Department stores in the United States are at a crossroads, with numerous retail giants struggling to maintain profitability amidst increasing competition and changing consumer behaviors. Investors, however, continue to eye their real estate assets, believing that selling off these properties offers a quicker path to financial recovery. Yet, history has shown that this strategy rarely leads to sustainable retail success.
This week, Macy’s, one of the most recognizable names in retail, captured headlines once again after catching the attention of activist investors. Just months after rejecting a bid from Arkhouse Management and Brigade Capital, the hedge fund Barington Capital and real estate firm Thor Equities have now urged Macy’s to reduce costs and create a separate entity focused solely on its real estate holdings, which they believe are valued at over $9 billion.
To understand the implications of these moves, we need to look deeper into the nature of department stores and their real estate. Historically, retail properties have been viewed not just as locations for sales, but as valuable assets. HBC, the owner of Saks Fifth Avenue, recently sold $2 billion in junk bonds to finance its acquisition of Neiman Marcus, further illustrating the pattern of leveraging real estate for financial maneuvers within the retail sector.
Richard Baker, chairman of HBC, is noted for his expertise in extracting value from retail properties. He exemplifies this approach through previous ventures, such as his acquisition of Lord & Taylor in 2006 for $1.2 billion. Baker managed to profit from real estate focused strategies even before Lord & Taylor’s eventual bankruptcy in 2020. The flagship Lord & Taylor store in Manhattan was sold to WeWork for $850 million, demonstrating the potential for real estate to generate cash despite operational failures.
However, the pattern shows that quick profits from real estate sales do not necessarily revitalize the core business. The emphasis on property sales as a strategy often provides a temporary cash influx that seldom translates into long-term viability. A poignant example is Sears, which spun off a big portion of its property holdings for $2.7 billion under the direction of hedge fund owner Eddie Lampert. Despite the significant cash flow, the company filed for bankruptcy in 2018, ultimately showcasing the fragility of relying on real estate alone to secure a retail legacy.
Lord & Taylor serves as another case study; after years of struggling against the wave of online competition, the store closed permanently in 2021. Baker’s real estate plays, like converting properties for other uses such as co-working spaces, reflect a failure to adapt the retail approach to contemporary shopping habits. The chain’s name is slated for a new launch as a luxury discount e-commerce site, but many are left questioning the effectiveness of these rebranding efforts.
In Macy’s case, although current CEO Tony Spring has rebuffed attempts to sell off its real estate, the chain’s ongoing struggle to stabilize its sales presents a challenge. Despite a focus on renovating and revamping its stores, the overall sales continued to decline, suggesting that while the real estate is valuable, it cannot compensate for deficiencies in retail strategy and customer engagement.
The narrative is similar with Saks Fifth Avenue. Their initiatives have not produced the desired outcomes, as evidenced by ongoing complaints from suppliers regarding late payments. The partnership with Neiman Marcus may present some potential, but it is unclear whether this merger will create a stronger player in luxury retail or merely stretch existing weaknesses across a larger platform.
Ultimately, the shrinking footprint of department stores in the American retail landscape challenges traditional marketing and merchandising strategies. While the sale of real estate properties might provide immediate relief, it becomes a band-aid solution to a more systemic issue—how to capture the attention and loyalty of modern consumers who increasingly favor online shopping and personalized experiences.
The lesson learned from these unfolding narratives is clear: while real estate can serve as a means for quick gains, it fails to serve as a viable long-term strategy to restore department stores. Investing in customer experience, modernizing the business model, and building strong online presences must become the core focus for these retailers to reinvigorate their brands and thrive in today’s market.
