Analysis: Is small the new big for department stores?

Alongside the closure, which will result in 2,000 job losses, was the news that the struggling US chain will be testing ‘Market by Macy’s’ – a new smaller store format selling a specially curated mix of merchandise and local products.

Smaller-format stores have been trialled by department store retailers throughout the years with mixed results. Debenhams trialled a mini-store format in 2004 that failed to take off, while Sears unveiled a smaller-format store, called Home & Life, in the US last year following its bankruptcy. While neither of these formats did much to revive the fortunes of either department store, others, such as Nordstrom’s Local format, have gained some traction.

As Macy’s prepares to trial its latest format, is small the new big for department stores? Or is this latest move from Macy’s little more than a last-ditch attempt to salvage the struggling business?

Is smaller better?

Macy’s reported a difficult Christmas trading period as its like-for-like sales fell 0.6% – and Kantar analyst Tiffany Hogan says just making a store smaller isn’t enough to revive a business.

“Many retailers are using a smaller footprint to reach shoppers in new places – strip centres, high streets and neighbourhoods – to connect with shoppers on a more localised basis.

“Smaller spaces can also help cut costs, but it’s what these retailers do inside these new stores that could have a greater effect on the business,” Hogan explains.

“Smaller stores also need to coexist within a fleet of larger existing stores, rather than operating as a seemingly separate entity. Nordstrom Local stores are a great example of this: smaller stores function as a more high-touch, quick-service experience that complements the full-line store experience.”

“Today, the customer who was pretty much tethered to their local department store now has complete freedom to browse and transact anywhere and any way they wish”

Mark Cohen, former Sears Canada CEO

But Mark Cohen, Columbia Business School director of retail studies and former Sears Canada chief executive, says that while reducing store space may improve a retailer’s productivity, a smaller store format is “a Band-Aid on a nasty wound”, and the bigger problem that department stores face is differentiating themselves from the competition.

“Years ago, they were the only place to shop for broad categories of merchandise and merchandise brands,” Cohen says.

“Today, the customer who was pretty much tethered to their local department store, whether high street or mall, now has complete freedom to browse and transact anywhere and any way they wish.”

Cohen added: “They are also increasingly able to shop for brands formerly available only in department stores through those brands’ own stores and websites.”

Global retail adviser Andrew Jennings says the department stores seen as trophy businesses are doing “just fine”, but would struggle if they didn’t continuously reinvent themselves.

But he adds that it is not feasible to run “a big group of department stores any more”, regardless of their size.

“They’ve got to be smaller groups and you’ve got to have innovation in your business on an ongoing basis; you’ve got to have excitement,” he says.

“If you look at the stores that are doing well, they know who their customers are, they’re constantly innovating and are supported by technology. They have great talent in their organisation to come up with newness and they are constantly changing.”

Edge by Ascential global content director Xian Wang says if department stores want to succeed they need to focus on four key characteristics regardless of their size: experiential elements; creating a community feel through social media; convenience and frictionless shopping; and specially curated products are all paramount to a department store’s success.

“If you look at the stores that are doing well, they know who their customers are, they’re constantly innovating and are supported by technology”

Andrew Jennings, global retail adviser

These are things “trophy businesses” such as Selfridges, Fortnum & Mason and Harrods all have, alongside much smaller store estates. Macy’s store estate is at the opposite end of the scale, with over 600 locations across the US. 

Risky business

Following the likes of Sears and Debenhams trialling smaller formats without a huge amount of success, this could be a risky move for Macy’s.

Hogan says: “The risks of any new format would be a lot of new investment dollars spent on a format that may not take, or take a while to gain traction in a tough market.”

Despite this risk, Hogan adds that the smaller stores could have some benefits to the wider group by using them as a place to innovate and test new strategies.

However, Cohen’s opinion of the department stores attempting new smaller formats is scathing.

“Sears is out of business in Canada and almost out of business in the US. Macy’s is talking about reducing the size of its stores, but all it is is talk.

“And Nordstrom has opened a handful of local tiny outposts in New York and California, whose actual value as a strategy remains to be seen,” he says.

Will Macy’s plan work?

As Macy’s prepares to shut stores and focus its attention on the new format, Hogan says “only time will tell” if it can help turnaround the business.

“This new store concept will need to do more than just thrive on its own, but help boost the business across the fleet and help activate Macy’s shoppers to spend more at the retailer,” she says.

However, Jennings is adamant the plan won’t work and gives a definitive “no” when asked if he thinks the smaller stores will revive the struggling chain.

“They need to decide who their customers are and what they are going to do with their stores, because they don’t need the amount of real estate that they’ve got,” he adds.

Although Cohen urges retailers to at least try and follow Macy’s attempt to reinvent themselves, he also says department stores are facing some extremely tough times.

“Do nothing, you die. Do something that is less than truly transformational, you also die. The department stores are perched on a burning platform,” he says.

However, Wang doesn’t think its all bad news for Macy’s.

“More test-and-learn means a higher chance of finding out what works for their brand, store base and customer base, and being able to roll that out across their portfolio,” she says.

“Their proactivity means they have a high chance of succeeding.”

Whether Macy’s shuts more stores, opens smaller ones or continues trading in the locations it has regardless of size, if its stores aren’t innovative, inspiring or experiential, then customers will not be satisfied.