Department stores are key US e-tailers so why are analysts worried?

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Macy’s is the sixth largest e-tailer in the US

US department stores are now among the biggest players in the e-tail sector but their profit margins are groaning under the pressure, according to analysts at credit Suisse.

Their analysis, reported by Fortune magazine shows that department store websites are popular shopping destinations with around 14% of the revenue of the chains that anchor US malls now being generated online.

That may seem pretty tame when compared to a company like the UK’s John Lewis where 40% of sales were made online over Christmas and which expects clicks to be bigger than bricks as soon as 2019. But it is, at least, double the rate of four years earlier and interesting given it’s not so many years ago that analysts were questioning whether the department store as a concept could survive in the 21st century.

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JC Penney

The 14% average figure masks some big variations with Nordstrom and Macy’s getting 19% and 18% of their sales, respectively, via e-tail last year. Macy’s is actually the sixth-biggest e-tailer in the US. Other chains’ e-sales that were analysed included JC Penney (13%), Kohl’s (11%), Bon-Ton (6%) and Dillard’s (5%). 

But there’s a downside to all this that Credit Suisse highlighted. And that’s the cost of e-commerce. Free shipping, free returns, investment in tech and distribution facilities all cost a lot. In fact, Credit Suisse said that Kohl’s (which shares the most info about the cost of its e-commerce ops out of all these firms) had an e-tail operating margin of 9% last year compared to 14% at its physical stores. And that weak 9% was a marked improvement on the operating margin that was negative four years ago.

Fortune reported that further problems come as e-commerce grows because sometimes this more-costly-to-maintain channel simply cannibalises store sales. That’s certainly looked like the case with Kohl’s.

And while some retailers are closing physical locations if they don’t generate enough profit, department stores are caught in a bit of a quandary. The increasingly-popular click-and-collect delivery option can only be offered with a large portfolio of local stores. JC Penney told Fortune that’s a key reason it won’t be closing many more of its 1,000 stores, even though sales per square foot are way down from peak levels.

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What does it all mean for the future? Well, Nordstrom has already said it won’t be increasing its e-tail investment anymore and is expecting online ops to make more of a contribution.

Of course, decisions taken now might change not too far down the line as consumer behaviour, shopper demand, technology, upstart competitors and any number of other factors mean strategy can’t be set in stone.

As Credit Suisse said: “The ‘new normal’ remains unclear.”

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