Department Stores & Discount Stores
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Industry Overview
Department and discount stores in the US have combined annual revenue of about $475 billion. Major companies include Wal-Mart, Target, Sears, JC Penney, and Federated. The industry includes 10,000 companies that operate 40,000 stores. The industry is highly concentrated: the 20 largest companies operate 26,000 stores and hold 95 percent of the market.
Competitive Landscape
Demand depends largely on consumer income and interest rates. The profitability of individual companies is closely linked to correct merchandising. Big companies have large efficiencies of scale in purchasing, distribution, and advertising. Small companies can compete effectively by offering different brands or types of merchandise. Average annual revenue per worker is about $150,000.
Products, Operations & Technology
Actual store operations are similar for all companies in the industry, and revolve around merchandising and supply chain management. A typical department or discount store may sell "hard goods" like tools, furniture, and appliances, and "soft goods" like clothing, towels, and sheets. Other major categories of goods are electronics, jewelry, toys, drugs, and groceries. (Companies often have different definitions of "soft goods" and "hard goods.") The size of a store can vary from 30,000 to more than 200,000 square feet. Department stores are often anchor tenants in malls, receiving favored lease terms. Discount stores more often favor stand-alone locations, partly because of their large size.
Each company usually has a specific merchandising strategy: deciding what categories of goods to sell and which items to sell in each category, to attract a particular kind of customer. The merchandise mix varies considerably at different companies, with traditional department stores usually selling a higher percentage of soft goods. Wal-Mart gets about 20 percent of its revenue from the sale of soft goods, 20 percent from hard goods, 10 percent from drugs, 10 percent from electronics, and 25 percent from groceries. Dillard's, a more traditional department store chain, gets more than half of its revenue from sales of soft goods.
Companies in the industry can be stratified by price, with conventional department store operators selling higher-priced goods, discounters selling lower-priced goods, and warehouse clubs selling goods at rock-bottom prices. The distinctions are sometimes blurred. Some large companies operate a number of chains, each targeting a slightly different type of customer. The mix of goods sold is seasonal. Women's apparel, in particular, has a fall and spring selling season and is subject to shifts in fashion. Because of the Christmas season, many stores build inventories in late fall and generate close to a third of revenue in fourth quarter.
Supply chain management includes supplier relationships, product distribution, and inventory management. A large company like JCPenney buys from 2,600 suppliers (both manufacturers and distributors), and may carry 50,000 different SKUs (stock keeping units). Although companies may have long-term relationships with suppliers, there are few long-term contracts. Goods are usually bought on credit. Costco sells many items so quickly that it receives sales revenue before it has to pay suppliers. Companies with multiple stores usually resupply each store from one or several distribution centers. Warehouse clubs, like Costco, cut costs by eliminating distribution centers and receiving goods at each store directly from the manufacturer.
Computer systems have become essential for department and discount stores, both for supply chain management and to collect marketing information. Wal-Mart pioneered sophisticated computerized inventory control systems that are now widely imitated in the industry. Such systems use point-of-sale (POS) terminals to capture detailed information about each item sold, produce automatic reordering from suppliers, and generate management reports that show which items are selling well or poorly. Wal-Mart recently pioneered the use of radio-frequency identification tags (RFID) to track shipments from suppliers.
