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Department stores: an inconvenient truth

Dr Nick Baker Chief Research Officer 30/10/2019

The internet has changed the way we shop. Department stores are worst affected. Only by focusing on convenience can they grow again.

Why are large-format department stores failing?"

September 2019, John Lewis announces its first ever half-year loss posting an underlying pre-tax loss of £25.9m . Last year, House of Fraser went bust. In May, M&S reported its third straight decline in profits. Debenhams issued a profit warning in March and not so long back BHS collapsed.

Why are large-format department stores failing?

  • Facilities: As more sales go online, investors don’t want to put money into bricks and mortar, and so the stores often look tired and shabby.
  • Range: Too much branded stock can be bought elsewhere meaning consumers have no compelling reason to visit stores to get what they want.
  • Profitability: Sluggish demand encourages marginal pricing and promotions. John Lewis cited rivals had doubled the number of “one day extravaganzas” which the firm says cost it £40m in the first half alone.

All of these issues could be fixed through store investment, more exclusive ranges and price discipline. However, the one issue that cannot be fixed is the internet.

The internet is not about price

It’s easy to think of the internet as a price deflator, pushing prices down and down. The larger threat it poses to retailers is convenience and disintermediation, cutting out retailers altogether.

The convenience trend

Convenience is the by-word of modern marketing. Consumers have too many choices and not enough time to make them, so convenience wins.

There was a time when department stores, shopping centres and even out of town retail parks were considered the pinnacle of convenient shopping: Single locations where everything was available in one place with easy parking.

The number of product choices in any given category has grown steadily over time. Single locations cannot house so much choice in one place. The internet has shrunk distances and delivery has become faster and cheaper. Physically going to a store is now less and less attractive.

Online consumers can get to grips with the shape and size of a retailer’s range in a fraction of the time it would take them to walk around a shop, where usually only a proportion of the range is on display.

Digital convenience makes the average shop feel inefficient, claustrophobic and limiting and department stores feel like walking round a museum.

Disintermediation and the rise of new middle men

It is however true that many department stores do have very good websites, John Lewis is an example. 39% of John Lewis’ sales are online. Like many brands’ websites, one can browse easily, move laterally, earmark choices and transact smoothly.

Nevertheless, the way we shop online is different to how we shop in store. Client research by Savanta shows that when consumers shop online they tend to start with a search engine, key in product features first with retailers and brands as a secondary thought.

Google > Black, jumper, cashmere, turtleneck, men, medium.

Dis-intermediators, or aggregators, like Google disrupt the online experience the retailer is trying to create by taking consumers past their front door straight to a virtual shelf: the first page of search results.

Think across to Google News searches, which transport the reader past the “newspaper brand” straight to the story.

Disintermediation (cutting out the middle man) means retailers must develop another form of convenience; mental convenience.

Retailer brands have to develop strong associations amongst consumers for each aspect of their range, so their consumers searches include the brand name. E.g. “Clarks, school shoes”.

This is easiest for retailers with a few products lines. It is hardest of all for departments stores, many of which sell over 100+ distinct categories. For example, John Lewis’s website has over 300 categories.

Google > John Lewis, Black, jumper, cashmere, turtleneck, men, medium.

This is a huge communications challenge and also very expensive requiring the creation and maintenance of complex memory structures in the general public.

Even Ikea’s top of mind product associations are surely a fraction of the size of its actual range. Perhaps we’ll do a survey on that to prove the point…

Of course, the alternative is to pay Google SEO-money to be artificially linked to common search terms like “bookcase” or “sofa”. This is far easier, but no less expensive in the long run as every investment in SEO actually feeds the formula. Google is now worth over $800bn.

Google and Amazon – the perfect storm

Amazon is the 1000 lb gorilla when it comes to perceived convenience. Assumed by consumers “to sell everything” and, with features like 1-click and Prime, considered very convenient.

Both Google and Amazon have become in a small period, two of the world’s most valuable companies by cornering the two sides of the shopping equation; search, or rather how products get found and convenience, be it mental or physical.

In so many client studies teams are routinely surprised by just how much of their customers’ wallets go to Amazon, not only in total, but in their own categories. Amazon is the mental and physical convenience benchmark against which retailers need to measure themselves.

What can be done?

John Lewis is rebranding. The company says it makes most of its annual returns in the second half, so let’s see how that goes. A new logo won’t change the world.

Department stores have to respond to the need for greater physical and mental convenience by shrinking both their store footprints, to be nearer to buyers and their ranges, to be more memorable and cheaper to continually promote online.

Interestingly both Harrords and Selfridges have posted sales growth this year. Both stores offer little in the way of mental or physical convenience for shoppers. However both Harrords and Selfridges have enough theatre and entertainment for consumers to experience inconvenience as pleasure, not pain. They’re both destinations.

So in addition large retailers need to offer experience. This is how Ikea remains strong, posting 6% sales growth in 2017; part furniture store, part day out, where people always leave having selected something they hadn’t intended to buy.

Cracking the omni-channel code is the great odyssey of modern retailing. Savanta has a range of consumer and retail experts to help teams improve their convenience and experience. We also carry data for you to benchmark against brands like Amazon and Google.

Get in touch to find out more.

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