Reinvented Department Stores and Malls See Robust Rebound

Bloomingdale’s at Santa Monica Place

Department stores and shopping centers malls are gaining market share for the first time in three decades, according to consultants Customer Growth Partners, and this month most will report their best annual earnings in years -- if not ever.

“Department stores from Macy’s to Nordstrom, and mall operators from Macerich to Simon, have used the recession not just to cut costs, but to reinvent themselves,” said Craig Johnson, president, Customer Growth Partners, a consulting and research firm serving retail and other consumer industries.

As a result, Johnson explained, department store anchors are no longer artifacts of a bygone shopping era. They have stemmed a generation-long attrition of customers to the big-box retailers, and have gained market share versus off-mall retailers for the first time since the 1980.

According to CGP’s just-released study, department stores’ share of the U.S. retail market rose for the first time since the 1980’s in 2010, fueled both by innovation and superior mall anchor execution -- combined with topline weakness at Walmart’s U.S. division, now suffering through almost two years of lagging sales.

“Industry leaders such as Macy’s, Nordstrom and Saks have all used the recession’s down years to reinvest and reinvent themselves for today’s shoppers, and to bring back levels of newness, excitement and execution not seen in years,” Johnson said. The result is that over the holiday season, department stores enjoyed their first fourth-quarter sales increase since 2006.”

Later this month, Johnson added, Macy’s will report its best performance since its 2005 acquisition of May Co., with 2010 sales up 6.5% to $25B from 2009’s recession-depressed levels.

“More important,” he added, “Macy’s operating income will reach an estimated $1.87B, a 75% increase over 2009, and the best results since 2005, propelled by the steep earnings leverage created by combining years of cost cuts with renewed topline growth.”

Johnson singled for credit the merchandising excitement that Macy’s has generated from partnerships with Tommy, Martha and Madonna -- and the kind of inventory and selling space productivity its MyMacy’s localization effort has achieved.

Nordstrom has also just completed a stellar comeback year, with sales of $9.3 billion a 13% year-over-year increase. According to Johnson, Nordstrom’s 2010 topline growth was fueled by great merchandising; continued full-line and Rack store, and e-commerce, expansion; and by improving store productivity. 

“Although 2010’s $400 per square foot productivity is a sharp improvement from 2009’s $362 per square foot, Nordstrom still lags 2007’s peak productivity of $435 per square foot,” Johnson said. “But it’s headed in the right direction, and when the year-end financials come out next week, Nordstrom’s earnings leverage will be as steep or steeper than Macy’s, and it will report its most robust earnings in years.”

Mall Growth: Looking at malls, Johnson said mall vacancy rates reached 10 to 20 year highs in 2008-09. But by later 2010, the rebound in consumer spending -- which underpins retail expansion plans -- led to the sector’s first increase in occupancy rates since 2007, and year-end regional mall occupancy rose to an estimated 92.5%.

One of the factors behind the increase in occupancy rates, according to Johnson, was a drop in retail Chapter 11 filings.

“But the primary growth driver was fleet growth at domestic retailers, such as Aeropostale/PS, Forever 21, Francesca’s, HH Gregg, Love Culture, Rue 21, Vera Bradley and Vineyard Vines,” he added. “Many foreign players such as Cotton On, H&M, Pandora and Sephora have also been rapidly expanding.”

Johnson also pointed out that mall operators haven’t been standing still waiting for consumers to return over the past three years. Developers such as Simon and Tanger, for example, have continued to expand their highly successful outlet malls. And while traditional enclosed mall development has been in the deep freeze for over five years, some REITS, such as Macerich, Simon and Westfield, have focused instead on redeveloping existing properties, bringing “B” malls to “A”, and even “AA” status, he said. “Redevelopment has focused on opening up older enclosed malls, repurposing -- and then retenanting -- vacated mall anchors such as Mervyn’s, or sometimes even adding off-mall big boxers such as Costco and Target,” Johnson said.

In August, for example, Macerich reopened Santa Monica Place to a rousing reception. The center is now anchored by Nordstrom, a SoHo-merchandised Bloomingdales, a host of high-end specialty stores -- and a rooftop restaurant area overlooking the Pacific.

“By bringing both newness and new tenants to shoppers, developers have sharply increased sales productivity at their anchor and in-line tenants, by as much as 40% or more,” Johnson said. 

As a result of such initiatives, mall productivity rose in 2010 for the first time since 2007, to $469 per square foot, an 8% increase over 2009. It’s important to note, Johnson said, that Macerich is about to announce the first new traditional mall in years, to open in suburban Phoenix in 2014.

CGP’s 2011 retail forecast calls for 5.1% growth, the fastest since 2006’s pre-recession 5.3%. The $2.87 trillion 2011 forecast would top the total sales record of $2.73 trillion set in 2010.

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