Women’s Wear Daily

By Evan Clark

August 2, 2016

Retailers are starting to rediscover their top shelf stores.

After something of a digital spree, a WWD analysis of capital expenditure data shows that most of the major broadline retailers are once again spending on their bread and butter — the physical stores that produce the lion’s share of their sales, particularly the flagships in key areas that are seen as having the greatest potential.

That’s not to say that they’ve left e-commerce or the bricks-and-clicks approach of omnichannel behind. But after a few years of heavy technology spending and a steady drip of store closures, retailers are looking to make their smaller store bases more exciting to a distracted consumer while better powering the effort with technology.

At least, that’s the idea.

The next phase of retail, which the dollars spent today will build for tomorrow, is still a work in progress. Sales have generally been disappointing since last summer, which makes splashy expenditures harder, but the money retailers are spending is going into the stores, despite all the crowing about e-commerce.

“Retailers have a higher bar now, because there’s so much competition, to make sure that your store experience is that much better given the new rules of retail,” said Oliver Chen, Cowen and Co. retail analyst. “The transition of retail is underway whether anyone likes it or not.”

Chen said that having a good customer experience is “imperative to maintaining brand health and store traffic. People need a better store experience than ever before, customers have a lot of substitutes for the physical store.”

Today’s stores have been getting low marks from many, including from retail’s Mr. Fixit, Allen Questrom, the former chairman and chief executive officer of J.C. Penney Co. Inc., Federated Department Stores, Barneys New York and Neiman Marcus Group.

When asked how department stores today should decide on where to put their money, he said that e-commerce and mobile were important, but generally stuck to his knitting: “The number-one thing always has been the quality of the store and presentation of the store,” Questrom said. “It’s the whole feel when you walk in.”

He said retailers have too many stores and too much inventory, which prompts an overly promotional stance.

“They’ve got to cut this [store count] down to a reasonable number, then they have to make sure those stores are an experience worth going to,” Questrom said.

Many are trying to do just that, focusing on their biggest and boldest stores and trying to make them more so.

Macy’s Inc., which in recent years was renovating its mammoth Herald Square flagship in Manhattan, plans to cut its capital expenditures by 19.1 percent to $900 million. In its annual report, the company reported that, “budgeted capital expenditures are primarily related to new stores, store remodels, maintenance, the renovation of the Macy’s Brooklyn location, technology and omnichannel investments, distribution network improvements and new growth initiatives.” It’s telling that the top four items on the spending list are all stores.

Nordstrom Inc., which sees its capex this year as down slightly from the $1.08 billion it spent in 2015, has steadily put a little more than 60 percent of its spending dollars toward its stores, which would include spending on its forthcoming Manhattan flagship.

Likewise, Neiman Marcus, which is toiling away with $4.8 billion in debt, planned to spend $260 million to $270 million in its fiscal year, which ended Saturday. That’s potentially off the $270 million to $300 million the company projected initially, but just down slightly from the $270.5 million spent a year earlier. Some of the big spending items going forward are also in New York bricks-and-mortar — a full-line store at Roosevelt Field in Long Island and a flagship at the new $20 billion Hudson Yards.

Antony Karabus, ceo of HRC Advisory, said retailers have been making up for lost time after spending heavily to build up their omnichannel infrastructure.

“What’s happened over the past two years — and I think it’s the right thing — is that retailers have been investing in their better stores,” he said.

Despite the major outlays of cash, Karabus said investments in top areas such as New York were important, in part because they are draws for international and domestic tourists.

“The best way to compete against Amazon is having the power of your own local assets where the customer can touch and feel and experience the brand,” Karabas said. “In the better stores, I don’t think there’s an upper limit on potential whereas, in the secondary market, there’s much more of an upper limit on volume.”

Hana Ben-Shabat, a partner in A.T. Kearney’s retail practice, said capital spending needs to be seen through the lens of store closures since so many companies are now in the process of cutting back.

“They’re reducing footprint [of bricks-and-mortar stores], they’re making the current footprint look better so people will be comfortable and find the environment more resonating,” Ben-Shabat said.

The reasoning, then, is to power that smaller base of stores with more technology, she said.

It’s an approach that the consultant said is the right one — for now. “Ten years from now there will be another round of rationalization,” she predicted.