Department Stores Need to Find Right Mix of E-Commerce, Physical Space to Compete Online

U.S. department stores will have to figure out a way to improve inventory management and take other steps to compete in the face of customers’ growing preference for off-price retailers and online shopping options. Department stores could see a roughly 11% decline this year in aggregate operating income, predicted Moody’s Investors Service analysts.

"Consumers today have access to a broad array of goods at the most competitive prices, which has spurred retailers across the industry to accelerate their efforts to compete more effectively," said Moody's Vice President Christina Boni. "Department stores have been the hardest hit, with relatively slow supply chains their biggest Achilles' heel."

When consumer demand suddenly changes, department stores can pay the price with inventory backlogs, Boni added. Highlighting the stores’ supply chain issues is consumers’ unwillingness to pay full price for goods that have had bigger markdowns in order to clear merchandise. “Unlike department stores, the off-price incumbents continue to achieve impressive results thanks to their ability to purchase high volumes of disparate goods closer to the time they're likely to be purchased,” Boni said.

Also, some department stores, such as Nordstrom and Neiman Marcus, have been more successful at growing online sales than others by investing in technology platforms and fulfillment capabilities to increase e-commerce to between 20% and 25% of total sales, respectively, Moody’s said. Other regional players have been falling behind with less than 10% of total sales in e-commerce.

These challenges place a greater importance on maximizing the use of physical space; Moody’s believes having a brick-and-mortar location makes product pickup and returns more efficient, but predicts owners may have to shingle some locations or reduce size to maintain good results.

In the near term, department stores’ operating income should see about 4% growth next year as trimmed inventory places them in good position to take advantage of holiday season sales and better inventory management positions them to take advantage of improved margins, Moody’s said.

– Nicholas Stern, editorial associate

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