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US Department Stores Struggle to Survive During Pandemic

17 June 2020

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When US department store retailer JC Penney Co Inc missed another interest payment on its debt on May 11, many industry observers assumed that the venerable company would soon be filing for bankruptcy. Sure enough, JC Penney formally filed Chapter 11 bankruptcy protection on May 15. The move was precipitated by the coronavirus (COVID-19) pandemic, during which JC Penney – classified as a non-essential business in all US states where it operates – has been forced to temporarily shutter its stores, resulting in an acute cashflow shortage for the retailer.

Before the COVID-19 pandemic escalated in the US, JC Penney was already facing an existential threat to its business due to the precipitous decline of the US department stores channel as a whole. Twenty years ago, department stores were the first place consumers across the country would turn to for their apparel and beauty needs. Even though sales of clothing, footwear and cosmetics remain the lifeblood of the channel, department stores are increasingly an afterthought to customers looking to purchase these types of products today.

The rise of e-commerce is one of the principal reasons for this shift, with apparel and beauty sales migrating online at an astounding rate. This development has understandably been exacerbated by the COVID-19 pandemic. Department stores, however, must also contend with increasingly formidable brick-and-mortar competition. Consumers across the income spectrum in the US have become increasingly value-obsessed in their purchasing behavior, which has allowed off-price apparel and footwear specialist retailers, such as TJX Cos In and Ross Stores Inc, to successfully lure former department store customers with their competitive prices on fashionable products. Mass merchandisers giant Target Corp has also attracted US consumers with its signature “cheap chic” aesthetic. Additionally, beauty specialist retailers, such as Ulta, Salon, Cosmetics & Fragrance Inc and Sephora USA LLC, have taken an ever-greater share of the US cosmetics market, amassing a devoted customer base who appreciate these retailers’ experience-focused outlets.

Over the years, JC Penney has certainly seen success. It embraced e-commerce earlier than most other US department store chains (although the company has arguably failed to capitalize on its head start). In 2007, it entered into a successful partnership with Sephora in which the beauty specialist retailer operates mini-stores within many of JC Penney’s outlets – a decision which has led US consumers to continue viewing JC Penney as a destination for cosmetics purchases. Yet, the general malaise affecting the US department stores channel and strategic missteps have led to JC Penney’s downward trajectory, posting declining sales every year since 2015.

In 2011, JC Penney – still reeling from the economic fallout of the Great Recession – hired Ron Johnson, formerly the senior vice president of retail operations at Apple Inc, to be its new CEO. Seeking to attract a more affluent clientele to JC Penney stores, Johnson implemented many of the same strategies that made Apple stores such a retailing success story. However, this involved eliminating discounts and coupons. These types of price promotions had been very popular with a large swathe of JC Penney’s most loyal customers, so Johnson’s decisions ultimately alienated many of the retailer’s existing customers while attracting relatively few new ones.

Since then, the CEO position at JC Penney has been a revolving door. Notably, in 2014, JC Penney hired Marvin Ellison, an executive from the Home Depot Inc, to be its new CEO. Seeking to capitalize on the misfortunes of archrival Sears Holdings Corp, Ellison moved to begin selling major appliances at JC Penney outlets. Yet this decision proved misguided; it involved a large capital expenditure on the part of JC Penney, but the resulting sales gains were minimal. As a result, following Ellison’s resignation in 2018, JC Penney quietly discontinued selling major appliances, putting an end to a costly, unsuccessful experiment.

Now, temporary store closures brought on by the COVID-19 pandemic are placing even more pressure on the US department stores channel (as evidenced by the recent bankruptcy filing of the Neiman Marcus Group, a storied luxury department store operator, and the decision made by Lord & Taylor, another department store chain, to liquidate its entire inventory). JC Penney has not been able to survive on its e-commerce sales alone during the pandemic, so the forced store closures represent months of revenue that will simply never be recouped. In addition to filing for bankruptcy, JC Penney has also announced that it will close 200 of its stores across the US. Unfortunately for the retailer, these closures may just be the beginning of the end.

This report was contributed by knowledge partner: