Department stores hit pause on rightsizing of store footprints during the pandemic as they dealt with store shutdowns, the need to drive consumers to their e-commerce sites and distribution of online orders. Now that stores have reopened and companies have had time to catch their breath, they are taking a fresh look at store strategies. That reset likely will result in more pruning of underperforming locations, revamps of stores and tests of merchandising, concepts and partnerships.

“I do think there is a place for department stores and that they will continue to exist,” said JLL Americas Retail president and CEO Greg Maloney. However, the number of department store players will continue to shrink, and those that will still be around five years from now will need a strong game plan in order to survive, he added.

The department store saga is not a new one. The sector has been losing market share steadily for 15 years. According to a U.S. retail report UBS published in April, sales per department store are near the lowest in more than a decade. Sales per store that reached $18.6 million at the peak in 2005 have dropped sharply to about $10 million. UBS also predicts additional closures, especially among regional, highly leveraged chains that likely will accelerate closures and potentially go out of business.

According to IBISWorld, department store sales have shrunk by an average of 8% per year since 2016 and are forecast to decline more moderately, by 4.3%, through 2026. However, it’s important to note that Target is one of the 49 department stores in IBISWorld’s data set. Target accounts for a huge chunk of market share, at 63.8% of the $111.3 billion in revenue. Taking Target’s positive growth rate of 5.6% out of the mix translates to a bigger erosion of sales for the balance of the sector.

Department stores have struggled against increased competition from e-commerce, value retailers and big-box category killers. “As it relates to department stores, they’re a little tired and boring,” said Colliers national director of retail Anjee Solanki. “There’s no wow factor. It feels like everything looks cookie-cutter.” That is an image department stores need to change in order to drive foot traffic to stores and especially attract younger shoppers. A challenge for department stores — and all retailers — is figuring out how to engage with consumers so they can build those loyal customers and repeat visits, she added.

How to adjust with the times

Department stores have a long history both of successful evolution and transformation and of shakeout among those slow to adapt. Those that do survive will have innovated and created more compelling experiences that bring shoppers into stores. “We’re going to see department stores take the guardrails off and do more testing and out-of-the-box partnerships,” said Tiffany Hogan, a director at data analytics and brand consulting company Kantar.

For example, Nordstrom recently announced a partnership with online fashion and cosmetics retailer Asos to attract 20-something customers. Nordstrom will bring Asos merchandise into its stores and provide Asos customers locations to pick up and return online orders. At its New York City flagship, Nordstrom has a Center Stage for pop-ups like Free People, pictured at top, and Rag & Bone. The company also has opened Nordstrom Local boutiques and operates Nordstrom Rack to take advantage of the growth in off-price retail. “We are going to continue to see that type of innovation into new price points and new shopping methods,” said Hogan.

Macy’s Inc. made headlines in early 2020 when it announced it would close 125 stores by 2023, but the retailer is introducing new concepts at the same time. It opened a freestanding Macy’s Backstage discount store in the Dallas-Fort Worth area, the first of two the company has planned for 2021. The company also is preparing to open its first small-format Bloomie’s, in the Washington, D.C., metro area; the 22,000-square-foot store will open in Fairfax, Virginia’s Mosaic District at the end of August. Macy’s Inc. chairman and CEO Jeff Gennette said in the firm’s first quarter-earnings call that stores remain a “key piece” of the firm’s strategy. In addition, he said the new concept stores will allow the company to “test and iterate on new strategies” to drive omnichannel sales and convenience for customers while attracting new shoppers. To that end, Macy’s Inc. also plans to reconceive its first Market by Macy’s, which opened in Texas’ Southlake Town Square in February 2020.

Historically, department stores served as one-stop shops that filled voids left by other mall tenants. The days when a department store could have all of these different departments and compete across different price points from value to luxury are gone. “In order for a department store to succeed, they need to focus on what it is a customer wants from that department store and concentrate on that one particular element,” said Maloney. “They really need to investigate what they want to be and start building on it so they have some longevity.”

Shrinking space needs

One thing experts agree on is that more change is ahead for department stores. “I think we will still see some shrinkage occur in the number of store locations, but I also think we are going to see a smaller footprint that evolves out of this,” said Solanki. Exactly what shape department store strategies will take, including the number of locations and geographic presence, is still up in the air, she added.

Some department stores are better positioned for survival than others. “We’ve seen JCPenney struggle to reinvent itself a few times already,” Hogan said. “So its future is on tenterhooks right now in terms of whether or not it can reinvent themselves again and do it successfully.” Some of the regional players, such as Belk and Dillard’s, may struggle due to their smaller size. However, they are pretty vital in some of the rural areas of the country, she said. “It is hard to say if they will go away completely if they are part of the fabric of a very specific region, but they are definitely going to have a much smaller presence than they used to.”

For some department stores, the future is intertwined with their malls’ performances. Some landlords want the space back so they can put in new tenants that will drive traffic, while others are working to hold on to those department store anchors.

In some cases, retailers opt to shrink the sizes of existing stores rather than shutter them completely. A three-level department store might have one level that has been vacant or near vacant for the better part of a decade, for example, and landlords want to take that vacant space and turn it into something that is going to make people want to come to the shopping center, Maloney said. That could be retail, a restaurant or something entirely different like a school or church. “Let’s make it productive space rather than just mothball it and have it sit there and do nothing,” he said.

A growing number of vacant department stores have been repurposed successfully to new uses that add value to those malls. “All landlords that own shopping centers are looking to expand and accelerate that so that they can reduce the amount of square footage of department stores,” Maloney said. Some department stores have 150,000 to 300,000 square feet tied up at shopping centers and aren’t fully utilizing it, he said. “We’re hopeful that we can continue to work with our department store friends and take a look store by store at how we can make a shopping center better by reducing and redoing some of their space.”