Moody’s: Slow supply chains are department stores' Achilles heel

Relatively slow supply chains are hindering department stores’ ability to compete effectively in today’s retail market.



That’s according to a new report by Moody’s Investor Service, which finds department stores fighting to stay relevant in a world in which consumers have rapidly prioritized value and convenience as pricing becomes more transparent, and in which consumers are shifting to off-price retailers and online shopping. Aggregate operating income of department stores is expected to decline approximately 11% this year.



“Consumers today have access to a broad array of goods at the most competitive prices, which has spurred retailers across the industry to accelerate their efforts to compete more effectively," said Moody's VP Christina Boni. "Department stores have been the hardest hit, with relatively slow supply chains their biggest Achilles' heel."



Department stores suffer inventory backlogs when consumer demand suddenly shifts, according to the “Department Stores Battle to Stay Relevant” report. Big markdowns to clear merchandise at such major players as Macy's and Nordstrom have dampened consumers' willingness to pay full price for goods. The markdowns also underscore department stores' supply chain challenge.



“Unlike department stores, the off-price incumbents continue to achieve impressive results thanks to their ability to purchase high volumes of disparate goods closer to the time they're likely to be purchased,” Moody’s stated.



Online sales have become an essential source of growth for department store operators. Nordstrom and Neiman Marcus have made the most notable progress in this regard, according to the report, building out their technology platforms and fulfillment capabilities to increase their e-commerce penetration to nearly 20% and over 25% of total sales, respectively. By contrast, most regional department stores lag, at less than 10%.



In the face of increasing online sales, one of the industry’s biggest challenges will be to maximize use of square footage. Moody's views department stores' physical locations as a competitive advantage in their efforts to increase online sales, since they facilitate product pick-up and returns. But as the long-term mix of online versus in-store purchases continues to unfold, operators may need to close some stores or reduce the size of existing ones.



The good news is that many department stores have cut back inventory, which has better positioned them for the upcoming holiday season, and even into 2017, according to the Moody's report. As they roll out or continue to implement new approaches to the business of selling, operating income is expected to grow more than 4% next year, as stores' sales pipelines and margins improve as a result of better inventory management.