Department Stores
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Industry Overview
The department store industry includes about 3,300 stores with a combined annual revenue of $90 billion. Major companies include Sears; JCPenney; Macy's (includes Bloomingdales); and Kohl's. The industry is highly concentrated: the top 50 companies are almost 100 percent of industry sales.
Department stores are different from discount department stores because most department stores have checkout registers within individual merchandise departments as opposed to having a central checkout area.
Competitive Landscape
Consumer spending and fashion trends drive demand. The profitability of individual companies depends on effective merchandising and marketing. Large companies have advantages in purchasing, distribution, and marketing. Small companies can compete effectively by offering unique merchandise, providing superior customer service, or delivering a distinctive store experience. The industry is labor-intensive: average annual revenue per worker is $130,000.
Department stores compete with discount department stores and mass merchandisers, specialty stores, off-price and outlet stores, Internet and mail-order retailers, and home shopping networks.
Products, Operations & Technology
Major products sold include apparel (50 percent of sales); cosmetics and appliances (10 percent each); and footwear (7 percent). Apparel includes women's, men's, and children's clothing. Cosmetics include makeup, skin care, hair care, and fragrances. Appliances include refrigerators, stoves, washers, dryers, and dishwashers. Companies may also sell kitchenware, bedding, towels, and sheets. Services include gift wrapping, delivery, appliance installation, and personal shopping.
National and regional chains dominate the department store industry. Store format and merchandise selection depends on a company's target market. For example, Neiman Marcus targets affluent shoppers, sells high-end designer apparel, and offers an elegant shopping environment. Kohl's targets family-oriented shoppers, sells moderately priced merchandise, and offers a convenience-based store design. Some companies lease space to independent companies to sell products requiring sales expertise (furs, designer handbags, high-end cosmetics). Effective store layouts and eye-catching merchandise displays can generate complementary sales and impulse purchases. Companies may have outlets to help sell excess inventory.
Most department stores are anchor tenants in large malls and a store's presence is used to drive traffic. Companies consider demographics, population density, and lifestyle when selecting locations. Store size averages about 80,000 square feet, according to Chain Store Age. Some companies have flagship stores that can exceed 250,000 square feet. A single department store typically generates between $10 to $20 million and averages $150 to $270 per square foot, although high-end stores can sell between $380 to $625 per square foot.
Because department stores deal with tens of thousands of stock keeping units (SKUs), effective supply chain management is critical to keeping costs low and supporting timely merchandise flow. Companies have extensive networks of warehouses and distribution centers to route products from suppliers to stores. Cross-docking facilities allow companies to unload and reallocate products in a single operation, minimizing storage costs. Dedicated distribution centers and call centers often support Internet or catalog sales.
Department stores buy inventory from manufacturers, importers, and distributors, and may work with thousands of suppliers. While long-term supplier relationships are common, few companies have long-term contracts. Lead times can be long: buyers may place orders six to nine months in advance for apparel and shoes and three to six months for handbags and jewelry. Buyers make purchasing decisions based on trends and historical sales, and may take local preferences and climate into account. Companies may receive allowances from suppliers for markdowns and advertising.
Inventory changes seasonally, with apparel driven by fall and spring selling periods. Private-label brands allow companies to offer their own designs and help develop customer loyalty. Some department stores have exclusive rights to sell certain brands. "Soft goods" include clothing, bedding, and sheets. "Hard goods" include appliances, furniture, and tools. Most companies have either eliminated hard goods or reduced selling space for hard goods due to the proliferation of specialty retailers in those segments.
Department stores rely highly on information systems to manage functional areas, including sales, merchandising, purchasing, inventory control, distribution, finance, and accounting. Point-of-sale (POS) systems record sales transactions and process credit card orders. Merchandise planning systems help companies forecast demand and allocate merchandise across stores. Inventory management systems monitor inventory levels and trigger replenishment orders. Electronic data interchange (EDI) allows companies to process purchase orders more efficiently. While most department stores use bar codes to identify and track products through the supply chain, some companies are testing radio frequency identification (RFID) to monitor merchandise movement.