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In the lead-up to the pivotal holiday quarter, American department stores have focused on refining their internal and consumer-facing strategies in a bid to capture the dollars of loyal but hard-pressed customers. Internally, they’re navigating whether to integrate physical and digital teams more closely (like Neiman Marcus) or silo them entirely (like Saks). Stores are also assessing their buying strategies, doubling down on tried-and-true products while integrating enough new offerings to keep consumers coming back.
At the core of stores’ consumer-facing communications is a renewed focus on personalisation. The idea is to tailor all channels to specific consumers, CMOs say — just as a sales assistant would in-store. With improved data science and tech capabilities, retailers can be more targeted than ever.
It’s no secret that the current US wholesale system leaves much to be desired. Overly high inventories prompt discounting, which leads to pressured margins. The cycle repeats. This is compounded by US consumer pullback — due to financial pressures from inflation, rising credit card debt and the reintroduction of student loans — as well as competition from e-commerce pure players that have the upper hand online. Doug Stephens, founder of consultancy Retail Prophet, looks beyond the immediate challenges posed by inflation and wavering foot traffic, contending instead that the main hurdle department stores are facing is “social and commercial irrelevance”. “They are struggling to make a pre-internet model of convenience succeed in a post-internet world,” he says.
That said, wholesale retail is historically resilient, says Steven Begley, partner at McKinsey & Company. “Department stores have proven — especially in the last few years — that they can innovate their business models over time.”
To silo or to integrate?
Internally, retailers are rethinking team structures to make behind-the-scenes operations more efficient. Though efficiency is, of course, not a novel goal, department stores are now taking more extreme steps to cope with added pressures. To this end, they’re shaking up internal operations in two very different directions: more integrated digital/physical teams (like Neiman) — or a hard split between the two businesses (like Saks Fifth Avenue’s separation from Saks.com).
For Neiman Marcus, an integrated model is the way to go because that’s the way consumers shop. (Or rather, it’s how it wants them to shop.) “From an NMG perspective, customers who shop both online and in-store spend an average of five times more than their single-channel counterparts, and customers in a relationship with a sales associate spend 12 times more,” president and head of NMG customer insights Ryan Ross says. The company is re-jigging roles to reduce silos and amp up efficiency across physical and digital teams by consolidating responsibilities. It also developed new senior management roles, including a ‘chief integrated retail officer’ to encourage multichannel shopping, and merged ‘chief technology and information officer’ into one role.
“In order to build and strengthen our customer relationships at every touchpoint, we structured our teams and our business to operate in a more seamlessly integrated way,” Ross says. “This new operating model gives us an elevated view of the customer and will drive execution excellence with coordinated action across all functions.”
When Saks split its offline and online businesses in March 2021, it was a recognition that, to supercharge the digital business — which Saks was keen to do — it needed to align its priorities around this sector, CMO Emily Essner says. Despite slowed e-commerce growth, Saks.com’s separation is paying off, she says, in terms of customer acquisition. Saks.com has acquired 3.5 million new customers since the split.
Within the now-standalone Saks.com organisation, though, the retailer is doing the opposite of siloing. In July 2023, Saks.com introduced working “pods”, which means members of the category growth team, the buying team and planning team work in cross-team pods rather than separately. “We want to get a lot closer to our customer as we think about how we merchandise and sell on Saks.com,” Essner says. The main goal is to foster a quicker loop of information sharing to respond to consumer needs more quickly and effectively. It’s early days, but the company is seeing success, Essner notes.
Buying strategies: Tried and true versus new
As well as team shake-ups, retailers are navigating how to balance their buying strategies to account for consumer uncertainty while still providing newness for shoppers. While it’s true that, when times are tough, consumers gravitate towards tried-and-true products, stores also need to lean on newness and innovation, as well as curated seasonal offers, to drive customer frequency and repeat visions, says Nicholas Goad, managing director and senior partner at BCG. It’s not either/or. McKinsey’s Begley echoes this sentiment: “Merchants need to deliver the time-tested brands [and products] for sure, but recurring newness in the assortment and curation for the consumer is critical for being relevant over time.”
Bloomingdale’s CMO Frank Berman recognises this need for newness. “Like most retailers, we have to adjust to a new consumer mindset that has shifted more of their disposable income to travel, entertainment and other experiential options,” he says. “To compete with these options, we have had to up our game in terms of new brands and products.” ‘Advanced contemporary’ clothing (which encompasses prices ranging from approximately $500 to $1,200) is performing particularly well, according to Bloomingdale’s. New additions in this sector that have performed well include Veronica Beard, Farm Rio and Self-Portrait.
Though there’s value in newness, there are several reasons why buyers are still focused on stocking more surefire items, says Tom Groves, global director of account management at NuOrder. For one, it helps retailers still rebounding from pandemic and supply chain issues to manage inventories by avoiding overstock. “This translates to buyers mitigating risks by focusing on tried-and-true products that have a loyal consumer base and have already been proven in the market,” he says, adding that buyers tend to have more historical data for these safer pieces, making demand forecasting easier.
Neiman Marcus, for instance, is focusing more heavily on consumer data and insights to inform its buying approach in accordance with demonstrated consumer preferences instead of just going off of market trends.
This increasing embrace of consumer insights data can benefit brands that want retailers to stock riskier trend styles. “Buyers are also more likely to consider riskier trend styles if there is data or market demand to support their potential success,” Groves says. Otherwise, brands can always employ strategies to twist retailers’ arms, he says. For instance, they might offer favourable terms (like extended payment terms, better pricing and/or rebates) or exclusive access to certain products. “This reduces the financial risk for the retailer in taking on riskier styles,” he says. On the flip side, department stores are incentivised to carry unique/trend items to differentiate themselves from competitors, he flags, as inventory overlap risks a pattern of sameness across wholesalers.
Consumer retention: Personalisation is key
Retailers are amping up marketing initiatives andexpanding their consumer loyalty programmes in a bid to convince shoppers to buy with them and buy more. By and large, the focus has shifted from consumer acquisition to retention. The strategy at the centre of it all? Deeper personalisation.
“Loyalty programmes and personalisation are two of the most powerful vehicles to target the customer with more items that they could spend on that retailer,” BCG’s Goad says. These hold the power to be “one of the most important differentiators”, he says.
For Neiman Marcus, the focus at present is on customer retention, Ross says. “We have a very loyal customer base, which is highly valuable for business resilience,” he says. “From an NMG perspective, 2 per cent of our customers drive 40 per cent of our revenue — and we retain 90 per cent of our top customers. Our strategy is focused on growing our relationships with high-value customers, as well as migrating high-potential customers.” The store is still fostering relationships with new customers, Ross assures.
Bloomingdale’s is also exploring how to grow business at the top of its consumer file, Berman says, noting that it’s the “major focus” at a time with so much economic uncertainty. The retailer works with a company that developed an algorithm that segments email recipients based on what time they are most likely to open the email and their propensity to shop a certain brand, category and trend. “It’s one of the ways we’re trying to pivot away from an ‘all-for-one’ message,” Berman says, noting that he wouldn’t go as far as to call it personalisation — yet.
Looking forward, the retailer has a roadmap for personalised site pages. “If we've got 250,000 items on the site, we could curate that for you so that it still has the things that you typically might like to buy using predictive analytics, but also the piece of inspiration,” he says. “You should always have a sense of discovery.”
Although Saks ramped up its customer acquisition with the online/in-store split, it’s now focusing more heavily on retention. “Over the last year, our focus has turned towards retention, especially in light of all the new customers we acquired,” Essner says. “The reality is, a retained consumer, you have a lot more information about them.” Which is a must, given personalisation is key to Saks’s strategy.
“We are very focused on driving high lifetime value (LTV),” the CMO says. This involves understanding which consumers like which brands, what types of merchandise they’re looking for and how these overlap. “There are also specific points in the consumer journey we know to drive high LTV,” she says, such as registering for a Saks account using the app or shopping for a second time within 12 weeks of an initial purchase. Understanding these helps Saks to tailor consumer journeys to drive higher LTV.
To this end, Saks is also doubling down on its VIP loyalty plays, including expanding its invite-only top-client programme, Saks Limitless, and has expanded its Fifth Avenue Club personal shopping service to luxury hotels and resorts. The former evolved with the siloing of Saks.com — consumers can now unlock experiences, benefits and stylist access online. “It drives AOV [average order value], but most importantly, it’s driving loyalty; it’s driving retention,” Essner says.
It’s here that department stores might just have a leg up on newer, digitally-native players. By implementing tech-enhanced personalisation capabilities to build on existing loyalty infrastructure — at institutions that already boast strong brand equities and heritages that resonate with consumers, says McKinsey’s Begley — department stores can unlock a uniquely personal relationship between store and customer. “It’s one of those things that’s very sticky,” Saks’s Essner says. “These experiences are very hard to replicate.”
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