Retail's Old Guard Lives
After Years of Eroding Business, Department Stores Stage a Comeback

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, November 11, 2006

Every holiday season needs a comeback story. This year, the honor goes to the long-suffering department store.

For the past two months, department stores have basked in strong sales growth after years of sluggish -- and occasionally downright miserable -- performance. It began with a strong back-to-school season that outpaced all other retail sectors in sales growth. Momentum built in October, with department stores again in the lead. And now industry experts expect them to be among the winners during the high-stakes holiday shopping season.

Someone must have gotten on Santa's good side.

"They're the stellar performers," said Michael P. Niemira, chief economist for the International Council of Shopping Centers, a trade group. "This is good news. It's something that we have not seen for years."

It is a surprising turn of events for a sector whose heyday many thought had long since passed. Department stores were once destinations for a generation of shoppers. They filled entire blocks downtown and made miracles happen on 34th Street.

Then came the suburban mall. Department stores fled cities to take up residence in behemoth shopping centers, unwittingly setting up their slow demise in the process. Customers, especially fickle but influential younger shoppers, began favoring the mall's smaller specialty stores with more current fashions and merchandise -- think Gap, Abercrombie & Fitch, Ann Taylor and Pottery Barn.

Meanwhile, big-box discounters emerged, offering many of the same types of goods as department stores but at much cheaper prices. Wal-Mart and Target siphoned customers away from traditional powerhouses such as Sears and JCPenney.

But early this year, something began to change. Specialty apparel chains faltered with boring merchandise. Discount stores were hit by falling home prices and costly gas, as well as a sartorial misstep or two. And department stores began to catch up.

In September, department stores recorded comparable sales growth, a key measure of retail, of 8.4 percent from September 2005, besting all other retail sectors for the first time this year. In October, they were up 6.2 percent, again beating other sectors. For the holiday season, Niemira predicted that sales growth would be 4.4 percent, compared with a nearly equivalent decline in 2002.

"Department stores have begun to understand what they need to do in the new retail marketplace," said Chris Donnelly, a partner at consulting firm Accenture Ltd.'s retail division. "They've started to kind of change the overall shopping experience to make it more current."

Experts debate the driving force behind the attraction. One theory is that young people are returning after being disappointed by specialty retailers. At department stores they find fashionable private-label brands and DJs spinning music to welcome them.

A monthly survey by marketing firm BIGresearch LLC asks about 7,000 people where they shop most often. In October, 26 percent of women ages 18 to 34 said they go to department stores. That's still lower than the 28.8 percent who said they shop at specialty stores, but it is the largest share department stores have had in two years.

JCPenney was also the second-most-popular destination for young women when shopping for clothes, with 6.8 percent saying they go there most often. Wal-Mart was in first place with 14.7 percent. Two years ago, Wal-Mart's share was 20.9 percent while JCPenney languished at 4.8 percent.

"This is the voice of the people," said Phil Rist, vice president of strategy for BIGresearch. "This is what they're saying."

If the hypothesis holds true, it could wind up saving department stores. Many specialty stores change with their demographic bases -- meaning there comes a time in a shopper's life when the thumping bass and heavy musk in Abercrombie & Fitch is no longer appealing. The shopper may move on to another retailer, but Abercrombie stays put and waits for a new teenager.

Not so with department stores. They are designed for customers of all ages, starting in the children's department, growing to juniors, and even registering cappuccino makers for wedding presents. If they win over shoppers when they are young, they could keep them for life.

Department stores employ a number of tactics to capture that base. JCPenney recently installed Sephora cosmetics shops in its stores. Popular girl group Danity Kane from MTV's "Making the Band" has been signing autographs at Nordstrom stores around the country.

It's unclear what impact such efforts have had. Several teenagers at the Fashion Centre at Pentagon City did not seem won over.

"It seems like department stores are, like, not played out, but focusing more on cosmetics, fragrances, household appliances," 17-year-old Sarah Pollard of Silver Spring said while eating at Taco Bell. "A department store is more like my last resort."

Niemira also wondered how much credit department stores should get for their success and how much should be attributed to a fortuitous combination of external economic factors -- falling gas prices, low unemployment and rising incomes, for example.

The sector may also have benefited from the marketing blitz in September that accompanied the change of several regional department store nameplates to Macy's, he said. Parent company Federated Department Stores Inc. acquired the chains in a merger last year with the former May Department Stores Co., which owned Hecht's, Marshall Field's and Filene's. The conversion could have helped renew interest and drive traffic to all department stores, not just Macy's.

The question is whether department stores can sustain the growth of the past two months or if it is simply an anomaly, a spark that soon will fizzle. Several industry experts were reluctant to forecast beyond the end of the year.

"If history is a guide, it continues at least for three or four months. Yeah, okay, that gets you through the holiday season," Niemira said. "Then what?"