The demise of the US department store

The fight to acquire Neiman Marcus in 2005 drew in some of the biggest names in private equity.

The price tag on the department store chain: $5.1bn. It was a plum sum for the much-admired purveyor of Chanel handbags and Loro Piana cashmere; its chief executive at the time, Burton Tansky, was so venerated in the retail world that he won the nickname “Mr Luxury”.

The group’s attention to detail was legendary; the New York Times marvelled in 1980 that the White Plains, New York, location sourced its smoked salmon and herring from Manhattan’s famous Murray’s Sturgeon Shop — not standard fare at the Texas-based company’s other stores.

That combination of rare goods and exceptional service is what made department stores — a concept imported from Europe in the mid-1800s — a hallmark of sophisticated urban life. The names adorned on the stores — B Altman, Stern’s, Marshall Field’s, Lord & Taylor — were known in households across the country. And, for a time, these department stores came to dominate retail in America.

Even as shoppers began to turn to the internet, Warburg Pincus and TPG — who ultimately won the 2005 bid for Neimans — were willing to bet that the newly well-to-do would continue to turn to the merchandisers they had long trusted. In 2013, sharing a similar vision, buyout group Ares Management and the Canada Pension Plan Investment Board bought Neiman for $6bn.

FILE -- The Neiman Marcus department store in Manhattan's new Hudson Yards development, April 2, 2019. Neiman Marcus has stopped accepting merchandise and is expected to declare bankruptcy in the coming days, the first major retailer felled by the coronavirus pandemic. (Karsten Moran/The New York Times) Credit: New York Times / Redux / eyevine For further information please contact eyevine tel: +44 (0) 20 8709 8709 e-mail: info@eyevine.com www.eyevine.com

Neiman Marcus’s department store in Manhattan’s Hudson Yards development. The company faces financial difficulties and missed debt payments in April © New York Times/Redux/eyevine

Now Neiman Marcus, which carries $4.8bn of debt and missed an interest payment to its lenders, is on the brink of bankruptcy. Other department stores are likely to follow. People briefed on the matter expect the company, which operates 43 namesake stores, 22 off-price locations and two Bergdorf Goodman flagships in New York, to file for protection from its creditors and landlords in the coming days. It comes less than a year after its New York rival Barneys did the same, a move that ultimately ended in liquidation.

If there was ever an event to test the mettle of retail chieftains across the US, the coronavirus pandemic has been it. Malls have shut. Consumer spending has flatlined, with sales at department stores down a staggering 23 per cent in March from a year prior, the largest decline since at least 1994, according to data from the Census Bureau. And all the while rent and interest payments have been accruing.

Line chart of US department store retail sales, % change vs same month in previous year showing Coronavirus crisis cripples US department stores

“Stores will reopen but we certainly don’t think things will snap back to where they were six months ago or six years ago,” says Erik Nordstrom, who leads the department store that bears his family’s name. Nordstrom announced on Tuesday that it plans to close 16 of its 116 locations. “Debt is much more of a problem in our environment right now.”

Neiman Marcus isn’t the only department store chain facing potential bankruptcy. JCPenney is seen as particularly vulnerable and could turn to bankruptcy protection to wipe out burdensome liabilities. Lord & Taylor, which was acquired by clothing rental startup Le Tote last year, is planning to liquidate when its stores reopen, CNBC reported on Tuesday.

Macy’s, meanwhile, has hired advisers to help it shore up its balance sheet. J Crew, another staple of the American shopping mall, filed for bankruptcy protection on Monday. When the pandemic is over, the American mall won’t look the same.

How did we get here? The coronavirus is not entirely to blame for the problems presently facing Neiman Marcus and JCPenney; both were already suffering from bloated debt levels that left them little able to respond to the sweeping changes in American retail over the past two decades, including the rise of e-commerce and the migration of young people from the suburbs to cities after the financial crisis.

“In this environment it’s just impossible when you have such massive fixed costs,” says David Shiffman, the co-head of investment bank PJ Solomon’s consumer retail group. “These businesses are enormous and consume huge amounts of capital. That has been ongoing for years.”

Debt has “paralysed” Neiman’s potential growth, adds Robert Burke, the chief executive of retail consultancy Robert Burke Associates. Burke, who previously oversaw luxury and fashion brands for Neiman Marcus’s Bergdorf Goodman, says the company had been hamstrung by its financial obligations as luxury brands and rivals such as Nordstrom were investing heavily in their online businesses and finessing supply chains to allow for in-store pickup and same-day delivery.

Line chart of Enterprise value ($bn) showing On sale: large US department store operators

“While we all talked about the importance of omnichannel, few of the department stores actually offered that, even though they said they did,” he says. “And to the consumer it’s all the same, whether they buy online or in store. That was a hard pill for the department stores to swallow.”

The troubles facing luxury goods department stores have been further exacerbated by the brands that they themselves helped incubate over many decades. Throughout the 2000s, labels such as Louis Vuitton, Prada and Gucci began to compete with the department stores by increasing their own retail footprint.

The expansion allowed them to establish a direct connection with their customers and exert more control over the presentation of their product and the cadence of discounting. And it shifted the power back in their favour: if a season’s merchandise was not critically well received, the brands still had an avenue to sell.

It was welcomed at first, making malls in Boca Raton, Florida and Short Hills, New Jersey bigger draws for an increasingly affluent clientele. But it began to splinter the consumer. If the same Burberry trench coat was available in Nordstrom, Saks Fifth Avenue or Macy’s-owned Bloomingdale’s, and at the Burberry outpost the brand owned itself, where would the consumer choose to shop?

Column chart of Personal luxury retail sales, US only ($bn) showing Changing consumer habits: luxury shopping goes increasingly online

E-commerce was also beginning to bite. Department stores, which had long differentiated themselves by sourcing the must-have product, were facing scores of new competitors. Gucci sunglasses and Diane von Furstenberg wrap dresses could now be found on dozens if not hundreds of websites, amplifying price competition. At the time of the Neiman buyout, consumers spent $40bn more at department stores than they did on goods online. Within two years, e-commerce sales had vaulted above.

William Taubman, the chief operating officer of mall operator Taubman, which owns the Beverly Center in Los Angeles, likens the shifts by consumers away from department stores to the declining ratings of broadcast networks.

“At one time the network anchors on ABC, NBC and CBS had a 90 per cent market share,” he says. “Today they have a much lower market share but they still represent a cultural consensus. They still attract a cross-section of America that comes together for different reasons at different times. The department store is the same thing. Their share is definitely lower, but they still have a unique drawing power.”

The fight among mid-market department stores such as JCPenney and Macy’s, which had a far larger footprint than upmarket rivals like Nordstrom or Saks, has been just as brutal. Amazon has encroached on their territory, while fast fashion purveyors such as H&M have continuously nipped away at marketshare.

Woman looking at shoes at Nieman Marcus department store, an edifice of elegance and glamour. (Photo By Nina Leen/The LIFE Picture Collection via Getty Images)

Better days: shopping for shoes at Neiman Marcus during a golden era for US department stores © LIFE Picture Collection via Getty

Young gift wrapper standing inside the Neiman Marcus store, Dallas, Texas, May 1945 (Photo by Nina Leen/The LIFE Picture Collection via Getty Images)

A gift wrapper at the Neiman Marcus store in Dallas in 1945 © LIFE Picture Collection via Getty

Can they recover? While retailers have attempted to ramp up sales through their e-commerce channels during lockdown, analysts expect many to face bankruptcy and that a new round of department store closures is in the offing. Consolidation has also been suggested, with Saks Fifth Avenue owner Hudson’s Bay seen as a potential white knight for Neiman Marcus if the business does indeed fall into bankruptcy. Hudson’s Bay chief executive Richard Baker has expressed his interest in acquiring the store before.

But Hudson’s Bay is now mired in its own challenges; its real estate joint venture decided to skip April payments owed on its mortgage obligations.

Analysts with the brokerage Cowen estimate that Macy’s, which in February was stripped of its investment grade credit rating from S&P Global, has enough cash to weather four months of closures. They expect Nordstrom, by contrast, could survive for a year with its doors shuttered.

It is a view that has market backing. While the yield on $500m worth of Macy’s debt that matures next year has shot above 13 per cent, underscoring the financial strain on the company, the yield on a $500m Nordstrom bond that comes due next October has climbed to a modest 5.4 per cent.

Graham Tuckwell

FT editors look at how the coronavirus crisis will transform the creative industries

Erik Nordstrom predicts a bout of discounting by retailers across the country when stores begin to open, given many are inundated with out-of-season merchandise. Nordstrom has moved swiftly to preserve its balance sheet and access to capital; it has drawn down a credit line from its banks, suspended its dividend, furloughed employees and cut management pay. It has also raised new debt to bolster its cash levels.

“A crisis is a good time to get very focused, to get very clear on priorities and drive the change that’s needed,” he says. “We have had to pull a lot of levers to ensure we’ve got the strength in our balance sheet and the financial flexibility to continue . . . in uncertain times.”

Others have not had the same good fortune. It is unlikely that department stores will ever regain the place they long held in the American consciousness, even if Americans flock again to the suburbs. But there is reasonable hope that not all department stores will go extinct, even if the vast majority struggle and ultimately fail.

A glimmer lies in the fact that for other battered-down retailers, the elimination of rivals has meant at least one or two brands can survive in some segments. The market is already placing bets on who that will be.