead to the loss of 6,000 jobs. The closures include its flagship Oxford Street store.

2018 has also been a year of doom and gloom for Debenhams with falling sales and profit warnings accompanied by announcements of a turnaround plan likely to lead to job cuts and store closures. A third profit warning for the year was issued in mid-June, with annual pre-tax profits expected to be £35-40m, below previous estimates of £50.3m. Debenhams has 176 stores in the UK.

Marks and Spencer announced that its profits fell by 75% in the year to 31 March 2018 compared to the prior year largely as a result of falling sales and insufficient online capability.  They also pinpointed the need to be more decisive with their estates strategy and deal with store closures more quickly, as they prepare to close at least 100 stores by 2022. Marks and Spencer has 1,035 stores in the UK, 300 of which sell clothing, homeware and food. The remaining are mainly Simply Food convenience stores.

Like Marks and Spencer, John Lewis saw a large fall in profits of 77% for the year to 27 January 2018, although much of this was due to one off redundancy and restructuring costs. Underlying profits fell by 22%. This led to a much publicised reduction in the Partnership staff bonus, down to 5% of annual salary which is the lowest level since 1954. Headcount was also reduced by 1,440. John Lewis is owned by its 85,500 employees (the partners) and has 50 stores (along with 353 Waitrose stores).
Is this the end of the department store as we know it? Will any of the major chains survive? And what makes one chain more likely to survive than another? In a two blog series, we look at some of the factors that have led to the decline and where success can be achieved.

Reasons to be fearful

The stores
There are two main issues with the stores themselves – the layout and the lease – and both can be very expensive to resolve.

Many department stores have been open and operating for several years or even several decades, and in this time what consumers want from their stores has changed. Consumers want a store that is easy to navigate with clearly defined sections. They want to get lost only in their shopping haze, not in the labyrinth that is many of the older stores. Renovation like this isn’t always possible, particularly if the buildings are old, and is likely to be an expensive risk to take in the current retail environment.

The length of leases also represents a problem for department stores, as long lease periods mean that there is a lack of flexibility. When individual stores or stores in certain regions are underperforming, the natural business decision may be to reduce the size of the store or close it altogether, but the long leases prevent this without a hefty cost.

The range
As consumers and analysts ponder the reasons for the struggles of department stores, the product range is often discussed, both in terms of the variety and quality of products.
The very essence of a department store is that it stocks many different products for many different purposes, and so it doesn’t have the same focus as a purely fashion, homeware, food or technology retailer. And without this focus, it is hard to make sure that their product range is meeting the latest fashion trends and customer demands. In today’s market, with the amount of choice available to customers, a satisfactory range is not sufficient.

There is an additional set of challenges when considering whether to focus on own-brand products or selling other brands. Own-brand products are not available elsewhere, so have a unique selling point, but they need to be designed and made to make customers want to come in and buy them. Other brands are available elsewhere, but it is easier to buy-in products based on current trends.

The market
Department stores have been hit from all angles with a general slowdown on the high street linked to weaker consumer confidence, online competition and rising overheads such as business rates and a higher minimum wage.

The unique selling point of the department store was that it offered a large range of different product types and brands under the same roof. But in the internet age this unique selling point has somewhat disappeared – consumers can now get any product they desire without even leaving their house. And if consumers still want to go to the shops, there is competition in terms of both product quality and price from specialist retailers.

The price
As a means of competing in a wider market place and with falling sales, some department stores have turned to discounting prices in a bid to keep sales rolling in. But they are not competing on a level playing field with competitors who have similar cost bases, and so department stores are often the losers in this race to the bottom.

Department stores have historically been reliant on reasonably high margins which allow them to continue to invest in their products and stores. This squeeze on margins, leaves department stores with less to spend on improvements, meaning they are able to offer their customers less.

Tomorrow we’ll discuss how success can be achieved for department stores. In the meantime, if you’d like to discuss how these reasons to be fearful are affecting your business, please call +44 (0)20 7334 9191 or contact us.