David Jones has decided to close its Wellington store in June 2022.
A spokesperson for the retailer confirmed the move, saying it was in line with its retail network strategy.
Retail NZ chief executive Greg Harford said retail in Wellington is fragile.
"There is a serious risk that the exit of David Jones will lead to a gutting of the CBD's retail offering."
Rumours were rife mid last year that the Wellington store would be closing down, but in May David Jones insisted it had no plans to change its store operations in New Zealand.
The Australian retail giant first expanded into New Zealand in July 2016 with the opening of its Wellington store in an iconic Lambton Quay building that once housed the Kirkcaldie & Stains department store.
Its Auckland store was more than three years in the making after David Jones had originally planned to enter the market in the City of Sails but due to real estate availability, launched in the capital.
The Newmarket store will remain open.
A David Jones spokesperson said the retailer remained committed to serving customers in New Zealand and, along with its Auckland store, looked forward to introducing online offerings in the second half of 2022.
"As the retail sector continues to transform, including the accelerated shift to online, the optimisation of our retail network – through investment in our digital and physical channels, a focus on right-sizing and where necessary, consolidation of our physical footprint – is critical to meeting the changing needs of our customers."
The spokesperson said the decision to close the Wellington store was not made lightly.
"We sincerely thank our customers and our team for their support and commitment."
Lambton Ward city councillor Nicola Young said the closure was sad for Wellingtonians, but not surprising.
She said the store was "nearly always pretty empty" and she had observed dwindling lines over time.
"It's a flagship shop and a hugely important part of the Lambton Quay streetscape, so it will have a ripple effect on other retailers.
"People who might have made a beeline for David Jones won't do that anymore."
Young described David Jones as being a victim of the global decline of department stores.
Harford agreed other inner-city retailers would likely see foot traffic diminish once the store closes.
"This is on top of the reduction in customer numbers that we have seen over the past year as the result of lockdowns and Government workers increasingly working from home."
"Retailers need to be working hard to have offerings that appeal to a changing customer base, but it's also really important for landlords to look seriously at the sustainability of CBD rentals, and for the Wellington City Council to be looking at ways of attracting shoppers into the city on an ongoing basis."
First Retail Group managing director Chris Wilkinson said the store was a key anchor of Wellington's Golden Mile.
"It's a destination many people associate with Wellington and it's a key part of Wellington's downtown economy."
He said there were thoughts in the business community that David Jones had misunderstood Wellington's DNA in the way it delivered its offering as a store.
"They increasingly have tried to run their portfolio as one. The reality is success for retail these days relies on businesses reflecting their markets, adapting, and being agile.
"Sadly because of the scale of their operations that just really wasn't possible."
Wilkinson said if the store was split into smaller spaces it could be "incredibly attractive" for businesses.
"By June next year we would fully expect to have much more clarity in terms of the market and consumer demand."
Wilkinson was slightly more rosy about the overall outlook and said Wellington retail has proven to be remarkably resilient over Covid-19.
"This closure will be a blip but it won't be forever."