H&M queues spell end of department stores

David Jones might been relishing a 2.4% increase in same-store sales – although maybe not as much as a nice takeover offer from South African retailer Woolworths - but out on the street, the shopper has spoken. And they aren't saying, 'Wow, DJs!'

In Melbourne last weekend, Intelligent Investor Share Advisor analyst Gaurav Sodhi was amazed at the size of the queues to enter Australia's first H&M store.

As any European will tell you, H&M is the retailing equivalent of broccoli, something that's okay to look at, slightly disappointing to eat but ultimately beneficial, even if you don't enjoy the ingestion process.

So the arrival of H&M is the worthiest of worthy additions to the local retailing scene. And yet there they were, 3,000 people queuing around the block to eat their greens, silently but eloquently making their point about capitalism, a system cruel on the complacent, unless you happen to be a big bank.

DJs and Myer emerged from capitalism's primordial soup caked in a belief that their magnificent brands and fine service, when you can find someone to deliver it, would always lure customers. The queues outside H&M prove that thesis wrong.

A 15-year credit boom that delivered profitable department store growth hid the changing reality. Instead of adapting to a new environment, they passed higher costs on to customers and avoided difficult choices, like renegotiating rents or closing stores.

Online retailing got underway in the dotcom era and to its credit, DJs got in early, picking up the assets of three failed 'etailers'. But three years and $28m later, former CEO Mark McInnes closed the sites down.

Only now is that grievous error being put right. The supposedly astonishing 190% increase in online sales in the latest quarter results is a mark of how far the company has to go, not how far it has come.

US department store Nordstrom generates a quarter of its sales online. Even after the latest figures, David Jones online delivers just 2.2% of total sales. A few minutes spent at Asos.com or Theiconic.com.au reveals the extent of the gulf between native online retailers and those attempting the migration.

H&M and online retailers aren't the only competitors sniffing out complacent incumbents. Gap, Ladurée, Miu Miu, Paul Smith, Top Shop, Zara, Abercrombie and Fitch, Hollister, H&M and Uniqlo have all recently opened local stores, or are about to.

Australia's shrinking middle class isn't helping the department stores, either. According to the OECD, of the total growth in Australia's income over the past 30 years, almost half went to the richest 10%. That's not as extreme as in the US, where the top 10% got 80% of the pie, but it's a big shift nonetheless. And these people are spending in Miu Miu, not Myer.

In the United States, the hollowing out of the middle class is already having an impact. Upscale stores like Nordstrom and Barneys are expanding, as are bargain basement outlets like Dollar Tree.

In the shrinking middle sit the US equivalents of Myer and DJs. In January, Sears announced it would close its flagship Chicago store while JC Penny said it would close 33 stores. The middle is becoming a bad place to be.

The future for David Jones and Myer looks much like it did for media companies 5-10 years ago. One can see the beginnings of the decline but the pace of it may surprise us.

Still, you have to admire the optimism, and undoubted retailing prowess, of DJ's purchaser Woolworths. But even it must understand that in the future, like our daily newspaper, department stores will become less central to how we live our lives.

We'll still find them, the occasional shimmering palace in an upmarket shopping centre close to a CBD. But for those out in the suburbs, in places like Roselands, Glen Waverley, Chermside and Karrinyup? Their time is up.