It’s been three years since Federated Department Stores announced its strategic plan to launch a national department store brand under the Macy’s banner. Since that time, the company has been busy rebranding its 800-plus stores, consolidating its real estate portfolio, even renaming itself Macy’s Inc. – all to prove business is better than ever and the department store sector is vital, not the dinosaur so many have charged it with becoming.

The nation’s economy has not cooperated, however. The costs of gas and food are rising, housing values have plummeted, unemployment is up and consumers’ discretionary spending is down. That’s impacting department store organizations’ bottom lines and stock prices. Dillard’s, Saks, Macy’s, even Target have been the subject of takeover speculation, as pressure mounts from investors to improve shareholder value.

Nordstrom emphasizes designer brands and hard shops to strengthen its appeal to fashion-savvy customers. Photo Credit: Chris Eden, Seattle

Many department stores reported lower-than-expected 2007 holiday sales and disappointing beginnings for 2008. Macy’s same-store sales were down 7.1 percent in January. Nordstrom suffered a 6.6 percent decrease. And, in these promotional times, an uptick in sales does not necessarily mean profits.

It’s enough to make the old department store dinosaur wander into extinction. But no! Instead, these retailers are putting on their Sunday best and sending out the message that their business is alive and well, with a focus on bringing back the old idea of customer experience. “Department stores went through a phase of becoming quite generic, just putting the brands out there,” says M.J. Munsell, principal at Seattle-based Callison Architecture, which has worked with such clients as Nordstrom and Harvey Nichols. “What we’re seeing now across the board is a desire to go back to providing that customer with a high level of experience.”

21st Century Experience

Just how are they doing that? By offering new merchandise assortments, improved shopping amenities and comfortable store environments that give shoppers a reason to want to return.

“Retailing today begins with merchandising but then it extends into experience, service and how the customer is treated,” says Dave Lindsey, Nordstrom’s vp, store planning. “All those components differentiate one store from another and are part and parcel to delivering your brand to your shopper.”

Decades ago, department stores were revered for delivering that all-under-one-roof offering. Then in the 1980s, many of those departments – which included not only apparel but also consumer electronics, toys, stationery, furniture, jewelry, hair salons and restaurants – began to shrink as big-box category killers entered the market. Without those defining merchandise offerings, the definition of who and what was a department store broadened.

Today’s department store sector ranges from the more traditional Macy’s – which still sells furniture and small appliances – to specialty apparel retailers like Nordstrom and Neiman Marcus and quasi-mass merchant discounters like Penney’s, Sears, Kohl’s and even Target.

While in the past, department stores sought to be all things to all people, now each retailer is trying to find its niche and be a dominant player in that market.

For Nordstrom, that means becoming even more of a fashion specialist and emphasizing designer brands and hard shops within its sophisticated store environment. “To win our customer’s loyalty, we have to be able to sell her the newest, most compelling merchandise available and have the expertise to pull it all together for her,” says Lindsey. “Our goal is to provide customers with a best-of-market selection of designer, luxury and quality fashion brands.”

Lord & Taylor has also recently revived its name by bringing more than 100 designer brands, like Diesel, Tracy Reese and Ted Baker, into its stores.

Others are trying to create a point of distinction by aligning themselves with design stars. Target started the trend, featuring products designed by the likes of Michael Graves, Isaac Mizrahi and Cynthia Rowley. Today, Kohl’s offers exclusive lines of women’s apparel, accessories and home goods with the Vera Wang label. Macy’s recently added a new tabletop line to its growing partnership with Martha Stewart, and Polo Ralph Lauren is offering a lower-priced American Living brand of apparel and home furnishings at Penney’s.

Along with their fashion offering, some department stores are paring down their general merchandise, giving customers the impression of a more exclusive assortment. “The amount of selection shoppers have out there is overwhelming,” says Callison’s Munsell. “Department stores are swinging back to being that point of authority and helping people edit through all that stuff.”

Taking Care of the Customer

Today’s department stores are also re-emphasizing customer amenities, expanding seating areas and fitting rooms and reintroducing restaurants and salons, chronically low-production sections that were jettisoned as times got tough. “It’s about thinking who your customer is and how she shops,” says Jim Lazzari, chief architectural officer at FRCH Design Worldwide (Cincinnati).

For example, larger, stylized fitting rooms appeal to moms with strollers or women shopping with friends. And nearby lounge areas are intended to make waiting more enjoyable for men, who become more patient with a comfortable place to sit and maybe a television to watch.

Focusing on the customer also means remembering that if you feed her, she will stay in your store longer. Nordstrom and Neiman’s never stopped pairing in-store dining with their sophisticated shopping experiences. Now, others are beginning to pull up a seat to the table. Macy’s is adding coffee bars and restaurants at some of its locations.

Department stores are also following customers to where they shop, looking beyond malls and creating smaller, regional formats. Last fall, Sears introduced “Solution Centers” in Ohio and Kentucky, featuring vignettes for different merchandise categories, including kitchen, electronics or garage.

Lazzari says he’s noticed Belk and Penney stores popping up in lifestyle centers where, a few years ago, he would have expected a Kohl’s or Target. Macy’s is also introducing a smaller format to its store portfolio.

“These stores average 100,000 to 120,000 square feet – roughly half the size of the more traditional department store model – allowing them to better position themselves regionally and compete with the local chains,” he says.

Customers today have many different means to find price and assortment, including shopping online. By focusing on the experience and the amenities they can offer shoppers, department stores can create a point of difference and, more importantly, a reason for shoppers to return. “That idea of creating a destination is key to department stores’ vitality,” says Munsell.

The effort will also ensure they don’t follow the dinosaur into the tar pit.