CIO —

Once upon a time, big department stores were the preferred destination of holiday shoppers. Those cathedrals of commerce lured millions of moms and dads, grandmas and grandpas, and girls and boys through their revolving doors with magical, theatrical Christmas displays. Every Yuletide (beginning in November), they decked their halls with boughs of faux holly and set Christmas trees bedecked with lights and tinsel at the end of every aisle. Gift-wrap departments bustled with elves tying satin bows.

Children—dressed in puffy parkas with mittens dangling from their sleeves, their cheeks crimson from the cold and their eyes shining with excitement—lined up to sit on Santa’s lap. Shoppers marveled at the spectacle as they crowded the stores in search of stocking stuffers and the finest gifts to secret under their trees. n But that was then.

Though department stores continue to spruce up for the holidays, they can no longer rely on theatrics to bring in the shoppers. Now they rely on holiday sales—pre-, not post—and that’s not good for their bottom lines because sales eat into profit margins. Even Santa has abandoned the big store. He’s moved his operations from the heart of the store to the center of the mall, and that’s where consumers are increasingly spending their holiday bonuses. They no longer crowd department stores in search of that something extra special for that extra-special someone. Instead, they head to Brooks Brothers for their husbands, Chico’s for their wives, Abercrombie & Fitch for their teenage sons and daughters. And when they leave the mall, they head across the highway to Wal-Mart to pick up toys for their tots.

Or they go online.

Last year, consumers spent $23.2 billion online during the Christmas season, according to Goldman Sachs, Harris Interactive and NielsenNetRatings, which was a 25 percent increase over the previous Yuletide season. Holiday sales across different brick-and-mortar stores rose just 2.3 percent from 2003 to 2004, compared with 4 percent from 2002 to 2003, according to the International Council of Shopping Centers (ICSC), a trade group that tracks and reports retail sales.

This holiday season isn’t looking much better for retailers, but it’s looking especially grim for the big department stores. Record-high gas prices have cut into consumer spending. A survey of 7,000 Americans conducted by Big Research, a provider of consumer market intelligence, showed more than 70 percent of Americans shifting their spending from luxuries to necessities because of staggering fuel costs. The National Retail Federation predicted holiday sales at discount, department, grocery and specialty stores would rise 5 percent this year, to $435 billion from $414.7 billion the previous year. The 5 percent bump is lower than last year’s 6.7 percent jump over 2003 and the slowest growth in holiday sales since 2002. (For more data on department store declines, see “Taking Inventory,” this page.)

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