What's happened with the way we shop is sort of like what happened with the way we watch TV. Before cable and subscription channels, there weren't many choices, and everyone watched the standard channels. People still watch standard channels, but because there are so many other choices, the audience for those standard channels is way down.
Department stores are sort of like the TV viewing of the past. With the availability of more specialty stores that offer more choices regarding where to shop and with online stores that change how we shop, department stores (and malls) have lost a huge market share -- so huge that many department stores won't be around in the future. And that's bad news for commercial real estate investors.
The closings already
Since COVID-19 kept shoppers out of department stores and enclosed malls for about a year, the many people who hadn't yet turned to online shopping turned to it during the pandemic. As a result, almost 200 department stores closed this past year, and another 800 are expected to close within the next five years, reports the Washington Post.
Department stores were already reeling from a combination of factors:
- General mall decline.
- The popularity of discount stores like Marshalls and TJ Maxx, which are both part of TJX Companies (NYSE: TJX).
- Online personal shoppers like Stitch Fix (NASDAQ: SFIX).
- The advent of online shopping.
But the pandemic pushed the decline further and faster. Some of the casualties so far include Lord & Taylor, which closed all its stores, and Sears, which has closed most of its stores. Neiman Marcus, J.C. Penney, and Belk have filed for bankruptcy. And although Macy's (NYSE: M) is closing many locations, this retailer plans to pivot by opening smaller stores (and not in malls) to remain relevant. Whether it works remains to be seen.
A merchandise problem
Another problem with department stores is the product. Department stores devote a huge chunk of real estate to clothing for men and women, much of it clothing people wear to work. Work and formal clothing, except for perhaps a special occasion, is unnecessary when people work from home. People have found, from working from home, that they simply need fewer things.
Department stores aren't as good
Department stores carry many brands, and for people who want to try different brands, they're ideal. But once people find brands they like, they can go directly to the manufacturer itself. The selection is greater, and because there's no sifting through mountains of competing brands, it's easier to find what you want. The outlier seems to be footwear: People are still buying shoes at department stores more than other places.
The mall problem
Department stores have been affected by the decline in malls. Some malls will make it -- the newer ones with amenities like a green space for children to run around surrounded by popular outfitter chains, athleisure stores like Lululemon (NASDAQ: LULU) and Athleta, and makeup and skincare retailers Sephora and Ulta (NASDAQ: ULTA). But many mid- and lower-tier malls are struggling. Department stores located in malls that won't make it probably won't make it either.
The good news
People have started shopping again. The pandemic appears to be waning and people want to get out and celebrate -- Roaring '20s style. Lana Todorovich of Neiman Marcus told the Washington Post she's seeing a resurgence in bridal wear, swimwear, and jewelry. And although department store clothing and shoe sales are not what they were before the pandemic, they are up 13% in March 2021 from February 2021 -- in large part because of stimulus checks.
The Millionacres bottom line
Although some malls are doing well, the mall-based department store is not in a good place (literally) right now. If you've been investing in department stores, watch the trends, and tread carefully over this landmine. Department stores are in decline, and the ones that are still standing are trying to redefine themselves. Stores that offer a good consumer experience and that are convenient and easy to get in and out of stand a better chance of success.