Department stores lose allure of 'uniqueness'

Apparently there's money to be made from the Australian shopper after all. So what's going on? Aren't bricks and mortar retailers struggling to make a buck from the new thrifty, online-savvy, consumer?

With profits plummeting, many local retail bosses have blamed consumer caution. David Jones chief executive Paul Zahra has pointed the finger at everything from the carbon tax to the euro debt crisis for unsettling shoppers.

Myer's latest profit results are littered with phrases like "subdued consumer confidence".

Gerry Harvey has been more blunt. In August last year he dismayed at the weak spending by saying Australians should be as happy as "pigs in shit".

But it's hard to reconcile this focus on consumer confidence with the queue of overseas fashion stores lining up to invest here.

No, the string of poor results from the department stores - or the heavily discounted sale of Dick Smith Electronics last week - points to deeper problems than consumer caution.

Instead, the grim situation facing the department stores has the hallmarks of a catchphrase that we're hearing a lot of these days: "structural change". Structural change refers to deep-seated shifts in the economic environment. Manufacturers are grappling with structural change caused by Asia's rise, which has boosted our dollar.

Retailers face their own distinctive set of structural changes. And just as structural change is painful for the manufacturers being squeezed by currency, so it is for the retailers.

Department stores are especially vulnerable - the sector's 10 per cent fall in sales during July was the biggest monthly drop in seven years. To understand why things are so hard for DJs and Myer, it's worth considering what made them successful in the first place.

Department stores emerged in the early 20th century because they could obtain "economies of scale." By bringing a huge range of goods under one roof, they could spread out their overheads, advertising and other costs and offer goods at competitive prices.

They also stocked exotic things from overseas that weren't available elsewhere, allowing them to charge a premium for exclusivity. Those grand, high-ceilinged buildings in the middle of town also had a sense of opulence, which drew in the lucrative wealthier shoppers.

Fast forward to today, and most of these advantages are gone.

Online shops can offer goods more cheaply, and often more conveniently. There's virtually nothing "unique" in department stores any more. There are also question marks over whether DJs needs to own all that prime real estate.

In a further challenge, the class distinctions that may have encouraged wealthier people to shop at DJs have been blurred.

People's spending decisions seem more influenced by value these days, not class consciousness.

Retail industry fellow at Deakin University, Steve Ogden-Barnes, says the cracks in the department store model probably appeared in the 1950s when the first shopping malls brought other specialist stores under the same roof.

But while one or two of these changes would be challenging on their own, the rise of online shopping means they're all coming at once. Spending is also growing slower than it used to, which makes responding to structural change an urgent priority. "We're at one of those points in retail history where doing more of the same or changing a little bit isn't really going to get you anywhere," Ogden-Barnes says.

In the language of economics, businesses like Myer used to extract a "rent" because they offered something you couldn't get elsewhere - whether it was uniqueness, novelty, or convenience.

A "rent" is basically a super profit - one larger than is needed to keep capital employed in the business.

But the latest full-year results - DJs' earnings dropped 40 per cent and Myer's fell 14 - showed there was nothing super about department store profits. This doesn't mean there's no money in retail. Chains like Zara are succeeding with a different business model that relies on getting the latest styles to the shop floor within weeks, rather than buying clothes months in advance and keeping stocks in inventory.

For department stores, however, responding to structural change is likely to be painful.

Ogden-Barnes says that instead of department stores trying to be everything to everyone, we may end up with fewer, higher quality department stores.

Myer and DJs, for instance, are constantly talking about investing in customer service.

Westfield is battling similar structural changes, and is sprucing up its shopping malls. Its Pitt Street Mall in Sydney is packed with upmarket cafes and restaurants, rather than the takeaway shops of old.

Westfield's Stratford City, on the edge of London's Olympic site, goes further. The biggest mall in Europe, it has its own casino and hotel.

Some might find this a bit crass. But Pitt Street Mall was deemed the most profitable per square metre in the world earlier this year, and the company boasted 5.5 million people passed through Stratford during the Olympics.

Structural change is not always pretty, but companies have little choice but to adapt.

Ross Gittins is on leave.