PRINTABLE VERSION HERE

Retailers do not need to be reminded that disruption in the space has been numerous with up-and-coming tech (Web3 and AI), figuring out the “new normal” following a global pandemic, a war in Europe, as well as inflation. These are only a few of the things that have impacted retail businesses between 2020 and 2022.

The role of the IADS as an expert platform dedicated to the department store world is to be able to step away from the immediacy and the constant stream of news and be able to analyse the situation based on actual and reliable numbers.

This is the reason why the IADS launched the first edition of its exclusive Department Store global observatory, the IADS 100, in May 2021. This list, capturing data from a number of department store companies around the world, is intended to track the changes in the retail format and see how players in various markets are able to adapt to challenges and change. It is exclusively based on first-party information that the IADS sources itself.

In the latest rendition of the IADS 100 monitor gathering 2021 fiscal year figures, it has been clear that compiling comparable information across markets has proven to be more and more difficult. Many retailers are forecasting against ‘normal’ times and looking to beat 2019 figures rather than 2020 results. This is fair as department stores were forced to operate in limited ways or not at all for long periods of time, therefore typical KPIs from 2020 are no longer reliable when moving the business back to ‘usual’ times.

What is hard about referring to 2019 figures rather than 2020 data is that there might not be a ‘business as usual’ reference to compare to anymore. It seems as if retailers are having to constantly adapt, therefore year over year comparisons need to be deeply analysed to be fully understood.

This report will attempt to understand some of these major changes across global retail markets. In order to make comparisons year over year, all exchange rates to Euros come from March 22, 2021, which was the date chosen during the initial IADS 100 release.

2021: retailers are not out of the woods yet

Before breaking into the numbers, it is important to first look at what happened in retail between the years 2020 and 2021 as a reminder of the times that these department stores are operating. 2021 started as a year of hope and recovery, but many could not imagine the impact that the global pandemic left on the world.

In March of 2021, the Suez Canal was blocked for 6 days, disrupting the global supply chain that was already weak due to Covid impacts. If the shutdown of factories was not enough to showcase the risks for retailers to operate with a global supply chain, this 6-day disruption brought even more awareness of the impact of having reliable and locally sourced products. The shipping delays caused by the Suez Canal block and from Covid interruptions led to a number of fully packed shipping cargo being stranded in ports. By the time some products arrived, they were out of season and no longer relevant, leading to too much inventory and major markdowns at the end of the year.

These supply chain disruptions also heightened the awareness of consumers as to where their products actually come from. They started to ask more questions about where brands are sourcing their goods, how the products are made, the impact supply chains have on the environment, and what the ‘made in’ label actually means. This even led to sanctions imposed by western countries on Chinese goods as a response to the alleged use of forced labour in Xinjiang, China.

The year 2021 also saw the re-emergence of social interactions with the release of the Covid vaccine. After being locked up at home during the pandemic and shifting to a more permanent work-from-home scheme, consumers started valuing personal interactions more, and their expectations for how retailers can entertain them are higher. Shoppers are looking for personalised and experiential shopping which has shifted the role of the physical store, meaning department stores need to make the most of their square footage and prime locations to capture the interest of consumers.

Working from home also changed what products consumers needed to buy. There was an increased need for home office furniture and technology and a reduced demand for work attire and formal wear. In fashion, loungewear took over sales from suites and dresses as formal celebrations like weddings and holiday parties were pushed or completely cancelled.

Understanding that selling to consumers where they are also grew in importance, especially when it came to reaching Gen Z customers. Retailers needed to successfully add social media platforms to their omnichannel strategy. Keeping up with the latest technology to stay relevant in the eyes of young shoppers is neither easy to implement nor cheap. New platforms beyond TikTok and Instagram started to emerge, and retailers realized the importance of fully understanding how to achieve sales across such channels.

Was 2021 a year of false hopes for retailers? What the final numbers tell us

Asia: struggles to bounce back due to waves of lockdowns

Asian department stores continued to be up against strict lockdowns and Covid measures in 2021, especially seen in China and Hong Kong. In China, BHG, Wangfujing, Rainbow, Parkson Retail Group, Maoye, and New World all saw a slightly positive sales trend in 2021 compared to 2020 as stores began to occasionally reopen and citizens were allowed to leave their homes. Travel has been heavily restricted, therefore Asian tourists that typically buy luxury goods in Europe have been forced to use this money at home rather than abroad. Despite the redirection of funds to local stores, Chinese department stores such as Wuhan and Golden Eagle continued to report losses in 2021 versus 2020. And in Hong Kong, Lifestyle Sogo reported positive turnover while Wing On saw losses.

Japanese department stores also saw a range of results with Takashimaya, Daimaru Matsuzakaya, H2O, Marui reporting relatively strong positive turnover between 2020 and 2021, while Isetan Mitsukoshi, Tokyu, and Tobu reported losses. Sogo Seibu in Japan reported a major loss from 2019 to 2020, but rebounds have yet to be reported as figures for 2021 are not available yet. It is important to note that Japan was closed to foreign tourists for two and a half years due to the global pandemic, thus the reopening in 2022 is sure to help sales figures for retailers in the coming year. This will be for sure a much-needed breath of air in the market, as all Japanese department stores reported lower sales in 2021 compared to 2019, including Tobu, where sales halved, and Isetan Mitsukoshi, which lost 66% compared to the 2019 sales level.

The rest of Asia saw a variety of results. In India, Lifestyle Landmark Group and Shopper’s Stop reported positive earnings. Matahari in Indonesia reported a slight increase in turnover, which was the same case for SM in the Philippines and Hanwha Galleria in Korea. Finally, Odel in Sri Lanka reported a loss of turnover from 2020 to 2021. The whole region was affected by relatively severe lockdowns, which explains why no retailers from this group were able to recuperate the 2019 sales levels, despite the stimulus checks granted by some governments.

With the goal being to outperform 2019 numbers, the only department stores in Asia that reported higher sales in 2021 than in 2019 are BHG, Wuhan, and Golden Eagle, all of which operate in China. BHG in particular grew an astounding +62% vs 2019, thanks to its exceptional positioning in the country when it comes to luxury brands and experiences. Such a performance allowed the Beijing location to secure the title of the most profitable department store in the world, which Harrods lost in 2020.

This indicates that department stores in Asia still have quite a journey to make to return to usual operating times and they might be heavily dependent on the reopening of Chinese borders, that was decided early 2023.

Europe: mostly a recovery story

The year 2021 was seen as a time to get back on track for European department stores. In the UK, John Lewis, Marks & Spencer, Selfridges, Harrods, Fenwick and Liberty all saw positive, but almost flat, results compared to 2020 figures. While Fortnum & Mason was not as fortunate and saw a continued downward trend in their sales figures. Harvey Nichols has not shared 2021 figures, but the department store shows the same 2019 to 2020 trend of a -67% drop in sales during the 2020 fiscal year.

Other European players such as Kaubamaja from Estonia, Stockmann from Finland, El Cortes Inglés from Spain, Ahlens and NK from Sweden, and Coop and Jelmoli from Switzerland showed positive but almost flat sales results from 2020 to 2021 that prove the road to recovery will not happen overnight. Europe is not only recovering from the direct impacts of Covid but also have new challenges which will make the bounce back even more challenging. This will be discussed further in the section below dissecting what is to be expected from 2022 results and beyond.

Only Marks & Spencer, Coop Group, John Lewis, and NK beat 2019 ‘normal time’ KPIs in 2021, making a swift recovery from the 2020 decline. The remaining European department stores will be looking to close the gap in the coming years with many barely missing the mark.

Interestingly, in the 4 department stores that increased their sales in 2021 compared to 2019, 3 of them (Marks & Spencer, Coop Group and John Lewis) include large food sections and a strategy based on prices, which explains their resilience in tough times thanks to their proximity with their customers (El Corte Inglés also belongs to this typology, however, the business in the company is also very much based on touristic flows, especially in Madrid, Barcelona and the Balearic islands).

NK is an anomaly as a luxury department store (hence also very much dependant on tourism), which is explained by the fact that it changed the nature of its business between 2019 and 2021. In 2021 NK bought the Departments Stores Europe AB company, a brand importer, and started de facto to purchase and manage product flows, while prior to this acquisition NK was only managing the real estate space within its department store.

Finally, the variable gap between 2019 and 2021 sales for the companies who did not pass also gives an idea of their sensitivity to tourism. For instance, in the UK, Selfridges and Harrods are much more dependent on tourism than Fortnum & Mason, which explains why returning to normal is harder for the two former companies.

Americas: 2021 sees positive growth

Department stores in the Americas (the sampling including United States, Mexico, and Chile) all saw positive sales trends between 2020 and 2021. In the United States, Macy’s, Kohl’s, Nordstrom, Dillard’s, and Neiman Marcus all saw a strong recovery in 2021 sales figures. While the United States was also hit by the global pandemic, stores did not shut down as drastically in the US as in other parts of the world such as Europe or Asia. US retailers were also able to reap the benefits of numerous stimulus checks granted to US citizens in 2020 and 2021 that boosted the economy.

In Latin America, positive sales trends were also noted from El Palacio de Hierro and Liverpool in Mexico, and Falabella, Ripley, and Cencosud in Chile. These countries have not only faced the pandemic but also lived through drastic political changes in government leaders that have shifted right winged regulations to more left policies since 2018. These changes might prove to bring more challenges in the upcoming years.

Compared to 2019 figures, most US department stores neared the 2019 target but slightly fell short except for Dillard’s and Neiman Marcus which reported figures just over 2019 figures. In Chile and Mexico all department stores in the sample outperformed 2019 turnover. This shows that at the end of 2021, the Americas retail markets were showing strong signs of recovery from the pandemic, but this might not be enough to get them through the next set of challenges that 2022 is to bring.

What to expect from the 2022 fiscal year and beyond

While fiscal results for 2022 are still being calculated and modelled, we can already predict what the data might reveal. While most of the world is rebounding from the global pandemic, China and parts of Asia are facing waves of lockdowns that have impacted travel and store operations. Beijing was also the host of the 2022 Winter Olympics which typically welcomes international travellers and is a major economy booster, but the event was strictly limited to citizens living in China to avoid any further spread of the Covid virus.

Chinese consumers being stuck in Asia has also impacted European department stores, especially the French ones that dedicate a lot of resources to selling to Chinese tourists. These department stores have had to shift to appeal to locals and US tourists to try to get their sales figures back on track. But with restrictions starting to lift for Chinese tourists, Europe could record a major bounce back in 2023 sales reflecting the return of these prized consumers. Across the English Channel, the UK faced the death of Queen Elizabeth in 2022 which closed shops for a short period of time and the country is dealing with an unstable government representative and heavy criticism of the leadership.

Another major headline in Europe in 2022 has been the war incited by Russia’s invasion of Ukraine. As countries and businesses show their support for Ukraine, many retailers had to pull their operations out of Russia, including department stores which were previously selling their private labels on the market, for instance. Russia and Ukraine are also both heavy exporters of goods that have impacted the global supply chain and created scarcities in a wide array of goods and increased the price of goods worldwide. Energy scarcities have led to a crisis that has heavily impacted the overhead costs of retail operations.

Between the Covid recovery and the war, the increase in the price of goods has led to painful inflation. Governments are now weary to respond with raised interest rates for fear of causing a recession. If a recession is in fact in the near future for 2023, this will greatly impact sales figures for retailers as consumers will stop spending on unnecessary goods and products.

Finally, regulations surrounding climate change and sustainability are starting to become more concrete with mandatory steps that are needed to be taken by brands and retailers. At the beginning of 2023 regulations will be enforced by Europe and the US that will heavily disrupt how they operate and communicate with consumers. But with the threat of inflation and a recession, it will be interesting to see if such sustainability issues will still be prioritized as profits and recovery take precedence in the eyes of governments and business leaders.

The ultimate test for department stores is not merely to encounter these disruptors, but to be able to make it out on the other side and learn lessons along the way. The unknown challenges that retailers face year after year are never black-and-white topics and each market has its own unique set of hurdles in their own time. Facing these obstacles alone is the greatest challenge, but difficult times can be eased by understanding how similar business cases have been dealt with by department store partners around the world. Exchange associations such as the IADS give global retail leaders an opportunity to ask hard questions when facing difficulty and share the lessons of their triumphs.

<u>IADS Note*</u>

While department store diversity can be a strength, it also makes comparisons difficult. It is clear, for example, that data concerning revenue, profits, selling space etc. will often not be available from privately held companies. If the IADS obtains such data privately and confidentially, we will not publish it.*

Read the financials from 2020 and 2021 here:

2020 and 2021 FINANCIAL RESULTS

Credits: IADS (Mary Jane Shea)