The death and rebirth of America’s department stores, in charts
A look at the finances, footprints, and futures of department store chains.
The pandemic has been terrible for numerous industries, and department stores are no exception. Once the main place many Americans did their clothing and other retail shopping, department stores have long been in decline, along with the malls that they anchored.
The decline of department stores, which have substantial footprints in physical real estate, is indicative of how shopping in America is continually moving online. Americans are still buying plenty — retail sales have already risen beyond their pre-pandemic highs, according to census data — but the shopping landscape has changed.
A spate of department store bankruptcies, declining sales, and closures, as well as a variety of new businesses popping up in their place show that retail in America is in a state of rapid transition. These trends also provide a number of clues as to where this will all land.
Death of department stores by the numbers
A big challenge for department stores in recent years is the sheer overhead of the physical space they occupy. This is part of the reason why online retailers have an edge. They sell all the same stuff as department stores, but their real estate footprint is much smaller.
And the pandemic meant that Americans couldn’t go to these stores safely — or legally — exacerbating a long-term trend away from shopping in stores. In turn, e-commerce sales surged this year. Online retail sales jumped 32 percent in the second quarter compared to the first quarter, reaching $211.5 billion, according to Census Bureau data. That’s 16 percent of all retail sales. It has since modulated a bit to 14 percent as more businesses reopened in the third quarter, but a new spate of shutdowns could reverse that.
Meanwhile, department store sales have been declining, according to data from the Census Bureau. After sales took a dive in the spring when stay-at-home orders kept people out of stores, the sector is having trouble recovering as Covid-19 numbers are surging again this fall. (Note that if department stores used separate establishments to fulfill their online orders, that wouldn’t be included in the data below, so total revenue should be higher.)
Department stores have upped their online presence, with digital sales at Kohl’s, Nordstrom, and Macy’s up double digits in the second quarter of 2020, according to Coresight Research. But that hasn’t been enough to compensate for overall revenue decline. For the publicly traded department stores, total revenue — which includes online sales — has generally been stagnant if not declining for the past decade, with a precipitous drop this year due to the pandemic. According to earnings reported at the beginning of 2020, annual profit declined for Kohl’s, Macy’s, Dillard’s, Nordstrom, and J.C. Penney.
Foot traffic is another way to look at how department stores’ physical retail operations have declined. Nationwide, foot traffic to major department stores is currently about half what it was last year, according to data from SafeGraph. A new round of lockdowns could bring foot traffic back to where it was this spring: next to nothing.
As a result of these pressures, a slew of department stores filed for bankruptcy this year, beginning with J.C. Penney, Neiman Marcus, and Stage Stores this spring, followed by Century 21, Stein Mart, and Lord & Taylor this summer. Retailers in general have filed for bankruptcy en masse this year, according to a CB Insights report.
“The Covid-19 pandemic has only accelerated the fall of several retailers, which have faced dwindling sales and growing debt over the past few years as consumer preferences change,” the report states.
Even department stores that haven’t gone bankrupt are shuttering stores in an effort to cut costs and rightsize their sprawling footprints. As a result, the total number of department stores has declined precipitously in the past few years. There are currently about 6,000 department stores in the US, according to market research firm IBISWorld, and that number is expected to decline by about another 2,000 in the next five years.
In February, even before the pandemic began to shutter businesses in the US, Macy’s announced it would be closing more than 20 percent of its stores. This spring, J.C. Penney announced it would close nearly 200 stores this year and another 50 next year — about 30 percent of its stores. Nordstrom announced closures of its own in May.
Additionally, department stores like Macy’s are opting for smaller footprints as fewer people go to stores and more people shop online. Instead of a place to buy things, the remaining physical stores are functioning as showrooms.
“They show you the sexiest goods to stimulate demand and start you thinking, knowing you’re going to pull out your phone and shop there,” Victor Calanog, head of commercial real estate economics at Moody’s, told Recode.
They’re also experimenting with different store formats to better serve the areas they’re in, according to MJ Munsell, chief creative officer at architecture and design firm MG2. That can mean smaller stores with merchandise particular to the location, stores geared toward picking up merchandise purchased online, and stores that offer, for example, services like tailoring or makeup application.
“The idea that you build the same store throughout the country and people will come is archaic,” she said.
The second lives of the fallen department stores
The story of dying department stores is also one of new beginnings.
Half of department stores within malls could close by the end of 2021, according to Green Street Advisors, and the average department store ranges from 100,000 to 160,000 square feet. All these closures are going to leave behind lots of empty space and unpaid bills — retailers owe $52 billion in back rent — as well as the potential for new businesses to overtake the old.
Whether or not it’s viable to repurpose old department stores depends on a number of factors, including location, the building itself, and the needs of other growing businesses. What department stores have been repurposed into falls generally into three buckets: other traditional retail space; something entirely different like restaurants or apartments; or — what has become the de facto replacement — warehouses or fulfillment centers for online retailers like Amazon.
Department stores located in regional malls — that is, large malls in densely populated areas — have the best odds of being repurposed, according to Brandon Hardin, a research economist at the National Association of Realtors who worked on the report.
“Assuming they’re in the right location, a significant portion could be repurposed into something more useful,” Hardin told Recode. Smaller malls located in less populous areas will have a harder time finding new uses.
Department store locations in city centers, especially those in historic buildings, lend themselves well to upscale apartments and offices. Meanwhile, ones located in the suburbs can benefit from conversions that make the space feel more urban.
“There’s convenience to living in the suburbs because there’s a lot there, but not a sense of community necessarily,” MG2’s Munsell said. “People are craving the notion that they can go to a space, get something to eat, exercise, meet friends — it gives a sense of place to suburban environments.”
As such, MG2 is in the process of reconceptualizing suburban malls, one in Florida and one on the West Coast, to be mixed-use community destinations. The plans include turning the malls and their giant parking lots into a combination of housing, entertainment, restaurants, and pedestrian-friendly green spaces, in addition to new retail space.
The National Association of Realtors (NAR) compiled a number of case studies about how malls and the department stores that serve as their anchor tenants have been or are already being repurposed.
According to an NAR survey in March, among 94 malls identified as formerly vacant, about a third were simply turned into other types of retail stores or popups. A number of malls have been turned into mixed-use buildings, with much of the retail being replaced by a combination of offices, apartments, and hotel rooms. A handful of others were turned into a wide variety of businesses, including medical offices, fitness centers, churches, and even one cricket stadium.
For example, Los Angeles’s Westside Pavilion — this is the iconic mall that used to house Macy’s and Nordstrom and was featured in the movie Clueless — has been converted into office space for Google.
The Westside Pavilion mall in Los Angeles, which was featured in Clueless, is being converted into Google office space.
An artist rendering of repurposed space at the Westside mall.
The million square feet of retail space of Worcester Center Galleria in Massachusetts has been converted into 500,000 square feet of office space, 1,000 residential units, and 168 hotel rooms, as well as 350,000 feet of new retail.
And then there are warehouses and fulfillment centers. A lot of the conditions that once made department stores in large malls viable also work well for online fulfillment centers. They’re centrally located spaces large enough to hold the goods needed for large nearby populations. Becoming distribution centers represents a productive second life for department stores — albeit one coated in a bit of irony, since the online retailers who use them are part of the reason for department stores’ decline in the first place.
The Wall Street Journal reported this summer that Simon Property Group, the biggest mall operator, was discussing turning some of their 11 Sears and 63 J.C. Penney stores — both of which have filed for bankruptcy — into fulfillment locations for Amazon, their biggest competitor. That would provide a much-needed source of revenue for Simon, which received only 85 percent of its expected rent last quarter.
Amazon has already converted a number of former retail spaces into online facilities.
Last year, Amazon finished construction on an 855,000-square-foot fulfillment center in the place of what had once been the closed and condemned Euclid Square Mall in Ohio. That was the second time an Amazon fulfillment store rose from the ashes of a dead Ohio mall.
Indeed, it’s likely many malls and department stores will meet a similar fate. Industrial space commands lower rent than retail, so mall owners will not be getting their previous premiums on those locations. For now, though, anything is better than empty space.