Archive for category: Class Oppression

The collapse of America’s middle class crushed department stores. Amazon and the pandemic are the final blows.

In a New Jersey suburb seven miles west of Midtown Manhattan, the American Dream is on shaky ground.

The Dream in question isn’t the mythological notion that upward social mobility is within reach for all hardworking Americans. It’s a $5 billion, 3 million-square-foot shopping and entertainment complex in East Rutherford featuring an indoor ski slope, an ice-skating rink, and a Nickelodeon-branded amusement park. The complex finally opened last fall, but it’s now facing huge new challenges.

The development’s complicated 17-year history, marked by ownership changes, false starts, and broken promises, had already put American Dream in a precarious situation. The Covid-19 pandemic hitting in March made things much worse. Whether the mall makes it in the long term will hinge in part on how it deals with the collapse of three of the marquee department stores that were to anchor the complex and draw foot traffic — Barneys New York, Lord & Taylor, and Century 21 — which all have gone bankrupt and closed, or are planning to close all their stores in the US.

Around 100 storefronts in American Dream opened their doors to customers in October and November, but the complex’s future is not guaranteed. Its owners, Triple Five Group, missed several mortgage payments this summer, and it’s not clear who might fill the enormous holes left by the three fallen department store chains, or which other retail tenants will opt out of their leases now that the development is missing three of its anchors.

While the story of American Dream is unique in many ways, its struggles are emblematic of the bleak future facing many US malls and department stores — whose destinies have long been intertwined. The downfall of these onetime crown jewels of retail will have meaningful impacts on the Americans who work for them and the communities they’ve long called home.

Across the US, department stores are shrinking or shuttering altogether. In 2011, US department stores employed 1.2 million employees across 8,600 stores, according to estimates from the research firm IBISWorld. But in 2020, there are now fewer than 700,000 employees in the sector, working across just over 6,000 locations.

The reasons for the struggles are both shared and unique. Since the Great Recession began in late 2007, the vast majority of income growth in the US has gone to high-income households, squeezing middle-class households and altering where they spend money. As a result, chains that sell brands at sharp discounts like TJ Maxx, Ross, and Dollar General have become more popular, siphoning away shoppers from full-price department stores like Macy’s and JC Penney that were designed to cater to a stronger middle class of yesteryear.

Department stores are also facing the reality that they are no longer the main way most shoppers discover or access new brands — which was once perhaps their main appeal as onetime innovators. Consumer brands have increasingly become focused on building connections with customers through their own stores, websites, social media platforms, and other online-only marketplaces.

All the while, department stores’ contraction is upending local labor markets and the communities they called home. And rock bottom is not even here yet. More than half of all mall-based department stores will close by the end of 2021, according to estimates by Green Street Advisors, a commercial property research firm. And that will have a massive impact on malls; as of January, department stores accounted for nearly one out of every three square feet in malls.

“The department store genre has been taking the great American shopping mall down with it, slowly but inevitably,” said Mark Cohen, the director of retail studies at Columbia University who was previously the CEO of multiple department store chains in the US and Canada.

What happens when an entire sector of retail, one that employs more than half a million people, is in free fall — and is slowing or dragging down shopping malls like American Dream with it? And what becomes of the local communities across the country whose social identities and local economies rested on, at least in part, now-fallen department stores and the malls they buttressed? We’re about to find out.

What’s killing the department store

For much of the past century, US department store chains played an important role in many Americans’ lives and an innovative role in the retail sector.

For the American middle class of the 20th century, department stores helped shape what successfully living the American dream looked like. These stores were often an entry point into fashion and home furnishing trends once reserved for only the wealthiest, since they offered large selections of name brands at affordable prices all under one roof — first in big cities, and then following population exoduses to the suburbs. And as the main attractions for malls in the suburban US, they played a foundational role in the idea of shopping as a social activity in the second half of the 20th century.

Department store employees also had it pretty good, for a time. The sector was welcoming to women salespeople, providing a path to certain corporate roles for those who found success, according to the book From Main Street to Mall: The Rise and Fall of the American Department Store. A successful salesperson working in one of these stores, especially before large chains came to dominate the sector, could make a career of their role, providing for their family, no college degree needed. Those days are mostly long gone.

But over the past two decades, a confluence of other factors has placed several giants at death’s door and put even the most innovative in a precarious situation. These factors were both external and internal: Amazon led a boom in online shopping, and many brands that once relied on department stores began selling directly to customers online and in their own stores. Meanwhile, many department store chains made the wrong bets, investing more heavily in store expansion while underinvesting in merchandise differentiation and e-commerce strategies.

But perhaps most critically for the chains targeting the middle class — think Macy’s, JC Penney, and Bon-Ton — this category of households has been struggling since the Great Recession began in 2007. According to a 2018 study from the consulting firm Deloitte, “the middle 40 percent” of the country saw its income shrink in the previous decade, while more than $8 out of every $10 in income growth nationwide went to high-income households. As a result, discount chains that sell name brands at a bargain — like TJ Maxx and Ross stores — became much more attractive to middle-class shoppers than department stores selling at full price. The treasure-hunting aspect of stores like TJ Maxx and Home Goods also added to their appeal over many of their department store competitors. Macy’s, the largest traditional department store in the country, said earlier this year that it planned to close 125 of its 800-plus stores — and that was before the pandemic.

“Sears was built for [the] middle-class mall goer,” Web Smith, the founder of the commerce and media newsletter 2PM, wrote in the wake of Sears’ 2018 bankruptcy. “It’s been the thesis of 2PM, Inc. that retailers who’ve built their businesses for this American demo will continue to struggle until the American middle class rebounds.”

But department stores catering to wealthier customers have failed, too. In addition to Sears and JC Penney, higher-end stores Barneys New York, Lord & Taylor, and Neiman Marcus have all filed for bankruptcy in the past two years. Even Nordstrom, viewed by industry insiders as the most progressive traditional department store chain, is facing significant headwinds. While overall US e-commerce sales increased 45 percent year over year from April to June as pandemic shutdowns pushed more shoppers online, Nordstrom registered just 20 percent growth in online sales.

As more Americans came online and as social media platforms rose in popularity, brands started establishing direct relationships online and through their own stores, which chipped away at their reliance on department stores for finding customers. For a while, department stores still could provide a way to reach mostly older consumers who preferred in-person shopping or others who didn’t have internet access, but the chains became more complementary for popular brands rather than remaining a crucial sales channel.

More mid-priced brands such as Levi’s and Adidas started selling on Amazon and other online marketplaces as department stores targeting the middle class began to struggle, meaning chains like Macy’s now had serious online competition, too. And since Amazon and other top online retailers are in many cases more convenient than visiting a large store where salespeople are trained and paid less than they once were, department store advantages further diminished.

Finally, some private equity companies — investment firms that buy up struggling companies in part by saddling them with debt — have taken aim at the sector, and the debt associated with their takeovers has hastened the demise of some department store chains like Neiman Marcus. The Dallas-based luxury chain filed for bankruptcy earlier this year under crushing debt from its PE owner.

The chain was also late to e-commerce — when it finally started getting aggressive around 2014, introducing free shipping and returns to better compete with Nordstrom, it didn’t work and instead crimped its profits. The company’s bottom line was also hurt by some of the biggest brands it sells moving from a wholesale model to a more flexible and lower-risk model that was less profitable for Neiman Marcus. While a private equity owner didn’t force these moves, the fallout from these crises coupled with a heavy debt burden was a recipe for disaster.

How the decline of department stores is reshaping communities

While the pandemic has accelerated contraction of the department store industry, the sector has been in a slow descent for decades. And the communities they call home, which experienced the upside of their presence during the golden years, are now faced with a series of cascading challenges.

“First they become an eyesore; it’s aesthetically damaging,” said Vicki Howard, the author of From Main Street to Mall. “Second, there’s the jobs. … Third, it impacts the consumers themselves that have turned to that area for leisure activities, for places to go in the winter, to go with their kids.”

“It’s quite a big economic and social and cultural phenomenon to have these department stores closing — and malls also,” she added. “They occupy such a physical place as well as a social space.”

The decline of department stores and the malls they supported has required local governments to get creative. In Bartlesville, Oklahoma, a city of 36,000 near the border of Kansas, local officials have embraced discount chains as the local Washington Park Mall has struggled. The city provided $1.5 million in incentives in 2016 to develop an outdoor shopping center with popular discount retailers TJ Maxx and Ross to help offset the longtime troubles of the mall, once anchored by the department stores Sears, JC Penney, and Dillard’s. (Sears and JC Penney both closed their stores there in recent years, and Dillard’s recently turned its mall location into a clearance store.)

“We’ve been exceedingly fortunate to have replaced the mall’s legacy brands with up-and-coming brands better aligned with today’s consumer preferences,” David Wood, Bartlesville’s economic development chief, told Recode in an email.

The city also provided a $200,000 incentive to divide an old Kmart into five smaller retail establishments, including outlet stores Ollie’s and Burkes Outlet, as well as a Dollar Tree store. The new retail additions, Wood added, “have largely offset the employment loss — with rising sales tax collections, too.” Taxable physical retail sales dropped in 2015 and 2016 in Bartlesville but grew modestly in 2018 and 2019. Of course, department store jobs are different from discount chain jobs, which have lower average hourly pay and rarely offer sales commissions.

In Madison, Wisconsin, local city-planning officials are looking ahead to a possible future where their city won’t have malls anchored by department stores. They have been discussing potential redevelopment plans for the areas around the community’s struggling East Towne Mall and West Towne Mall since 2018, and the discussions took on added significance when the malls’ owner filed for bankruptcy in early November.

Several of the malls’ anchor tenants have closed up shop in the past few years, including the department store chains Boston Store and Sears. While the Madison economy is diverse outside of retail, with a large research university and state government offices calling the city home, city planners believe it is critical to start discussing potential redevelopment plans, whether or not the mall’s owner ends up selling or gets on board with redevelopment, because by the time large commercial properties are in true distress, the ripple effects can be dangerous.

“Longer-term vacancies can sometimes snowball and have the effect of spreading and negatively impacting surrounding areas,” said Ben Zeller, a city planner for Madison.

Madison officials have been studying other mall redevelopment plans around the country for ideas about what to do. If redevelopment of these Madison malls does end up happening and looks anything like projects in other communities that city planners are studying, the retail presence would likely be downsized and supplemented by new residential buildings and non-retail employers. Zeller himself lives in an apartment building built on a former mall parking lot in another part of Madison.

At a high level, Zeller told Recode that such redevelopment plans are complex, which means they take time: 15 to 20 years or longer to complete. One challenge involves the fragmented ownership structure of large mall properties, where the main mall may be owned by one business and the department store anchors and restaurants could be owned by separate entities. Another challenge involves restructuring the public street network around malls.

“It’s very difficult to have a future neighborhood created when there are blocks [in existing mall developments] that are 100 to 200 acres as opposed to a normal city block,” he added. Residential neighborhoods typically need shorter street connections to make public transportation and walking viable.

Zeller added that the city wants to make sure that, no matter who buys in, “we ultimately end up with a connected public street network, adequate parkland to serve new residential uses, integrated transit, an improved bike network, and other components of complete neighborhoods.”

In short, communities can rebound from department store chain failures — and the ripple effect on malls — if they have the time and resources to plan two decades into the future like Madison is starting to. But not every American community does.

What it means for the people who depend on retail jobs

While some of the evolution that the department store sector has gone through marked natural generational shifts in consumer behavior, the industry’s failures have had a significant impact for those who work in retail, extinguishing the idea of retail sales positions as careers — which in the 20th century was an advantage for department stores.

“It’s a negative cycle. If you have less career-oriented employees and higher turnover, you invest less in those employees,” said Jason Goldberg, the chief commerce strategy officer at the global advertising holding company Publicis. “It creates this vicious cycle and then you can’t recruit good employees. They were turned from advisers and very relationship-based salespeople into cashiers.”

With few exceptions, the idea of a department store sales job being a career hasn’t been a reality for decades. In the mid-1900s, they could be steady, family-supporting jobs with fixed schedules. But in the decades following the birth of big-box retailers Walmart, Kmart, and Target — all in 1962 — retail wages began dropping as traditional chains chased the lower-paying labor models of the new discount retailers.

“I would have to guess that by 1980 it was not likely that a single-wage earner could support a family while working on the selling floor of a retail store,” said Cohen, the Columbia professor and former department store executive.

Yes, there are still top salespeople at chains like Nordstrom or Neiman Marcus who might pull in six figures, but they are the few exceptions to the rule.

So where are department store employees going as their employers cut jobs, close stores, or go bankrupt? In the five-year period from 2015 to 2019, more started working in discount chains. The category of the retail industry that includes dollar stores like Dollar General jumped into the Top 5 categories of employment that attracted workers who had recently left or were laid off from a department store job. (This job transition data was based on a Brookings Institution analysis of current population survey public-use microdata provided to Recode by Chad Shearer, a former senior research associate at the think tank who is now an economic development consultant.)

That may not be a great thing, as least as it relates to employee earnings. While Dollar General’s stock price has nearly tripled over the past five years, its front-line employees don’t see much of that enrichment. Average hourly base pay at Dollar General is $9, according to the job review site Glassdoor, compared to $11 at Macy’s.

The rise of e-commerce can be seen in this job movement data, too. During the same five-year period, if you combine the “electronic shopping” and “warehousing” job sectors (which both include e-commerce companies) into one category of employment, the combined sector moves into the Top 10 for industries where employees who had recently left department store roles went to work next. It’s possible e-commerce employers should rank even higher in reality, since many e-commerce warehouse employees are technically hired by third-party temporary employment firms.

There are trade-offs to this shift. On the one hand, Amazon warehouse employees in the US make a base wage of $15 an hour, which is a higher base pay than most entry-level department store jobs. But the work is often much more physical in nature than a retail job, requiring workers to pick or stow hundreds of items per hour at a rapid pace and to be able to lift up to 50 pounds of goods. The reality is that when it comes to finding a job in 2020, Amazon and Walmart — already the two biggest private-sector employers in the US — are the retailers offering work. While so many industries have contracted, they’ve added hundreds of thousands of new job openings this year alone. And as department stores continue to cut jobs, the largest players in the new retail economy capture more power in the labor market.

How to rebuild from department stores’ ruins

There is no silver bullet for US department stores to immediately start thriving again, so the best many can do is simply try to adapt and survive. For chains that still have a nationwide presence — like Macy’s or Nordstrom — that means fewer large, full-price stores and more investment in e-commerce sales, potentially supplemented by smaller pickup points for online orders to offset expensive shipping costs. Macy’s executives have also said the company plans to test smaller stores that aren’t attached to malls in an effort to unhitch their destiny from struggling regional malls built for a weakening American middle class.

As these chains fight their uphill battles, they are being replaced by a bevy of options that can provide better prices, selection, or convenience to shoppers of all wealth levels. The best discount chains, for example, are still thriving a decade after the Great Recession ended. Even without a strong e-commerce presence, the parent company of TJ Maxx, Marshalls, and Home Goods is moving steadily through the pandemic, with a stock price equal to what it was before Covid-19 hit the US in March. And Dollar General’s stock price hit an all-time high in October; the company is now worth nearly $53 billion.

Brands that sell apparel and cosmetics — key product categories for many department store chains — continue to sell more goods directly to shoppers through their own stores and websites rather than through department store chains. This direct connection gives brands — whether they’re established or new startups — more control over how their goods are displayed, more information about who their customers are, and often better profit margins. Nike, for example, stopped selling through department stores Belk and Dillard’s earlier this year and is no longer available at the online retailer Zappos. Under Armour announced it would cut its wholesale partners in North America by 2,000 to 3,000 stores. New online retailers that attract digital-savvy consumers and, in turn, more brands — like Stitch Fix, Rent the Runway, The RealReal, and ThredUp — were also stealing market share from department stores pre-pandemic.

But Amazon continues to be the titan of the modern retail world. It’s at least seven times bigger than No. 2 Walmart in e-commerce, and it’s continuing to invest in beefing up its physical store presence as well. While the online giant’s direct impact on department stores was minimal for much of its history, things have changed in recent years. Amazon is still not a high-end fashion destination, but it is absolutely a place where a majority of Americans are willing to buy footwear, casual clothing, or basics like underwear and socks. In April, the retail research firm Coresight said that more than 70 percent of apparel shoppers bought clothing or footwear on Amazon in the prior 12 months — an increase of 10 percentage points from 2019 and 25 percentage points from 2018. At the weakest moment for department stores, Amazon is becoming a more powerful direct competitor.

Taken together, the future for department stores is bleak, and for many of the malls they anchor. Yes, the US has too many retail stores — 40 percent more retail square feet per person than No. 2 Canada — and too many subpar malls, considering current shopping trends. Yes, the retailers courting business away from department stores are providing superior products, prices, or experiences that are resonating better with shoppers. Yes, it is normal in capitalism for industry categories to fall while others rise.

But the communities across the country that depended on these stores and malls as job creators will have to get creative to rebuild around their ruins. And the Americans who once saw a department store sales job as a potential career, or at least an entry path to a better-paying retail corporate job, now face a new reality: Many of the biggest retailers hiring today — discount chains and e-commerce giants — are offering less pay, or perhaps better pay but less personable and more grueling work.

Even if you could snap your fingers and return this retail sector to glory, it wouldn’t solve the key societal and macroeconomic problems connected to its decline. While the median US household brought in 48 percent more income in 2018 than in 1970, the vast majority of those gains happened prior to 2000. Along the way, the middle class’s income share — which many of the biggest department store chains catered to — has shrunk by 19 percentage points as the rich keep getting richer. In turn, most shoppers value discounts above all else — who can blame them? And for those who can afford it, the convenience of Amazon Prime delivery and its endless virtual shelves of merchandise is very difficult to beat. If the American dream of department stores wasn’t fully extinguished before 2020, the year of the pandemic will make sure it is.