How should major US retailers change their business models?

Major U.S. department stores are undergoing changes. Last quarter, Target piloted a new store model in Chicago, dividing some stores into areas more focused on back-office operations and online order fulfillment, while high-traffic stores prioritized in-store customer interaction and ample shelf inventory. The company plans a major overhaul of its store layout next year. Meanwhile, Best Buy launched a third-party e-commerce platform in August for online sellers offering products not sold in its physical stores. CEO Corey Barry told investors last week that the platform has already attracted over 1,000 sellers, offering 11 times the variety of products found in Best Buy's physical stores.

Firstly, for large retailers, advertising and retail media are not just a revenue stream; they are a deeply intertwined part of the business and involve important external partners. For example, earlier this year, Best Buy launched a social media advertising buying extension called Social+ within its advertising business. However, for now, the "social" label is somewhat misleading, as the product currently only partners with one partner: Meta's Advantage+ shopping campaign.

Furthermore, Best Buy is launching a major marketing campaign and has stated that it has prioritized ESPN as a key target media outlet, planning a large-scale streaming promotional campaign to highlight its NFL sponsorship. Additionally, Best Buy Media will launch a new large-scale in-store advertising program in January, with ESPN and Meta among the initial sponsors.

Secondly, retail media networks can typically partner with businesses as marketplaces or publishers, then transition from spenders to revenue generators. In an October interview with AdExchanger, Mark Graser, now head of advertising at PayPal, mentioned the company's partnership with Ulta. Currently, this means PayPal helps Ulta optimize its marketing budget by running ads to PayPal users. However, if this partnership develops successfully, PayPal could potentially generate advertising revenue for Ulta.

Furthermore, third-party marketplaces have a similar impact on retailers, as they significantly boost advertising revenue and ultimately influence store performance. As of the third quarter, Walmart, Target, and Best Buy were among the first U.S. chain retailers to adopt Amazon's third-party marketplace model. Target reported that total merchandise sales on its Target Plus online marketplace grew nearly 50% year-over-year, and advertising sales at its retail media business, Roundel, also saw double-digit growth. CEO Doug McMillon told investors last month that this growth “demonstrates the breadth and growing importance of our digital ecosystem.” He added that equally important are advertising and online marketplace sales, which are key drivers of foot traffic as they can direct customers to a particular store for pickup, while another store, primarily serving in-store customers, may not be able to process online orders quickly.

Meanwhile, Walmart reported higher inventory turnover than ever before. John Furner, Walmart’s executive vice president and CEO, stated that during major shopping seasons like Halloween and back-to-school, Walmart’s top priority is “ensuring inventory is cleared and ready for the next sales season.” This is partly attributed to Walmart’s more cautious approach to merchandise selection and inventory levels. Retail media also played a role, adjusting advertising spending to clear inventory in specific markets.

Overall, major U.S. department stores are currently undergoing a profound and complex transformation. In short, they are undergoing a major reshuffle, closing numerous stores and adjusting their strategic focus in an effort to find a new foothold in an e-commerce-dominated era. The American department store industry is not dying out, but rather undergoing a painful evolution. They are abandoning the illusion of being "large and comprehensive" and turning to a more focused, experiential, and digital "new species."