The face of department stores is radically changing, and could soon look more like a warehouse than a boutique

• Department stores were already facing challenges in the form of sales declines and debt. Then, the pandemic hit.
• Of the 28 major retailers that have filed for bankruptcy so far in 2020, three are department stores.
• Department stores will likely have to evolve to survive, whether that evolution takes the form of downsizing or improving their omnichannel services.
• "For those retailers that decide to maintain their boxes, their stores could become more than simply a location to shop," Simeon Siegel, managing director at BMO Capital Markets, said.

The department store as we know it may be on its way out.

The coronavirus pandemic — plus the subsequent store closures and changes to consumer spending — have wreaked havoc on a sector that was already facing sales declines and falling foot traffic.

At least 28 major retailers have filed for bankruptcy so far in 2020. Of that group, three — Neiman Marcus, JCPenney, and Lord & Taylor — are department stores with long histories in the United States.

"Generally speaking, the Venn diagram of companies that are filing for bankruptcy these days involve debt, selling other people's goods, and a history of challenges," Simeon Siegel, managing director at BMO Capital Markets, told Business Insider.

The pandemic has forced a reset for these retailers, giving them a chance to look inward and reevaluate. Rather than focus on growth, as they have in recent years, distressed retailers are making decisions to prioritize the health of their business.

The path forward for department stores could go in a number of different directions.

For one, many are downsizing their store portfolio. JCPenney, for example, said in May that it could close up to 30% of its stores after filing for bankruptcy. Its closures were largely targeted at underperforming mall locations. More than 150 closing locations have already been identified, and liquidation sales have kicked off there.

Neiman Marcus is closing 17 off-price Last Call stores and four department stores, including its highly anticipated Hudson Yards location that had been open for just over a year.

Lord & Taylor, the latest department store to file for bankruptcy, is seeking a buyer for its most profitable locations while kicking off liquidation sales at 19 stores. If it doesn't find a buyer, it could liquidate all of its stores.

Though it hasn't filed for bankruptcy, Nordstrom has cut jobs and shifted workers' responsibilities to cover more tasks, including fulfilling online orders, in addition to permanently closing 19 of its own stores.

That shift to online order fulfillment could be something seen in stores across the industry. Department stores have frequently been accused of being slow to adapt to the age of e-commerce. But, if retailers can use their stores to better blend online and in-person retail, they could find success.

"For those retailers that decide to maintain their boxes, their stores could become more than simply a location to shop," Siegel said.

Before the pandemic arrived, "experiential retail" was a topic raised in almost any discussion of the industry. In 2018, Macy's acquired the experiential retail company Story, which creates highly curated shops inside stores. When Nordstrom opened its New York flagship store in 2019, it came complete with a host of dining options and a Coach customization shop.

But, the pandemic has changed things for many would-be shoppers. Many don't plan to return to malls anytime soon.

"Everyone was looking to create the most positively experiential retail format," Siegel said. "As of today, experiences in stores are exactly what people are afraid of."

At the same time, when they do return to stores, it's likely customers won't want to do their clothes shopping in a setting that feels like a warehouse. The key, Siegel said, will be in meeting customers where they are most comfortable, and balancing any experiential aspects and fulfillment capabilities without hurting the store's brand.