The Covid crisis has hit certain department stores very hard: can they recover - and, if so, how? The book The Future of Department Stores sheds some light through own analysis and interviews with icons from the sector.
A love story
A publication with contributions from such icons as Philippe Houzé (Galeries Lafayette), Vittorio Radice (Central Group), Adam Fenwick (Fenwick Limited), Giovanni Colauto (De Bijenkorf), Maurizio Borletti (Borletti Group) or André Maeder (KaDeWe) is bound to get some attention. And rightly so: over the past two years, authors Erik Van Heuven and Stefan Van Rompaey have delved into the world of European luxury department stores, a sector that is facing disruption even more than other retail branches. The delving led to an interview series, which in turn led to a book: The Future of Department Stores - Nine escalators to a golden future for the department store. Feel free to consider it the successor to The Future of Shopping - Where everyone is a retailer, the book by RetailDetail colleagues Jorg Snoeck and Pauline Neerman that was named Management Book of the Year at the end of 2018. First question: why this book?
Erik Van Heuven: "When I moved house, I saw my first contract with then Belgian retailer GB-Inno-BM, signed by the late François Vaxelaire and Jacques Dopchie, real icons from Belgium's retail history. I have worked at Inno, Kaufhof and Karstadt: three department stores that are part of one group today. I thought back to all the changes I have seen, and thought I should do something with them: I sensed a strong story in them."
The interviews with international industry leaders make the book really unique. How did you reach them?
EVH: "Firstly, we started an interview series called 'A Love for Department Stores', because it is also a love story. That was a smart approach, because these people are very passionate about their profession, their sector. They were eager to talk about it, and often it became very personal. They showed a remarkable openness, a great willingness to share their insights. We have had excellent experiences with that. The series does not stop, by the way: we have already planned new meetings with the people behind major department stores like Italian Coin and Spanish El Corte Inglés…"
Is it not a bit contradictory to have a book about the future of a sector that seems to rely so heavily on a rich history?
Stefan Van Rompaey: "It is quite fascinating that about 150 years ago, these companies were the founders of modern retail. They invented the sales techniques, the presentation methods, the promotion stunts and the purchasing practices that are still used today. But today they have to change, in order to survive the digital revolution. That is extremely difficult for traditional companies that have always gotten away with simply referring to their impressive heritage. The pain that affects all retailers today, hits department stores the hardest: there is a lot to learn from that."
Are department stores more vulnerable than other retailers in the current circumstances?
EVH: "I think so, partly because they have higher fixed costs: the rent for those buildings is huge, they often have a somewhat older workforce, there is little flexibility, they are heavily syndicated ... So once such a retailer, who has a profit margin of 3 % in the best of times, gets into trouble, things can become really difficult. Many department stores have sold their real estate to create financial space, but such a 'sale & lease back' can double your rental costs, from 6 to 12 %. How can you still make a profit like that? Department stores that still own their own buildings - such as Fenwick or Galeries Lafayette - still have more security."
And then the coronavirus breaks out. How will department stores survive that heavy blow?
EVH: "Department stores are the retail's Champions League. If you have to manage so many facets and you are so dependent on tourists and then you get such a sledgehammer blow... then the question is indeed how will they recover from that. But I think department stores that position themselves higher in the market will survive, while department stores that are too much in the middle segment in terms of average expenditure per transaction will have to tinker with that in order to remain relevant. Companies like Galeria Karstadt Kaufhof have their work cut out for them."
So you have to be a luxury department store in order to survive?
EVH: "The upper middle segment in any case: the average prices have to go up. Luxury is the only way to survive, and I think there is room in Belgium for a beautiful luxury department store. I do not understand why there is none. There is potential for local heroes: L&T in Osnabrück is a good example, in my book. I can imagine that there are also possibilities for a real luxury department store in a city like Antwerp."
SVR: "CEO Armin Devender also says now that his Inno should offer more luxury. He wants to make it an omnichannel luxury department store. He is also engaging in talks with potential new food partners: these seem justified choices - you would almost think that he has already read our book. It will therefore be interesting to see how Inno will evolve now."
EVH: "The fact that Galeria Karstadt Kaufhof now has an agreement on a social plan is certainly good news for Inno, it ensures that the parent company can breathe again."
But the group will close 62 stores. Is this jeopardising the advantage of scale, or does that not exist in this sector?
EVH: "Department stores will have to scale down: a chain with too many branches will fail. Look at what happened to V&D in the Netherlands: that company had a good management, but it had too many branches in smaller cities. Had they been able to continue with the twenty-something properties that Hudson's Bay eventually took over, they would have survived. The problem is: the faster you grow, the more money you make in retail... but you can not go back: closing stores and firing people is way too expensive. Therefore, you better have one store with a gigantic surface in a metropolis - think of Le Bon Marché, Harrods or KaDeWe: that is ideal. Although the question remains what will happen to tourism: I think the Chinese and Arab travellers will return, but it may take a while..."
The current problems in the sector also reveal the financial weaknesses of many retailers. The debt burden is often far too high, with Dutch Hema as the most recent example.
SVR: "In principle, Hema should be fine: it is an extremely familiar brand in the Netherlands and Belgium, and operationally there is almost nothing wrong. However, its situation does indeed show how vital financial health is: the company has been somewhat mistreated in the past by KKR and Lion Capital. Moreover, it has to rally its Dutch franchisees back together, and for that you need an investor with a vision. That can also be a venture capitalist - they are not all vultures."
EVH: "De Bijenkorf is also owned by an investor family, but I still give René Benko the benefit of the doubt: I think he means well and he has a long-term vision. But former V&D owner Sun Capital, for example, is only after short term profit and they had little retail experience. That works against them - even though they have been in Scotch & Soda for years now. What I like about those department stores is that they really started as family-owned companies. That is so great about these interviews: Adam Fenwick, Philippe Houzé, Maurizio Borletti (who has now also become a venture capitalist, by the way): their love for department stores speaks volumes. If that disappears, you quickly lose the DNA, the passion..."
Instagram on the shop floor
Perhaps one of the most surprising insights in the book is the growing importance of food for department stores?
SVR: "Food is experience. A good conversation over a cup of coffee or a nice lunch, is something you simply can not experience online. Food reinforces the function of the department store as a meeting place. The largest department stores are investing heavily in new restaurant concepts now: everything has to be a little bit better and more special - distinctive, is the key word. With all due respect, but with a standard branch of a Pizza Hut is not going to be enough..."
The department stores are struggling to catch up with digitisation. Will they succeed in doing so?
EVH: "I think so. Department stores have ignored an important part of the public: people under the age of forty, who are actually not interested in department stores at the moment. They need to be appealed to again: by using social media much more, they can use inspiration to attract new brands. In fact, Instagram is coming to the shop floor: a concept like Story in New York, for example, is very interesting: they bring the online trends to the store to appeal to younger generations."
SVR: "Actually, department stores were already platforms before platforms were invented: what online platforms do today, department stores have always done in the physical world - offering a platform to emerging brands or makers. Today, that kind of thing needs to be 'phygital': both online and in the store. There are interesting creative start-ups in fashion, in decoration, you name it, who are looking for good sales channels. They can make department stores relevant again."
EVH: "Such brands are not the big 'money makers', but they are the 'traffic builders' to new generations. This is a big challenge for department stores in the middle segment, because trendy shopping streets are partly taking over that function. Department stores need that buzz, they have to be alive... If they can do that, I see a lot of opportunities."
The book "The Future of Department Stores - 9 escalators to a golden future for the department store" is available in Dutch and English and has been published by Lannoo Campus in Belgium and the Netherlands. Buy your copy in the better bookstore or click here to order it online.