Plagued by layoffs, closures and plummeting sales, the American department store’s fortunes are fading fast. It’s easy to forget that stores such as Macy’s and Bloomingdales were once the hubs of their communities, where people came to marvel at their towering 20-plus stories, vibrant window displays, live entertainment spectacles and—most importantly—a seemingly unlimited display of goods under one roof. But shoppers have changed since then and the flagging success of department stores in America makes us question whether the everything-under-one-roof model is still relevant to the upper end of retail.

In January, Saks Fifth Avenue cut 1,100 jobs (including that of Fashion Director Michael Fink), and decided to reduce inventory for the coming seasons by 20%—decisions that, in a statement, were directly attributed to the “current economic climate.” At the same time, Neiman Marcus announced 375 layoffs thanks to a 31% drop in December sales, while Macy’s is in the process of closing 11 stores and cutting 7,000 jobs nationwide. Although it’s not suffering as much as some of its counterparts, NRDC Equity Partners did not renew Lord & Taylor CEO Jane Elfers‘ contract in September, seeking to combine corporate operations with the firm’s other retail properties in an effort to cut costs.

The slump seems to be spreading around the world: three of Japan’s largest department stores are also in danger. Isetan and Takashimaya saw their sales fall by 10% in December, while Matsuzakaya’s dropped nearly 14% for the same period.

While the poor economy is surely at play, department stores have been reporting lackluster sales since well before the crisis hit last September. So where have their customers gone? According to the National Shopping Behavior Study, affluent shoppers in particular are taking their business to the internet, where they can find a selection that rivals that of a department store, but in a highly efficient, targeted way. In fact, online retail is one of the few sectors continuing to trend upward at the moment. In a recent interview with JC Report, Paul Hurley, CEO of invite-only sample sale site ideeli.com, reported that the site’s business has doubled in the past three months. Hurley attributed the rise not just to low prices, but to a focus on “creating a true community with our members to drive trust, authenticity and engagement.”

Net-a-Porter.com also reported a massive 50% rise in profits from 2007 to 2008, thanks to its constant quest to re-define luxury as it pertains to online shopping. From its posh packaging to a hardbound catalog and magazine sent to customers twice a year, the site has always aimed to bring the same attention to detail to the online arena as one would get on the designer floor of Bergdorf Goodman. And although LVMH’s eLuxury.com is forfeiting its retail operations, the company explained that the brands it represents now have their own successful e-tail operations.

The targeted approach is also being filled by specialty boutiques that cater to a very specific customer. One example is Atelier New York, a shop with a strong focus (menswear) and a defined aesthetic (dark, experimental), which serves as its own kind of everything-under-one-roof retailer. “At Atelier, we offer a very specific point of view and for those who connect with that point of view, we are seen as a one-stop shopping destination,” says owner Karlo Steel. “Also, being small, we offer intimate and very personal service. We get to know our clients and what they like. And finally, but very importantly, is product knowledge: knowing all about the fit and construction of each garment, the designers’ aesthetic point of view and history and, in our case, the staff being very connected to what they are selling.”

Chanel has also caught on to the power of precision, with the introduction of smaller boutiques fine-tuned to the location. Their first shop in this format, on LA’s Robertson Boulevard, is geared toward that neighborhood’s trendier client, even carrying exclusive products such as nail polish shades developed for that specific store.

With so many options for customers to find everything under one roof—on their own, highly personalized terms—one might think that the big box department store’s fate has truly been sealed. But that doesn’t mean they’re not trying to reverse their fortunes. WWD recently reported on Saks’ efforts to re-invigorate their contemporary floor, which is now dotted with contemporary art, Tom Dixon lighting and found furniture. Its core contemporary offering has grown to include brands such as Vena Cava, Elizabeth & James and Twenty8Twelve—most of which can be found in any number of boutiques around the city. In a time when customers seem to be seeking exclusivity and uniqueness above all else, it’s still unclear whether this strategy will lift Saks from the department store doldrums, but it proves they aren’t willing to go down without a fight.

—Erin Magner