How the department store model works, and why it is changing
Department stores are part merchant, part landlord. How their model makes money, why it came under pressure and what brands should ask of them now.
KEY TAKEAWAYS Summary by the editors
- Department stores combine own-bought wholesale, concessions, consignment, private label and services under one roof.
- Their traditional advantage was one-stop shopping in prime locations, an advantage weakened by online competition and brands selling direct.
- High fixed costs and heavy reliance on markdowns have made the model difficult to adjust when footfall falls.
- Adapting department stores are shifting stock risk to brands, adding marketplaces and drop shipping, and investing in services and experience.
- Brands should assess each department store account on commercial model, data sharing, online integration, markdown policy and financial health.
A department store is, at heart, a merchant, a landlord and a media owner under one roof. It buys some products outright, hosts brands that run their own counters, and sells access to a large, often affluent footfall. That hybrid model made department stores the anchors of high streets and shopping centres for well over a century. It is also why they have found recent changes in shopping behaviour so difficult, and why the survivors look very different from their predecessors.
How does the department store business model work?
Department stores combine several commercial arrangements, often on the same floor.
| Arrangement | How it works | Who carries stock risk |
|---|---|---|
| Own-bought wholesale | The store buys from brands and resells | Department store |
| Concessions | Brands operate their own space; the store takes a commission on sales | Brand |
| Consignment | The brand supplies stock; the store pays only for items sold | Brand |
| Private label | The store designs and sources its own brands | Department store |
| Services and leasing | Restaurants, beauty services, events, leased units | Varies |
The balance between these arrangements varies widely by retailer and by country. Fashion and beauty are typically central categories, and beauty in particular has long relied on brand-operated counters.
What made the model successful?
For decades, department stores offered something no other format could: a wide choice of brands and categories in a single trip, in prime locations, with services such as alterations, gift wrapping and personal shopping. For brands, a presence in a leading department store meant credibility, visibility and access to customers who might never visit a standalone store.
The model also benefited from buying scale, strong private-label ranges and, in many cases, valuable property. Owning large city-centre buildings gave some groups a financial resilience that pure retailers lacked.
Why has the department store model come under pressure?
- Online competition. E-commerce offers more choice than any single building and removes the advantage of one-stop shopping.
- Brands going direct. Many brands now sell through their own stores and websites, reducing their dependence on department stores and competing for the same customer.
- High fixed costs. Large buildings, long leases and big teams are hard to adjust when footfall falls.
- Markdown dependence. Frequent, deep promotions trained some customers to wait for the sale, eroding margins and brand perception.
- Shifting footfall. Changes in how people use city centres and shopping malls have weakened some anchor locations.
The result, across several markets, has been consolidation, store closures and restructurings, alongside a smaller group of department stores that continue to perform well.
How are department stores changing?
The department stores that are adapting tend to share a few strategies. They are reducing the share of space they buy outright and expanding concessions and consignment, moving inventory risk to brands. They are building online marketplaces and drop-ship programmes that extend the range without holding stock. They are investing in services, food, beauty and events that give customers reasons to visit. And they are using loyalty programmes and customer data to personalise marketing and service.
Some are also reducing selling space, letting parts of their buildings to other occupiers or concentrating on fewer, stronger flagship locations.
What should brands ask of their department store partners?
For brands, the department store relationship has become more complex and more demanding. The questions to ask about each account have changed.
- Which commercial model applies? Wholesale, concession, consignment or a mix, and how the economics compare after staff, stock and returns.
- What data is shared? Access to sell-through, stock and customer insight determines how well the brand can manage its business in that account.
- How are online and stores integrated? Whether the brand's products appear on the store's website, and whether the brand ships those orders itself.
- What is the markdown policy? The timing and depth of promotions affect brand positioning across all channels.
- How healthy is the partner? Payment terms and credit exposure deserve close attention in a consolidating sector.
Does the department store still have a future?
The format is unlikely to disappear, but it is equally unlikely to return to its former role as the default destination for fashion. The department stores that remain relevant are those that curate rather than accumulate, act as a platform for brands rather than only a buyer of their goods, and offer an experience worth leaving home for.
For brands, they remain valuable partners for visibility, credibility and access to customers, provided the terms, the data and the presentation are right. The relationship is now less about a single seasonal order and more about operating a shared business on the shop floor and online.
Frequently asked questions
How do department stores make money?
Through a mix of buying and reselling goods, taking commission on brand-operated concessions, consignment arrangements, private-label ranges, and income from services and leased space. The mix varies widely by retailer.
Why have department stores struggled?
Online shopping weakened their one-stop advantage, brands increasingly sell direct, fixed costs are high, and frequent promotions eroded margins. Changing footfall patterns in city centres and malls have added pressure.
Why are department stores moving to concessions?
Concessions and consignment shift inventory and markdown risk to brands, reduce the working capital the store ties up in stock and provide a more predictable return from floor space.
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