The Death of the Department Store and Why it Matters
20 for 2020 is a newsletter sent to 20 people in preparation for the U.S. Presidential election of 2020. This is the twelfth newsletter and it is focused on the department store and its ecosystem.
Unsold Clothing Buries Retailers —a WSJ headline and article in early April and The death of the department store: ‘Very few are likely to survive’ from the NY Times present a warning and a dangerous reality regarding American society that warrants a closer look. Department Stores may just be the best barometer for how the American Economy is really doing.
In the 1980s, when I was a freshman in college, my roommate’s father worked for Dayton’s Department Store selling men’s suits and I worked for JC Penney in the shoe department. Department stores played an important role in commerce and in society. People like my roommate’s father could have a career and earn a decent living, and high schoolers and college students could gain valuable experience adhering to store policies and presenting a pleasant face to the general public. One of my duties was to regularly change the price tags on the merchandise as this was a time of high inflation. Prices were going up.
Throughout their history, department stores modeled the niceties of culture and society and strove very hard to make it accessible to the middle class and working class. Quite a balancing act. We saved up to buy that special dress and could hardly wait for their sales. We liked knowledgeable help and appreciated gracious return policies. We learned how to be civilized.
Ever cheapening clothing driven by aggressive and subsidized Chinese business models, willing American brand companies and a now expectant American public may have run their thirty year course as the Coronavirus presents an opportunity and even forces department store executives and us as a society to really examine what is a healthy economy and what are impediments. The notion that “we are all in this together” only works if we find new metrics for measuring the health of an economy and society. As we now clearly see unemployment rates and the stock market fail to represent a prosperous, healthy and growing middle class. Warning signs of imbalance like inflation are no longer present in large part due an endless supply of dumped goods from China, serving to artificially quiet the need for higher interest rates.
In a 2018 Study done by Lau Chor Tak Institute of Global Economics and Finance promoting the benefits of non-oil and apparel import trade with China to the United States, the paper finds that “Chinese imports into the United States have helped to keep the prices of consumer goods low in the U.S. since 1994. It is found that between 1994 and 2017, a one-percentage-point increase in the share of U.S. apparel imports from China would lower the annual rate of growth of the U.S. apparel price index by approximately 0.2 percentage point.” “The Chinese share rose from 12.6 percent in 1989 to a peak of 48.1 percent in 2010. It has since been in decline, falling to 39.6 percent in 2017. In terms of absolute value, U.S. apparel imports from China rose from US$4.4 billion in 1989 to a peak of US$52.2 billion in 2015, a more than tenfold increase.” “ The U.S. apparel price index rose rapidly between 1966 and 1991 at an average annual rate of almost 4 percent, but between 1991 and 2010, it declined at an average annual rate of 0.2 percent. The level of the U.S. apparel price index peaked in 1993, and its value in 2017 was actually below that in 1991! This decline may be attributed in part to the increase in the share of U.S. apparel imports from China during this period.”
Selling three blouses for $100 total sale is not as lucrative as selling one blouse for $100 from a retailer’s perspective.
A U.S. Bureau of Labor and Statistics working paper “What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models” published in July 2018 takes a more comprehensive look and yields more significant findings in that “ We estimate the impact of trade with China on U.S. consumer prices and use this evidence to discipline quantitative trade models. Using comprehensive price data from the U.S. Bureau of Labor Statistics and two complementary identification strategies from Pierce and Schott (2016) and Autor et al. (2014), we find that trade with China had a large impact on U.S. prices. Between 2000 and 2007, a one percentage point increase in Chinese import penetration in a given industry led to a three percentage point fall in the Consumer Price Index in that industry. This effect is large but plausible; abstracting from GE effects and benchmarking our estimates against those of Autor et al. (2013), our results imply that increased Chinese import penetration generated benefits to U.S. consumers through lower prices equal to $101,250 per lost manufacturing job, or a cumulative 1.97% fall in the aggregate U.S. CPI between 2000 and 2007. These price effects are one order of magnitude larger than in the class of trade models nested by Arkolakis et al. (2012). In contrast with these models, we find that (i) the price response of pre-existing domestic products drives the overall price effects; (ii) market concentration is a key predictor of the magnitude of the price response. Using a simple model, we show that these patterns can be explained by a fall in markups in response to increased import competition. These results indicate that the pro-competitive effects of trade have important implications for inflation and consumer welfare.”
Department stores are inextricably linked to the middle class in American society for them and for society at large there is need for truth and there is a need to acknowledge and deal with the core issue if we wish to preserve these valuable members of our society and if we wish to preserve the capacity for future generations to know society as we have. Is a $100,000 worth of cheap clothing worth our culture? Current practices simply aren’t sustainable and they aren’t necessarily desirable.
Department stores also serve as anchors for malls and draw traffic to other specialty stores. Even today many mall stores have clauses for reduced rent if anchors leave. In the recession of 2008, department stores were known for encouraging supply chain management and leadership, all in an environment where the product is simply too cheap. Retail bifurcated, with growth in luxury stores addressing the wealthy and an abundance of dollar stores for those with meager budgets, in a sense mirroring the U.S. economy where some are working two jobs at minimum wage and others are living off of passive income.
All of this stress has taken the joy and the room for joy out of shopping and has opened the door for greater on line penetration from sources with even more problematic and undesirable business models. Does it really make sense to have individuals shop clearance at Macy’s and resell it online through Amazon? These are activities and businesses most typically associated with underdeveloped nations. These activities account for many “new businesses” in America today. It is a vicious cycle. A cohesive federal plan to limit the number of apparel imports and an explicit effort to bring back the U.S. apparel market may be required to save department stores.
They say in International Trade you pick up the values of your trading partners. I have observed throughout my career that Europeans in general are slow to develop relationships and want partners and the business to be good for both parties in the long term. Business with the East, and especially China has been more transaction based. China is a communist country with a planned and subsidized economy. The United States has benefited from Catholic Social teachings serving as underlying principles, notably: the dignity of man, the greater good, subsidiarity, and solidarity. Fair trade matters. Paying the right price, not just the lowest price matters. Bringing us back to this equilibrium takes courage, leadership and a national vision that enforces fair trade and just business practices.
I believe this can happen. There are some department store Executives going without salary to try to make this happen. Now is the time to think, pray, and strive to preserve what is important.