Is the department store doomed? Don’t count on it

House of Fraser, Debenhams and others are in trouble. But history shows this retail format has the capacity to reinvent itself and bounce back, says Max King.

Department stores are widely regarded as the backbone of shopping centres and high streets. Yet they have been struggling for years. House of Fraser recently announced that it would close many of its shops; Marks & Spencer is planning to close 100 by 2022; Debenhams will shut ten; and BHS has gone bust. What's more, the latest trading figures at John Lewis were a disappointment.

To me, the surprise is not that they are now closing but that they have survived for so long. One of my first audits as a trainee at Peat, Marwick & Mitchell (now KPMG) 40 years ago was Debenhams, which involved a long stretch at its accounting centre in Taunton. For at least nine months of the year Debenhams didn't make enough money to cover its variable costs, let alone its fixed ones. The two or three months over Christmas and the January sales always came to the rescue. Even then the profits were earned by the finance arm, which issued store cards to its own customers and those of other retailers. Like most retailers, Debenhams' year-end was 31 January, when its balance sheet looked best.

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Department stores had been closing down for decades all around the country, even in Oxford Street where Bourne & Hollingsworth and Gamages, on what had become the unfashionable eastern side of Oxford Circus, shut down in the early 1970s. And no wonder. They occupied large buildings with little or no car parking either at the store or nearby. This was a particular problem for the in-store food halls, normally downstairs, which were struggling to compete with out-of-town supermarkets. Customers might venture up to the first floor, but it was hard to get them any higher.

The upper floors were occupied by the departments selling carpets, furniture and electrical goods, which were regarded as destination rather than impulse items. Here, too, sales were migrating to specialist stores, usually out of town, with more space and more choice. Finally, opening hours were short; no Sunday trading and 5.30pm closing on most days.

The 1980s revival

In time, the stores adapted, with longer opening hours and new, more focused, retailing formats. Stores with just three storeys were opened in new shopping centres and atriums were cut through the flagship stores, encouraging customers to venture higher. Uncompetitive departments were closed down or handed over to specialist operators. Service levels improved. Shop-in-shop concessions with rentals based on turnover were broadened, offering customers well-regarded brand names while the operators gained flexible floor space. The concessions were complemented by improved in-house merchandise, with the chains contracting in well-regarded designers. Fashion and department stores ceased to be a contradiction in terms. There were still plenty of customers who wanted to browse between department stores rather than slog from one specialist store to another, and cafes proved to be a much bigger draw for the top floor than carpets and curtains.

Still, it remained a rocky ride financially. Mohamed al-Fayed spun out House of Fraser in 1994, and only Harrods remained in his portfolio. Debenhams was taken over by Burtons and then spun out again, minus Harvey Nichols and its freeholds. This created a requirement to pay rent on the stores, increasing financial vulnerability. In 2000, C&A closed its 109 stores; in 2005, House of Fraser closed Barkers. BHS was struggling long before Philip Green decided to ditch it.

Hope for the future

Still, it would be a mistake to assume that department stores are now doomed. People like the convenience of buying online, but they also like seeing the goods, especially clothes, before they buy. A department store with a good on-line offering has the potential to get the best of both worlds. Customers prefer walking away from a shop with a bag to coming home to find a card brusquely reporting a failed delivery. For many, shopping is still a social activity, not simply a chore.

Companies die because they fail to reinvent themselves and give up; not, generally, because their market disappears. Woolworths, which seemed equally doomed as a retailing format in the early 1980s, continues to flourish in Australia and South Africa where, remarkably, Wimpy still holds its own against McDonald's and the other burger chains. The cornerstone of 3i's success in recent years has been the rapid expansion and growth in profits of Action, a pan-European retailing format that looks remarkably like Woolworths.

Forty years ago, I thought department stores were doomed. Now, with the benefit of experience, I am much less sure, despite their equally daunting challenges today.