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Bright future for department stores

Bright future for department stores

Department store retailing, a concept that appeared to be heading for terminal decline globally only a few years ago, now has a much brighter future says a new report by retail analysts Verdict Research.

Following a period of consolidation, investment and expansion in both mature markets and fast developing economies has given a new lease of life to the sector. Verdict Research forecasts that this sector’s growth rate will double over the next five years.

Between 2001 and 2006, growth in the US$302.6bn (£151.3bn) global department store market was subdued (8.7%). The ongoing recession in the important Japanese market, declining sales in Germany, the second largest market in Europe, and a downturn in the largest market North America counteracted any positive developments.

However, Verdict forecasts growth will double between 2007 and 2012 to 17%, due primarily to three main factors.

Firstly, consolidation is strengthening the sector. Though mergers tend to disrupt trading this trend is ridding the sector, especially in mature economies, of many weaker operators, and giving retailers with stronger propositions the opportunity to gain scale benefits and invest in growth.

In the US, which accounts for nearly half of all global department store sales, Macy’s acquisition of May department stores has not been problem free, but is creating a much more cohesive nationwide group.

In Japan, the sector has entered a period of prolonged consolidation. Sogo and Seibu, and Daimaru and Matsuzakya have been brought together under holding companies and more recently Daimaru and smaller department store operator Matsuzakaya announced the setting up of a joint holding company, J Front Retailing, to integrate the two companies, with the aim of cutting costs and improving profitability.

Meanwhile in Europe, a merger between Kaufhof and Karstadt would allow the new group to do the same and rationalise the sector in Germany.

Secondly, greater investment is meeting the demand from consumers for more aspirational shopping experiences.   Many department store groups have underinvested in their existing store portfolios, instead focusing on cost cutting, which has made them not only less attractive destinations for consumers but also for suppliers.

Luxury brands have developed ‘brandalone’ stores making them less reliant on department stores as a distribution channel.  However, retailers are upgrading and refurbishing stores to a much higher level, as well as opening new stores.

This is attracting back aspirational brands and providing department store operators with the opportunity to participate in the strong growth in luxury goods, as well as bringing in more shoppers.

Thirdly, operators are expanding again. In the US JC Penney, Kohl's and Nordstrom all have active development plans that will see them add over 600 stores to their combined portfolio by 2011.

While the former is extending its already massive presence across the US, the latter two are filling in holes in their regional coverage. In the case of Nordstrom, with just 155 stores, it still has some way to go.

Likewise in the UK John Lewis is reaping the benefits of its investment in its existing store portfolio and is on an expansion trail that will give it nationwide coverage over the next decade.

Apart from the recovery in the most mature and largest markets, there will also be explosive growth from developing economies.

Verdict Research forecasts that China, as well as new markets like India, where department stores are only just developing as an important format for the first time, will continue to see explosive growth.

Rising real disposable incomes and a class of consumers whose wealth is expanding fast will spur a wave of development led by franchisees and licensees. 

These markets are attractive for iconic department store operators such as Saks and Harvey Nichols that can leverage the global recognition of their names in new markets.

The Middle East market and other oil producing economies will continue to be boosted by higher oil prices, which will have a positive knock-on effect on luxury spending, supported by a growing local store infrastructure.

Furthermore, increasing numbers of local retailers will also upgrade their store environments to levels where they can attract international designer and premium brands. This will be a particularly important effect in markets such as Latin America.

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