The department store era is over

Capitalism is cruel on the long-lived. Entrenching cultures and ways of doing, the passing of time breeds complacency in the old on which the new pounce.

David Jones was founded in 1838, Myer in 1900. Whether they merge or not, and it would make sense to do so, both are unlikely to survive in anything but a token form in a decade or so.

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.

Stay of execution

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

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.

It was a grievous error. The chance to be at the forefront of online retailing, to stake out territory and learn, was forsaken to protect the bricks and mortar stores. From that moment, DJ's defences were wide open.

In contrast, US department store Nordstrom persisted. Now more than a quarter of its sales are online, and they are more profitable than those in its stores. Just 1% of David Jones overall sales come through its website.

It took almost 10 years for DJs to right the McInnes' error. Paul Zahra launched the company's 'omnichannel strategy' – a phrase that almost pleads for failure – in March 2012 but the moment was lost.

A few minutes spent at Asos.com or Theiconic.com.au and the gulf between native online retailers and those migrating from bricks and mortar becomes obvious. A small example: If you want to order a present from a Myer gift registry online the company advises you to 'print it out and take it into your nearest store.' The week-long crash of Myer's website during the Christmas sales only emphasises the point.

It's not just the internet

But it's not just online retailers sniffing out complacent incumbents. International retailers that have honed their skills in hyper-competitive US and European markets see huge opportunity in Australia.

Gap, Ladurée, Mui Mui, Paul Smith, Top Shop, Zara, Abercrombie and Fitch, Hollister, H&M and Uniqlo have either already arrived or are coming soon. More will follow.

This makes the lives of department stores even harder, as does Australia's shrinking middle class from which they've traditionally drawn their customers. This is a point not much discussed but of vital consideration.

According to the OECD, of the total growth in Australian's income over the past 30 years, almost half went to the richest 10%. That's not as extreme as the US, where the top 10% got 80% of the pie, but it's a significant shift.

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.

Since their peaks in early 2007 their shares have fallen 82% and 94%, respectively. Since 2009 they've fallen around 30% and 75%, while retailers targeting either the very rich or very poor have generally doubled or more. The middle is becoming a bad place to be.

Dying breed

Facing more adept competition, online and off, and a shrinking middle class, the future for David Jones and Myer looks bleak.

Should they fail to adapt, in a decade department stores will be a retail curiosity much like milk bars and ice cream vans, a reminder of how mum and dad used to shop before Zara, ASOS and Topshop.

If they get it right, a few department stores will pepper the upmarket shopping centres in our richest suburbs. Those in Roselands, Glen Waverley, Chermside and Karrinyup will be long gone.

Should David Jones and Myer merge, they can close more of those stores more quickly, improve their collective buying power and reduce head office costs. But this will only serve to delay the inevitable shrinking of their size and influence.

The department store era is all but over. The principal task for directors is to manage the decline.