February 2014

Global Department Store Retailing | Verdict Channel Report page 2

Mature markets North America and Europe suffer and lose share…

While North America and Europe combined accounted for over half of the market, at 53.5%, in

2009, they have suffered significantly in recent years, with sales weakening due to saturation in the

market, lack of growth opportunities and department store players needing to steal market share

away from rivals rather than being able to generate organic market growth. Market share is

expected to decline for North America and Europe by 4.9 percentage points and 3.5 percentage

points, respectively, in the five years to 2014, causing their combined share to fall to 45.1%.

…while China and Latin America continue to achieve strong growth

The dominance of North America and Europe is weakening, and the focus is now shifting toward

the developing markets of China, South East Asia and Latin America, as they have continued to

achieve strong growth and gain interest from international players. Department store operators can

achieve growth more easily in these regions due to there being fewer local players and therefore

less competition, while growing populations, increasing affluence and consumer willingness to

purchase discretionary items will drive consumer spend.

Figure 1: Share of department store expenditure by region (%), 2009 and 2014e

31.3% 26.4%

North America

22.2% 18.7%

Europe

18.1% 26.9%

China

17.3% 13.5%

Japan

1.2% 1.4%

Middle East & Africa

6.9% 8.6%

Asia Pacific ex Japan & China

2009 2014e

Share of global sales

3.0% 4.5%

Latin America

Source: Verdict V E R D I C T

February 2014

Global Department Store Retailing | Verdict Channel Report page 3

Private label should be central to the department store proposition

Private label ranges drive footfall and loyalty

Offering consumers unique ranges and brands is necessary for department stores to differentiate

from competitors and sector specialists. While providing private label ranges is a logical way to

achieve this, they are not vital for all department store operators, as the likes of Selfridges can

attest to, instead focussing on branded product exclusives and investing in services and the store

environment to distinguish itself from rivals.

We do, however, expect more retailers to invest in their private label proposition over the next five

years as markets become more saturated and competition increases. These ranges can act as

major drivers of footfall for stores and online, as it is unique to that retailer, and if retailers

successfully build the profile of their own brands, like Debenhams and Kohl’s have achieved, they

can also help the department store to garner customer loyalty, ensuring return visits and repeat

purchases.

Figure 2: Benefits of private label in department stores, 2014

Benefits of private label

Drives footfall

Can help to

appeal to a

new customer

base

Garners loyalty

Quality and

design must be

on par with

branded offer

Build marginsDifferentiates

product offer

Designer

ranges add

clout

Source: Verdict V E R D I C T

February 2014

Global Department Store Retailing | Verdict Channel Report page 4

Chinese players need to invest in private label

We expect private label to become a key battleground for department store operators in China,

which have previously relied on a concession-based business model, with little focus on developing

their own ranges due to the investment involved and shoppers’ demand for branded goods.

Players must set themselves apart from competitors, so alongside brand exclusives and limited

edition branded ranges, private label development would be a local solution to the homogeneous

market. Department store operators in China should therefore introduce private label ranges by

international designers, providing exclusivity to their proposition, as long as products are of high

quality and showcase their design credentials.

Sears and JC Penney are the greatest losers

Macy's holds 1.7 percentage point lead over nearest rival Sears

US player Macy's is forecast to maintain its leading market share in 2014, achieving 0.3

percentage point growth in the five years since 2009. Macy's has not been without its challenges in

its 2013/14 financial year, recording underperformance in Q2 – with sales down 0.8% on the year,

and comparable sales also down 0.8% – but its investment in promotional activities and marketing,

as well as widening its price architecture at the lower end of its proposition to better appeal to cash-

strapped domestic shoppers, has paid off.

February 2014

Global Department Store Retailing | Verdict Channel Report page 5

In contrast to Q2, for the nine weeks ended January 4, 2014 – incorporating the core Christmas

trading period – comparable store sales were up by 3.6% on the year. Macy's turnaround in trading

performance is impressive, and in a mature market such as North America, Macy's has been able

to achieve organic share growth by attracting shoppers away from competitors by ensuring its store

environment and product offer are appealing. We do not anticipate any competitive threats to

Macy's leading position in 2014, as its closest rival Sears is now some way behind – despite being

in pole position prior to 2010.

Nordstrom to seize additional market share in 2014 as investments pay off

We expect Nordstrom's focus on customer service with its Fashion Rewards loyalty scheme, and

its investment in multichannel activities and integrating its online and offline operations, will help

the retailer to grow its market share by 0.1 percentage point to 2.9% in 2014. Nordstrom is one of

just two players that have grown share in the past five years, posing a real threat to its rivals in the

US such as Macy's, Saks and Barneys. The announcement in January 2014 of plans to open a

third distribution centre in the US in summer 2015 will ensure that the retailer can meet consumer

demand for fast delivery of online orders and support future growth of its e-commerce business.

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