The internet has created a platform where every business can compete without major structural obstacles. In the past, if you set up a store in New York, it would have been next to impossible to sell to a customer in California. As such, only the National players had the opportunity to address the whole of the U.S. market in whatever category they operated in.
However, e-commerce platforms now allow businesses to sell nationally to people without having to open a store in every corner of the country and this has changed the game. The big players are now finding it hard to ward off competition from regional retailers and startups, as well as the obvious threat from giant online stores.
In the apparel industry, most chain stores rely on selling designer products and branded outfits. This means that for every unit of apparel they sell, they owe some percentage to the brand owner. Therefore, companies like Macy’s (M, Financial), Kohl’s (KSS, Financial) and J.C. Penney (JCP, Financial) have endured tough times after the emergence of e-commerce.
They are finding it difficult to cope with designers and brand owners who are now setting up their own e-commerce platforms to augment their sales from partner apparel stores. In addition, the e-commerce marketplace has sparked the rise of startup online stores offering similar products to what you would find at Macy’s and Kohl’s.
Due to their smaller sizes compared to the likes of J.C. Penney, these startups are able to develop strategic campaigns targeted at a specific group of customers to increase sales. A good example is StyleWe, which is an online fashion and design apparel store focusing on women's clothing and sportswear. At such platforms, you can find lucrative discounts occasionally as the smaller team makes it easy to pass such decisions.
However, in large companies like Under Armour (UA, Financial), Macy’s, Kohl’s and J.C. Penney, such decisions are made carefully, considering the potential repercussions if they fail to work. According to statistics, the e-commerce market continues to grow as part of the overall retail market, which means that in time, it could outrun traditional department store sales.
The e-commerce industry as a percentage of the retail market is growing at an incremental rate of 16.7% every quarter, while the annual growth rate based on recent numbers stands at about 14.1%. All major department stores have realized this paradigm shift and now are trying to adapt to the situation by setting up online platforms.
Some of them have made significant inroads while others continue to struggle. For instance, Macy’s has struggled to improve sales with Amazon (AMZN, Financial), the world’s largest online retailer now taking the larger share of the clothing and apparel market.
Amazon is an established e-commerce giant and all that it needs to dominate the clothing industry is to host as many top brands as possible. With traditional retailers like Macy’s and Kohl’s struggling to deliver sales, most brands will be moving a majority of their products to Amazon and other flourishing online stores.
While clothing stores will remain relevant for the foreseeable future, there will certainly be some level of trimming in order to cut costs. Macy’s CEO Terry Lundgren believes that despite the influx of e-commerce platforms in the clothing and apparel marketplace, physical stores will still serve a purpose and thus cannot be summarily eliminated.
Investors can blame poor management or resistance to change for the declining sales amongst department stores, but the reality is that e-commerce players are just playing the game better than their traditional counterparts.
Just a couple of years ago, Macy’s was used to illustrate what companies like J.C. Penney should have done to embrace the changing marketplace. However, Lundgren’s company is now staring at the same problem of declining sales and shrinking profits as it continues to close stores to cut costs.
Conclusion
In summary, department stores won’t go away easily because as pointed out by Macy’s CEO, they still play a big part within the e-commerce industry. Sometimes having a physical store at the West Coast to complement a company’s presence in the East Coast serves a better purpose than opting to ship out across the country every product that is purchased online.
However, with startup e-commerce platforms alongside giant online retailers like Amazon continuing to encroach on what used to be the department stores’ main source of revenue, Macy’s and counterparts will continue to struggle to improve topline.
Disclosure: I have no position in any stock mentioned in this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
