Macy’s decision to shutter 100 of its shops across the US created shockwaves last week, despite its recent poor financial performance.

The US department store giant, which also owns Bloomingdale’s, has fallen prey to universal retail ailments: value specialists such as TK Maxx, seemingly unstoppable fast-fashion titans and a shift in consumer spending towards the experiential.

But above all, the rise of ecommerce, which has in important ways usurped the position of the traditional department store, has hit Macy’s. Amazon’s growing private-label business in the US is expected to surpass Macy’s as the largest online fashion retailer in the US next year, according to some analysts.

“Whether Macy’s decision to shut large numbers of stores could be replicated here by department store groups is a question that divides analysts”

TK Maxx

TK Maxx

The rise of value department stores, including TK Maxx, has meant a number of larger ones are unable to compete.

And the malls that Macy’s often anchors are also increasingly under threat – for many of the same reasons.

In a country as vast as the US, the closure of 100 stores is not as disastrous as it might sound to a UK retailer. But it still represents 14% of Macy’s estate. The closures will leave Macy’s with 666 shops, including 38 Bloomingdale’s branches.

Tellingly, at its January 2007 peak, Macy’s had 868 US stores, so nearly a quarter (23.7%) of its estate has gone in less than a decade.

The picture in Britain

Across the Atlantic, UK department stores are also under pressure.

While John Lewis has managed to adapt in the challenging market, going from strength-to-strength under a unique customer proposition, some other department store groups are battling to stand still.

BHS has collapsed and its stores will all be shut within days. Marks & Spencer’s ongoing poor performance has become as predictable as unseasonable weather.

House of Fraser turned a pre-tax profit for the first time in 10 years that, while representing a welcome upturn in fortunes, speaks volumes about how difficult it can be to make money from department stores.

And questions are being asked about Debenhams, which describes itself as Britain’s leading department store chain but has had a difficult time in recent years, and where former Amazon executive Sergio Bucher will join as chief executive in October.

Haitong analyst Tony Shiret published a 79-page note on the retailer last week. He flagged falling margins – from an EBIT margin of 10.9% in 2006 to 4.7% in 2015 – and declared “Debenhams has not been a successful retailer nor a successful investment since its 2006 IPO”.

“There is a consensus that some UK department stores will shut some doors, however, even if not on the scale of Macy’s”

The broker observed: “We believe that Bucher will focus on improving and accelerating online execution. But we feel that the more pressing need is to repair the in-store offer to the point of long-term sustainability. We cannot see how he will do that.”

Macy's Fifth Avenue

Macy’s Fifth Avenue

Macy’s Fifth Avenue store. There will be 100 Macy’s US stores closing down, which has come as a shock to many of its customers.

On the property front, he said: “This debate is set in Debenhams’ case in the context of having the longest unexpired rental period within the UK non-food retail sector. So the problem of too much space is not just going to go away with a few lease expiries.

“Clearly Debenhams has some in-store options open to it that smaller units do not have. It can close floors while keeping the store overall open, for example.

“We would like to see a thought-through presentation on in-store profitability dynamics to test the notion of adjusting down space in the existing store footprint. Clearly the other option that should be considered is the implications of store closures vis-a-vis the likely available in-store market size in the medium-to-longer term.

“We would imagine that Debenhams has only a low proportion of prime space in its total portfolio, even within its best stores. We believe that what we are considering here is the economics of varying degrees of sub-optimal space.

“What impact would closing floors have on Debenhams’ economics? Currently the strategy of upgrading under-performing space through the space improvement programme is taking the opposite view of trying to improve that space. Effectively this is likely to prevent Debenhams from subsequently moving to a closure programme within the stores currently being done.”

No comment was available from Debenhams on Haitong’s note.

Closures to come?

Whether Macy’s decision to shut large numbers of stores could be replicated here by department store groups is a question that divides analysts.

“The parallels are very strong,” asserts analyst Richard Hyman of RAH Advisory. “We have far too many stores, we have had generations of physical expansion and in the past 15 to 20 years massive online expansion. 

“There is not enough spend around – it as simple as that. The writing has been on the wall for anyone who wanted to read it. A lot of people will be in denial about it.”

But Conlumino managing director Neil Saunders believes that while the problems facing department store chains in both the US and UK are similar, the response of companies has been very different.

BHS Oxford Street

BHS Oxford Street

The BHS flagship store on Oxford Street closed this week. The rest of its branches will follow shortly.

“US department store chains have been lacklustre about differentiating themselves and doing developing omnichannel,” he maintains.

“But UK retailers, especially John Lewis, have been very quick to respond and to differentiate. The problems are the same but the UK response will allow department stores to do a lot better than in US.”

The development of own-label brands have been key to John Lewis’s successful differentiation. That is something that other British department stores, such as House of Fraser and Debenhams, have also prioriotised, albeit less successfully.

US department stores are further behind in that respect and designer collaborations are a relatively new idea.

There is a consensus that some UK department stores will shut some doors, however, even if not on the scale of Macy’s.

The problems that plague this particular retail model – big estates, high staffing costs, the need for multiple categories to perform – are too taxing to leave UK retailers entirely unaffected.

Already BHS has folded under the pressure while other smaller department store chains such as Beales have gone through CVAs.

“There are more closures to come,” concludes Saunders. “This model is particularly undermined by online. The signal here is that there is a lot more work to do.”