What’s Next for Department Stores, How Will They Evolve?

Macy’s is closing 150 stores its CEO says were “built for a different era.” This follows many other closings in the sector. What will it take for department stores to survive?

Can department stores evolve enough to regain relevance? It might take more than the magic of Macy’s.

The storied department store chain in February said it will shutter nearly 30% of its remaining locations – a staggering 150 – leaving it with 350 core stores (from 2016 to 2023, Macy’s dropped 170 locations, bringing the total of eliminated stores in the past eight years to 320, almost 50% of its store base). The reduction follows hundreds of department store closings, including at JCPenney, T.J. Maxx and Sears, the last of which is down to roughly 12 locations.

The reason could be encapsulated in one sobering sentence by Macy’s CEO Tony Spring: The chain had been running “too many locations that were built for a different era.”

This begs the question: How were these stores allowed to operate out-of-era for so long?

In 2023, sales at department stores represented just 2.6% of total retail transactions, compared with 14.1% in 1993 and 5.7% in 2013, according to CNN. It’s been a downward slide for some time.

The Problems Behind the Problem of Department Stores

If more of today’s department stores are, like Macy’s, “built for a different era,” then the problem is simple: they have not kept pace with shoppers. The problems behind the problem, however, might not be simple to fix.

Based on coverage of Macy’s closures, department store companies need to get in front of three foundational issues:

1. Too many bricks. The biggest department store companies, including Macy’s, got so big because they invested a lot of time and resources in acquiring their competitors instead of improving the customer experience. Now, post-pandemic, they’re stuck with the cost of managing millions of square feet of physical space when most of their customers have been conditioned to shop online. From 2020 through 2023, online retail sales rose to 34% of total retail purchases, from 26% in 2020, according to a consumer survey on MishTalk. Further, profiting from store ownership requires real estate expertise, and not all retailers possess that. Macy’s, for example, has been pressured to better manage its real estate by investors threatening to take over the company.
2. Too little listening. Still, many consumers intentionally shop at physical stores that have remained relevant to them, such as Costco, Target and Sephora. This is because these stores listen to their customers and invest accordingly. As the retail analyst Neil Saunders of GlobalData told CNN about department stores: “Quite frankly, a lot of them stopped caring. They stopped listening to customers. Sure, online has taken its share; sure, big box has taken its share. But most of all, it’s a failure to evolve.” This is especially regretful considering the data large department stores can access through their reward programs. JCPenney has evidently recognized this. In an effort to boost shopper visits, the chain recently launched a loyalty program that doubles the rate at which members earn points. The company said 20 million reward members “consistently” shop at JCPenney on average of five times per year. It probably would prefer once a month.
3. Too much that’s out of date. Because more people are working from home now (thanks to the COVID-19 pandemic), they are spending less on dressy office apparel and more on household items, groceries, and comfortable clothes that still look good on video calls. But it’s not only the offerings at department stores that fail to resonate; it’s the process. Shoppers have been conditioned to online-to-curbside service, which essential retailers speedily installed during the pandemic (71% of shoppers now buy makeup on specialty websites; just 24% in department stores). People have gotten out of the habit of department store shopping, which typically entails long-distance parking, overstuffed aisles, beauty reps spraying perfume samples, and so many discounts that shoppers question their quality. This problem behind the problem might require more than consumer insights to resolve, but using reward program data insights to inform customized, relevant recommendations and experiences could have reduced the effect.

What Is the Next-Era Department Store?

Exacerbating the problem for relic department stores is that their failure to evolve has made it so easy for other retail concepts to win market share. Perhaps the leaders of Macy’s and other chains can take a page from these competitors and use their success strategies to scope the future.

Direct-to-solutions sites. Branded sites such as Warby Parker and Dollar Shave Club have fertilized a market for more solutions-focused retailers that tailor to demands not met in stores. The menopause-products site Stripes, founded by the actress Naomi Watts, comes to mind. Meanwhile, a number of direct-to-consumer clothing brands, including The Only Jane and Kampos, opportunistically emerged during the pandemic, recognizing that quarantined consumers couldn’t clothes-shop in stores. Suggesting that department store companies convert to D2C brands oversimplifies the resolution. However, they can better position the categories they offer as answers to contemporary needs – new life stages, work-from-home fashions – complete with informational resources.

Ankle-biters. Smaller brick-and-mortar retailers have proven more able to keep up with changing consumer demands in part because they aren’t bound to multiple vendors. They also can insert themselves into typical shopper pathways more easily, complementing an outing to an entertainment district, for example. Additionally, the experience of a small-format store often replicates what appeals to online shoppers – namely, convenience and minimal time commitments. Big retailers have been experimenting with smaller formats and store-within-store concepts for years, with mixed success that could be due to the distracting demands of their larger footprints. Relieving themselves of this burden extends beyond closing stores; it entails curating assortments to market preferences and generating FOMO by limiting the length of time exclusive brands are carried, a la Target.

Purpose-driven brands. Unrelenting high prices have torqued off a lot of shoppers, many of whom have trained themselves to simply do without, while harboring resentment. This benefits retailers that have a proven record of standing for something beyond profit – such as cultural wellness (REI) and inclusivity (Savage). This level of commitment requires structural change that can be difficult to achieve for a company owned by profit-seeking shareholders, and inauthentic promises can be devastating. Reward program memberships can serve as two-way communications platforms for identifying what customers value most and how they expect it to be delivered, as long as the retailer is honest in its feedback as to what it can and cannot do and why.

Staying Relevant Means Staying Young

Making the above alterations could help department stores recapture some of their magic, although it could take more than that to lure younger shoppers back into those locations.

Macy’s has been part of U.S. retail history since 1858. To survive into the next generation of consumers, it must change with the times. You can’t spell generation without “era,” after all.

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This article originally appeared in Forbes.