David Jones and Myer slide into irrelevance: Why our department stores are failing

For more than 100 years, David Jones and Myer ruled Australian retail. From the 1800s they linked us to the world, giving us a taste of the high fashion and luxury missing on Australian shores.

Now the two department stores no longer reign supreme. Facing a trifecta of missed opportunities, a downcast consumer and the rise of lean, agile rivals, few are optimistic about the future of the dominant retailers.

So dire is their plight that in January, analysts at investment bank Morgan Stanley threshed out the plausibility of the two giants merging.

“Department stores now compete more with others [than with each other],” wrote Morgan Stanley retail analyst Tom Kierath. By merging, the two stores could save some of the money that goes into competing with each other, and more efficiently focus on planning for the future.

Kierath and his team even did the sums on it. They reckon the two stores could save $91 million, or 26% of their net profits, in synergies, largely through a lower management headcount and “more rational discounting”.

The Morgan Stanley analysts acknowledged they hadn’t heard of any merger talks between the two, and given the historical rivalry and potential regulatory hurdles, a merger is unlikely. Nonetheless, the proposal shows the belief in many sectors of the market that the two companies need to do something radical to emerge from their slump. 

“Without visionary, out-of-the-box thinking, they could well become redundant,” says Steve Ogden-Barnes, a retail industry fellow at Deakin University. “Without that, their future is one of very limited growth and increased competition.”

Ogden-Barnes says he doesn’t have the solution to the dilemma facing department stores. And he’s pessimistic about what he sees as tired, rehashed solutions.

“Domestic expansion doesn’t seem to work. Discounting doesn’t seem to work. Trying to sell more to existing customers doesn’t work. Trying to be a dominant force in online doesn’t seem to work.

“I’m not sure where that leaves you. There isn’t an easy answer. You can always try harder and do better, but I don’t think there’s an obvious, straightforward answer. There’s no single thing, or no shortlist of things, that will change things exponentially for either of them.”

It’s hard to believe that only five years ago the outlook for the two department stores was bright. In 2008, just before the GFC hit Australian consumers, Myer and David Jones had sales of $3.3 billion and $2.1 billion respectively. By 2012, Myer was down 6% on 2008 figures to $3.1 million in sales while David Jones lost 11% to $1.87 million. If we look at profits, Myer weathered the downturn better than David Jones – posting a 8% rise in pre-tax profits over the five-year period (from $213 million to $230 million), compared to David Jones’ 40% fall (from $174.6 million to $105 million).

Last year Myer chief Bernie Brookes said retail conditions were “as tough as I’ve seen them”. This has been a go-to reason given by Brookes and David Jones’ head Paul Zahra for their performance in recent years. To blame this for their troubles is fair, up to a point. After the GFC, consumer sentiment collapsed. Most customers held back on the non-essentials, and scoured the market for bargains.  

But during this period of restraint Myer and David have opened dozens of stores. David Jones operates 36 stores, with another six in the pipeline, while Myer plans to have twice that number by 2016.

“My view is they expanded too quickly,” says Brian Walker, the CEO of retail consultancy Retail Doctor Group. “The Bourke Street Myer in Melbourne is a world-class destination. But it’s very hard to maintain that sort of standard in the suburbs. You and I could walk into a David Jones or Myer in the ‘burbs and be pretty underwhelmed.”

The point of putting a department store within reach of most Australian consumers is to make it their go-to destination for high-end, quality goods. But online retail offers the same goods, often at cheaper prices than Myer and David Jones.

The two companies were caught out by the rise of online shopping. David Jones opened an online store in 2000. After losing millions, it shut it down in 2003, when most of its online rivals were struck by the dotcom crash, which took down most of the early online retailers. Mistaking the skirmish for the war, David Jones didn’t reopen its online store until 2010.  Myer was quicker, opening an online gift shop in 2007.

In response to their collapsing margins, David Jones and Myer cut staff numbers. This collapse in service led to a customer backlash. The two companies are now hiring more staff in a bid to boost customer service.

While the department stores opened and shut online stores, and fired then rehired sales staff, their rivals have grown. Recent years have seen the arrival of fast-fashion maestros Zara and Topshop, along with high-end brands such as Dior and Burberry opening Australian stores. We have more alternatives than ever when it comes to high fashion – once the domain of the department store.

These are the reasons David Jones and Myer are being squeezed. But are these problems universal or specific to Australian department stores? The answer depends on who you talk to.

Walker sits on Myer’s Innovation Council. In recent years he’s also been a moderator at the World Department Store Forum. He says the concerns over the future of department stores are fairly common no matter what continent you’re on.

“All over the world there’s a general awareness that department stores to survive need to adapt to the times and lead through them,” he says.

But not all department stores are doing badly. Despite facing a notoriously difficult retail environment, Britain’s are doing alright.

The UK has three major department stores: Selfridges, Harrods and John Lewis.

“Selfridges is having a good time of it, and this is the best time in the history of John Lewis. They’re breaking their sales records every year,” says Mark Ritson, a professor of marketing at Melbourne Business School. Ritson is a consultant for many high-end brands sold in department stores.

Harrods – sold to Qatar Holdings in 2010 – posted a 15% rise in pre-tax profits last July. That comes on top of a 39% rise in profits the year before. In 2011 the company made record sales, surpassing the £1 billion mark.

A year later, Selfridges also broke through the £1 billion sales barrier for the first time in its history – a 5% jump in sales on the year before.

Employee-owned John Lewis, famous for its “Never knowingly undersold” slogan, enjoyed a profit rise of 20% in 2010, followed by a 8.7% fall in 2011 as it disastrously tried to match the prices of online rivals. However, 2012 saw it post a 60% profit rise.

Across the Atlantic ocean, American department stores suffered a dip in 2009 but some have since rebounded. Last Friday Nordstrom posted its fifth consecutive quarter of double-digit year-on-year revenue growth. The Seattle-based store has managed to carve out a successful niche in online retail, opening its  web store in 2000. New York’s Macy’s has also rebounded from a disastrous  2009.

Ritson says the reason many foreign department stores are in a far stronger position than Myer and David Jones is because they’re properly differentiated from each other – each possessing a different target shopper and enjoying different brand attributes. He says the fact that we always mull the future of David Jones and Myer in the same sentence is testament to the fact that in consumers’ minds, they’re utterly interchangeable.

In the Melbourne CBD, Myer and David Jones sit side by side in Bourke Street Mall. “Knock a door between the two, and people wouldn’t know which store they were in,” Ritson says. “The stores are identical! I think it’s quite an achievement that they both renovated and came up with such nice, utterly undifferentiated stores.”

Told of Kierath’s merger idea, Ritson laughs and says: “It wouldn’t be expensive.”

Some say David Jones and Myer are in trouble because they’ve lost their place in society. As Gilbert Rochecouste of Village Well puts it, department stores cannot survive if they are monuments only to consumption.

Rochecouste is one of the world’s leading authorities on place-making, which he defines as “the art and science of making authentic, vibrant, resilient places that are valued by their communities and admired by visitors”. He’s got the ear of many of Australia’s largest property developers. He and his team at Village Well have been part of the revitalisation of Melbourne’s laneways, and for the design of the Melbourne Central shopping precinct.

Years ago, Rochecouste was a store planning and design manager at the Bourke Street Myer, as well as the general manager of Chadstone shopping centre in Melbourne (considered the largest shopping mall in the southern hemisphere).

“Department stores have reached a crossroads – a tipping point,” he says. “There’s a context around that.” Rochecouste contrasts the department stores of today with the Myer family’s ownership of the store. The highly-philanthropic Myer family were pillars of their community, and their stores paid homage to these values. “They put gardens in their centres. They had community facilities. They had beautiful ladies and men’s rooms. They had magazines. They had food courts.

“All of this led to a sense of community.”

Rochecouste says today’s department stores are “beige” – removed from their community, lacking a sense of theatre and place, unreflective of Australia’s multicultural diversity, out-of-touch with the new values of conservation and environmentalism, and to top it off, curiously anonymous despite their expensive refurbishments. A cathedral to little more than consumption is easily replaced by online retail, he says.   

Luckily for our two department stores, none of the experts LeadingCompany spoke to predict the collapse of David Jones and Myer. The more common view is of a slow slide towards irrelevance – one that can be halted through innovation and reinvention. Both David Jones’ Zahra and his Myer counterpart, Brookes, seem to realise this, if we go by their public statements. But admitting this is one thing  – the road to recovery will rest on their execution.

Brian Walker, of Retail Doctor Group, doesn’t think department stores, or Australia’s in particular, are doomed. He says the chief offering of department stores – many brands under one roof – remains attractive to today’s customer. “But they need to reinvent.”

One way department stores are working to maximise their competitive advantage while minimising some of the associated costs is by operating more like a shopping centre.

“The classic model of retailing is to buy the product, stick it on the shelf, sell it, pay the supplier and hopefully make a profit,” Walker says. Now, David Jones and Myer sub-let floor space to brands, particularly in fashion categories.

“The point is the model is changing with regards to who bears the risk,” Walker explains. “Suddenly, department stores have defrayed their rental overhead, their staffing overhead, their inventory overhead, and they have all these new brands.”

Part of this vision is also the highly targeted use of customer databases, built up with the lure of loyalty cards. Increasingly, department stores also offer their own credit cards, which can earn a tidy profit. David Jones has a highly lucrative financial services division, which includes its joint-venture credit card with American Express.

Amped-up customer service is another part of the solution proposed by the department stores. David Jones is trialling a new mobile-payments system, where sales assistants will be able to process payments for goods away from cash registers, leaving them free to interact with customers.

Walker also points to what retail types call ‘omni-channel’ as the way of the future. An omni-channel retailer is one that delivers a consistent customer experience, no matter what ‘channel’ (website, mobile app or physical store) a customer uses. It’s a key part of the strategy of both Myer and David Jones.

But Ogden-Barnes doesn’t see omni-channel retailing as the saviour of the department store.

“It’s already happening with a majority of retailers,” he says. “It won’t save the day. If the department stores don’t do it, it’ll put them further back. It’s just one of the new costs of doing business – you just won’t be taken seriously by consumers if you don’t do it.”

One thing Myer and David Jones have going for them is strong, trusted brands. They’re such a part of Australia’s history that it’s hard to imagine them ever not being there.

But that won’t save them, Ritson says.

“If you have strong heritage and use it in a contemporary way, that’s an advantage to you,” he says.

“But if something has strong brand heritage without a contemporary side, consumers become overwhelmed by nostalgia. The brand is deemed well-loved but old-fashioned. And that’s a killer.”