With revenue forecasted to decrease at 1.1% annually over the next five years, the once untouchable department store industry is now faced with a battle for survival[i]. The department store industry, which includes storied Canadian brands like the Hudson’s Bay and Holt Renfrew, have been historically dominant in their respective market segment due to their market size, strategic retail locations, and brand recognition. Becoming increasingly insignificant in the modern retail environment, these strengths no longer offer the same level of competitive advantage with innovation becoming crucial to the future of the stagnant industry.
With companies like Hudson’s Bay, with history starting in 1670, department stores retail a broad range of general merchandise goods, including apparel, jewelry, cosmetics, and general household products, and is among the oldest industries in North America. The oversaturation of competition has made the industry highly competitive with traditional corporations holding significant market shares. Despite the competition, the industry generated over $23 billion in 2015 and remains a dominant force in the Canadian retail landscape[i].
The main factors influencing the industry are economic and technology[ii]. Because the department store industry is primarily composed of discretionary purchases, the growth and decline of the economy is a primary indicator for the industry. As one of the key indicators, per capita disposable income is often used to analyze and predict industry trends due to its positive correlation with the retail industry. According to Statistics Canada, Canada’s per capita disposable income has grown by 2.7% in 2016 and is set to increase for the next six years, from 2016 to 2022[iii]. The growth in per capita disposable income should reflect and predict the continued growth of the retail market but ironically contrast with the performance of major department stores. With major Canadian department stores having decreased by 3.6% annually over the past five years, the disparity between a traditional key indicator and industry performance indicates the decline is not solely due to weak economic environment but caused by other surmountable factors.
As technology evolves, online shopping has become an important channel for consumers and retailers. The $1.5 trillion global e-commerce market has damaged brick-and-mortar department revenue. However, it offers a highly profitable environment for the industry to grow. The introduction of e-commerce has increased competition by decreasing the barrier of entry and transformed the competitive advantage of strategic retail locations into a costly disadvantage. The increase in competition was not only limited to online-retailers, such as Amazon.com, but allowed small boutique stores, such as SSENSE.com to gain exposure and access to potential customers. To exemplify this, a study conducted by GE Capital Retail Bank found that 81% of shoppers research online before making a purchase. This further diminished the value of brand recognition of large department stores, demonstrates the key threats faced by major corporations in a growing industry, and stresses the importance of an online presence for department stores.
Benefit and Solution:
Although late to the market, department stores currently recognize the potential of e-commerce and have altered business strategies to become more online-oriented. Corporations like the Hudson’s Bay Company, who sold its Zeller leases for $1.8billion in 2011 as well as its flagship Toronto property for $650million in 2014 and acquired online-retailer Guilt Group, have altered business strategies to become more online-oriented[iv]. Property sales have also enabled corporations to increase cash flow and net income by lowering fixed cost, interest expense, and depreciation expense. Other benefits stem from the innovation of the retail experience. Traditionally, retail stores required extensive inventory space and large quantity of items on the shelves. As sales become increasingly generated through e-commerce, retailers have altered in-store strategies to become focused on developing a retail experience that represents the brand image and markets the items efficiently. The retail strategy pioneered by Apple Inc. uses technology to provide a polished environment that emphasizes the effective showcasing products and creating connections with consumers[v].
Ranked 1st in the digital luxury brand category by online think-tank L2[vi], luxury fashion Burberry Group Inc. is another company that successfully applied embraced technology, and by doing so increased revenue by 11% in 2015. These companies provide excellent examples of advantages in technology towards efficiently allocating resources, decreasing retail space needed, and access to potential global consumers. Like Burberry, department stores generate the most revenue through footwear and apparel, 54.9%, and therefore can also apply similar strategies to its retail space[vii].
The Hudson’s Bay Company has taken advantage of this change by sharing the retail space of its existing the Bay locations with the Saks Fifth Avenue brand that it acquired in 2013. Additionally, strong online presence can mitigate threats posed by increased competition and aging clientele. With American department stores, such as Nordstrom and Saks Fifth Avenue, expanding to Canada, upscale department stores like Holt Renfrew need to innovate its business strategy to compete[viii]. Despite investing heavily on web presence, none of these businesses were able to create a successful and streamlined online marketplace. Being late to enter e-commerce, Holt Renfrew should examine successful layout and create an easy to use online platform for consumers to access premium products and services that is consistent with its brand. In addition, Holt Renfrew will benefit greatly by including customization features on its online store. A survey conducted by Bain & Co concludes that 25%-30% of consumers are interested with online customization options[ix]. This provides an opportunity for luxury retailers to differentiate from its competitors while offering a premium service that is consistent with their brand image. Online retail allows department stores to expand and access potential consumers who are increasingly shopping online. Information provided by Statista show an increase in e-commerce use through generations and 29% of the lucrative Generation X segment preferring to buy online[x]. Successfully creating this platform allows Holt Renfrew to stand out from competition, target lucrative market segments, and provide a long-lasting positive effect on future generations.
Despite being late to embrace technology, the department store industry can still effectively utilize e-commerce to overcome threats imposed upon the industry. With a negative forecasted growth in a growing market, traditionally department stores are in dire need of modernizing its business strategy and growing its online presence. By applying strategies that are consistent with brand values and accounts for the advancement of technology, companies like Hudson’s Bay Company and Holt Renfrew can differentiate and solidify its place as dominant forces in the Canadian retail market.