Analysis: Two sides to the story, says struggling Debenhams

This morning Debenhams reported underlying pre-tax profit of £42 million for the 26 weeks to 3 March, down considerably from £87.8 million the year before.

CEO, Sergio Bucher, said that the UK retail environment was undergoing profound change, while the UK's inclimate weather was also to blame for the drop in sales. 

“Today’s results highlight the scale of the challenges confronting UK department stores,” said Natalie Berg, Founder, NBK Retail. “Not only are they facing a perfect storm of rising costs and subdued demand, but the original concept of a department store – one-stop shopping – has been completely eroded by online retail. Unfortunately for Debenhams, many stores are tethered to long-term leases so there is no quick fix for addressing the shift to online shopping.”

On a mission

Bucher, the former Amazon Executive who joined Debenhams as CEO in 2016, kicked off a presentation for analysts and investors by stressing that there were two sides to the retailer’s story. “I’m disappointed with our performance but we are on a mission to fix it. We made a plan to address a changing retail market. Those changes are happening even faster than we expected, so we are increasing our activity,” he said. The plan includes ramping up its digital/social shopping strategy, changing the in-store experience, improving the fashion offering and delivering cost reduction activity. 

Digital is the star player right now. Sales grew 9.7% in the half. They accounted for 21% of the UK business in the first half. Meanwhile, a partnership with Mobify to implement progressive web application (PWA) technology has helped to drive a 16% improvement in smartphone conversion rates. Debenhams has also launched its PWA tech on the Irish and international websites.

Real estate overhaul

Physical store issues have been mounting up. Debenhams is hampered by tired, outdated bricks and mortar locations, many of which closed in March due to extreme weather conditions. A review of the UK estate was announced a year ago; this identified up to 10 stores that could become unprofitable over time. It closed the first two of these, in Farnborough and Eltham, in January, and also opened one new location at Wolverhampton.

A modernisation project is also underway, featuring a ‘test lab’ store at Stevenage where Debenhams has adopted an operating model that, it claims, is cheaper and more flexible than its traditional model. During the analysts/investors presentation, Bucher played a video featuring ‘a Debenhams non-user, 18-34’. She commented that Debenhams was not usually on her list of favourite retailers, but a visit to the new look Stevenage branch had won her over. “You can spend the whole day here, finding the right outfit and having lunch,” she enthused.

Four other locations are adopting the same layout. Bucher conceded that a roll-out across the entire estate is unrealistic at this point, but highlighted the opening of a new store containing the prototype for its Beauty Hall of the Future at Watford early in FY2019. It has also conducted remerchandising trials in some existing locations based on the fashion layout tested at Stevenage. “For a small capital outlay we have seen a mid-single digit uplift in the departments affected. We plan to apply these principles across all fashion and home departments in three stores this season, with a further 15-20 ready for autumn/winter 18.”

The ultimate goal is to move beyond the notion of simply selling stuff to customers, to create an immersive digital/social shopping environment. NBK Retail’s Berg commented: “In the past, it made sense to dedicate 100,000-plus square feet of retail space to these ‘palaces of consumption’, aggregating lots of brands under one roof. But today, shoppers have access to millions of products at their fingertips, so department stores must reposition themselves to be less about product and more about experience.”

Debenhams can’t be faulted for effort, she added. Under Bucher, it has embraced store reinvention, recognising that the department store of the future will be a place not only to buy stuff, but also to eat, discover, play and even work. Partnerships with brands like Swoon and Maisons du Monde create a point of differentiation, while the installation of gyms and beauty bars and potential collaboration with WeWork allow Debenhams to make better use of excess space while simultaneously driving footfall.

Berg concluded: “Store reinvention’s not cheap but it’s better than standing still. Winning in retail today means excelling in everything Amazon can’t do – department stores must genuinely wow shoppers by becoming more experiential and service-led.”