Amid AI revolution and changing consumer behaviour, department stores must reinvent themselves

“If you’re asking whether department stores will still exist in 20 years’ time, you’re asking the wrong question. Of course they will. The real question is: what will a department store look like in 20 years’ time?” For Selvane Mohandas du Ménil, who leads the IADS, the international federation of department stores, with prestigious members worldwide, these temples of consumerism, partners of premium and luxury brands, are facing a profound transformation of customer expectations- and even of the role they play.

In a nuanced analysis of the market, the executive set out the current and future challenges facing department stores around the world at the Institut Français de la Mode’s (IFM) Fashion Reboot day, held in Paris on November 27.

The model is facing a geographical shift in wealth, with countries like the US and China concentrating great fortunes and luxury consumption, but above all a profound transformation, with younger generations possessing far less wealth than the baby-boomer generation, both in the US and in Europe.

“Today, we’re at a key moment where the generations who need wealth to be able to invest and build their homes do not have the means to do so. This de facto favours alternative means of consumption such as, for example, ultra-fast fashion.” On average, the purchase of a first home has been pushed back by more than 20 years compared with the 1990s. And young people’s expectations of the car are evolving worldwide.

“These changes in major purchases imply that we are moving from an economy based on possession to one based on use and experience,” emphasises Selvane Mohandas du Ménil, who notes that this poses a major question to department stores, whose business model still rests on the sale of objects.

With technological developments and the rise of Chinese players in particular, department stores are facing fiercer competition for access to products. “When you’re a retailer today, there will always be someone who does it cheaper, faster, and in a more automated way,” says Selvane Mohandas du Ménil. Ethics aside, Shein is a striking example of an extremely efficient industrial platform. It’s not an isolated case in China’s industrial evolution. It’s only the first iteration. And what will happen when China or other countries are able to launch industrial platforms that replicate Shein’s efficiency, while also being efficient in environmental and social terms? China has built part of its success on public-private partnerships. We think that department stores, like other players, are going to have to explore these avenues.”

Reinventing the value proposition: from possession to experience

For the executive, the first point is therefore to recognise the industrial shift as inevitable and to imagine responses from the historic players. The other point defended by the IADS representative is to fight on a front other than price. “If the price battle is lost, what do we do? Either we continue to play that game, in a market that was dominated yesterday by Amazon, today by Shein, and tomorrow by who knows what. Or we decide to make a clear choice in terms of editorial direction and curation. This means stopping talking about price and defining whom we’re addressing. The boss of Harrods has already done this. He says: ‘I speak to 0.005% of the world’s population.’ That’s clear. However, we also remind our members that when you make a choice and curate, you inevitably exclude other customers. That means strategic choices.”

These strategic choices include places like the WOW Centre on Gran Vía in Madrid, which offers Instagrammable concepts that prompt online purchasing; cosmetics brand Tamburins, which in Seoul has opened a flagship in the basement of a building under construction; and Louis, Louis Vuitton‘s vast concept venue in Shanghai shaped like a luxurious yacht. “What we’re reminding our members today is that yesterday they thought their competitors were the ones across the street. Today, we’re telling them to set aside their differences, because the competition is Netflix for entertainment; Erewhon, a Californian supermarket chain; Cheval Blanc for hospitality; and Third Space, a British luxury sports club, for the notion of belonging. The question we ask our bosses is ‘how do you adapt?'”

This question arises not only from the transformation of consumption patterns, but also from technological developments and the new paradigms born of the general public’s use of generative AI.

“At a time when spending is being redirected towards what provides immediate value- that is, attention, experience, access, and service- we are witnessing a new technological paradigm. Until now, software served sellers to sell better; AI is becoming a tool for consumers, helping them or even replacing them in the act of purchase.” The executive explains that a study by OpenAI, owner of ChatGPT, showed that in the first half of the year 2.1% of the tool’s queries related to shopping. A small proportion, but one that, he recalls, already represented 50 million daily searches- a usage that is steadily increasing.

Agentic AI and strategic curation: the new battlegrounds of the “temples of consumption”

There is a new reality that supersedes the notion of e-commerce site visibility and SEO strategies aimed at pleasing Google.

“This means having new strategies that may still sound strange, like deciding whether to create a partnership with ChatGPT, Gemini, DeepMind… Of course, this raises questions. A department store is supposed to be about singularity, pleasure, emotion, conversation. So basically, ‘how do we sell the experience on ChatGPT?’ And if we want to embark on hours-long conversations with CEOs, we’re going to ask ourselves how to approach agentic AI,” the IADS executive argues. “According to Amazon, agentic AI is the ability of AI to set goals, plan and execute end-to-end tasks without continuous human supervision. This is not science fiction.”

According to Selvane Mohandas du Ménil, department stores are really starting to get to grips with the issues surrounding artificial intelligence. He cites in particular the initiative of the Chalhoub Group in the Middle East, which has launched Layla, a chatbot capable of adapting each exchange according to preferences, seasonal needs or beauty trends. However, he voices a number of reservations: these tools remain limited by existing data and cannot reproduce the full richness of the experiences offered in department stores, nor guarantee optimal information sharing. Above all, while capital is concentrated in the hands of the baby-boomer generation, it is younger people who are most fluent in today’s technological shifts. One of the challenges is therefore to attract younger generations while also appealing to older ones.

“When it comes to mature customers, department stores face several options. Celebrate them, even if it means cutting themselves off even further from the young; sell them eternal youth, even if it means having a few problems with sincerity; or decide to make them bridges between generations. On this point, at the association level we’ve yet to see a convincing example, but we think it’s an important avenue. These three options provide the structure for offer creation, brand assortment, and services.”

Beyond these strategic choices, the executive reminds us that department stores face other key challenges, such as the development of retail media, the place of private labels in their offer, the overhaul of loyalty concepts, and the integration of second-hand solutions, most of whose business models are not yet profitable. All these points are important but complementary to the deeper evolution of department store strategy: focusing beyond the mere sale of products and knowing exactly whom they want to address.

“There’s a profound shift in value. If you want to buy things, Amazon serves you very well. But the department store is where you’re going to spend the time you’ve saved by using Amazon,” points out Selvane Mohandas du Ménil, who also believes that “department stores find themselves caught in a pincer movement between two opposing dynamics: the youngest, who are cool, who consume with gusto but have less spending power; and the more mature, who are a little less cool but have purchasing needs. Obviously, between the two, each brand needs to define its strategy, as it conditions the ability to invest and prepare for tomorrow’s world.”

All this while keeping in mind that they are not alone in the equation. Customers and brands are stakeholders. “If tomorrow LVMH decides to develop the second-hand offer for its brands’ bags, 20% of department store business is affected,” points out the IADS executive. And the impact on profits would certainly be even greater- a reminder that the strategic decisions of the sector’s giants can have major impacts on this old, resilient business model.