Fashion Industry the Decline of the Department

Fashion Industry

The decline of the department store has been ongoing for a number of years. I agree with the general statement that department stores in struggling in part because they have facing a more competitive environment. Not only do department stores compete against each other, but they also must compete against discount stores, specialty stores and category killers. In essence, the department store is a generalist in an environment full of specialists. The department store must find ways to innovate its business model in order to succeed in the future.

Competition has taken its toll on department stores. Department stores essentially thrive in an era when there was a certain degree of information asymmetry for consumers, as they were relatively unable to comparison shop beyond more than a few stores. Consumers may have been price sensitive, but their price awareness was not as acute as it is today. Moreover, consumers were willing to sacrifice price to some extent for convenience. The shift towards discount stores has impacted on the competitive balance. Aggressive promotion on the basis of price has allowed discount stores to increase the price sensitivity of consumers, and this hurts department stores. The effect is enhanced by the ability of discount stores, with volume buying and supply chains into low-cost-production nations like China, to offer goods of slightly lower quality than department stores at significantly lower prices. For their part, department stores seemed unready for this challenge, and sought to maintain high margins.

Those high margins were necessitated by the high overhead costs faced by traditional department stores. While they have the same amount of space in their stores as the major discounter chains, those discount chains are more adept at merchandising, and that allows them to enjoy higher sales per square foot than traditional department stores. In addition, efficiencies throughout the supply chain and in management allowed the discounters to undercut department stores significantly. Most department store chains were unable to adapt to a more cost-conscious environment quickly enough. As a result, they were left with price conscious consumers no longer interested in their offerings.

Most department stores still earn considerable revenues, but their difficulties come from the fact that their costs are high. Typically anchor tenants in malls or on downtown shopping streets, departments stores have high square footage and large sales staff. To pay for this, department stores need to do high volume and for the most part that volume was attracted by the selection the stores offered. However, selection has come under fire from competition just as prices have. Specialty stores have been able to offer the same differentiated selection as department stores, but with better service. In addition, while department stores tend to stock large, well-known brands, specialty stores can be more differentiated, offering smaller niche lines. This attracts consumers seeking this individuality. Department stores have difficulty competing -- they tend to offer expensive clothes for example that do not justify their expensive with their design.

Some department stores have also contributed to their own demise. For the most part, department stores lack innovation -- the shopping experience has changed little in the past several decades. As a result, they present a stagnant image to consumers that is incongruent with modern value. Yet most department stores do not have any answers to meet the needs of consumers.

A study by consulting firm Cavallino Capital in 2008 noted that department stores simply do are not executing their business model well. Modern consumers are not attracted to "overpriced branded merchandise, hi-lo pricing, coupons and loyalty programs." The survey showed that consumers respond most to the type of merchandise in stock. Department stores are focused too much on high-margin merchandise, despite the fact that consumers either do not want this or want it from boutique stores with high service levels. A good return policy ranks third after merchandise and service. Department stores that offer this, such as Nordstrom, have not faced declines are sharp as department stores that do not have strong return policies. After prices, pleasant atmosphere is the fifth most desirable trait for shoppers. The department store layout, aside from being dated, is not aesthetically pleasing and this also drives customers away from traditional department stores.

Department stores also used to use selection as a key point of differentiation and a source of competitive advantage. Levinson (2005) argues that category killers have taken a lot of business directly away from department stores. They are able to offer broader and deeper selections of specific types of goods, often at better prices than a department store can match. Department stores simply do not have the bargaining power with suppliers than the category killers have.

The problems at department stores, therefore, are deep-rooted. Levinson (2005) argues that department stores simply have been unable to find a business model that works against discounters and category killers. The traits of department stores that used to appeal to consumers simply no longer appeal. Consumers are not being drawn through the doors of department stores by the selection of goods on offer, the pricing strategy, the shopping atmosphere or the service level. New shoppers often eschew department stores altogether.

B. For department stores to recover, they must find something at which they outperform the competition. According to Michael Porter's typology, department stores suffer from falling in between a differentiated seller and a cost leader (QuickMBA, 2010). This positioning in the market is typically going to result in failure, as players in this position lose on price to the cost leaders and on the high end they lose to differentiated providers. Department stores must choose to compete as one or the other.

For the most part, department stores have opted to compete as differentiated providers. The problem is in the execution of this strategy. Department stores are oriented towards the overpriced branded goods, perfumes and other expensive items. However, the product offerings at most department stores are poorly differentiated. The buyers for department stores all face the same problem -- they buy in bulk which means that they only buy from the same companies as their competitors, for the same reasons. Yet purchasing and merchandising is one of the most important criteria identified by Cavallino Capital as a key draw for consumers. This implies that department stores need to improve their product offerings. If they are to compete as differentiated providers, they must truly differentiate from one another. This means being more creative with respect to their product offerings. This will put them squarely against boutiques in terms of their offerings, and that is the idea. Boutiques are the most vulnerable competitive group, being smaller, fragmented and varying greatly in terms of their product/service offering.