ANDREW MORAN
It is a real bloodbath out there in the retail world. Forget the education bubble, debt crisis or the second-coming dot-com calamity, the next major U.S. catastrophe will be the shopping mall.
J.C. Penney announced that it plans to close as many as 140 stores, Kmart is shuttering 108 stores, Staples pegs the number at seventy and Macy’s is ending sixty-eight locations. In 2017, a record 8,640 stores - and counting - will be closing. It represents approximately 150 million of retail square footage, an all-time high.
Meanwhile, dozens of retail businesses have filed for bankruptcy protection as of April 2017, such as Payless ShoeSource, RadioShack, Eastern Outfitters and Gormans. The high yield default rate is projected to soar to 9% by the end of 2017 with defaults totaling more than $4 billion.
That isn’t all. Fitch, a credit rating agency, recently updated its “retail concern list” that looks at companies of significant risk to default within the next twelve months. The list consists of Sears Holdings, Nine West Holdings, Claire’s Stores, 99 Cents Only Stores and Gymboree. The Moody’s list sits at nineteen.
In case you thought it couldn’t get any worse, another report came out last week that made a dire warning. Credit Suisse stated in a new report that by 2022 there would be 25% fewer shopping malls:
Traditional mall anchors … have announced numerous store closings in recent months. Clothiers including American Apparel, Bebe and BCBG Max Azria have filed for bankruptcy. The report estimates that around 8,640 stores will close by the end of the year.
But the Swiss bank is painting a rosier picture than the truth because the report does not include outdoor malls, outlet malls or even lifestyle malls. When these elements are factored into the equation, that figure surges to more than 30%, according to Ron Friedman of the retail advisory firm Marcum:
It’s more in the 30% range. There are a lot of malls that know they’re in big trouble.
It was only a matter of time before the brick-and-mortar retail bubble started to burst at the seams.
Richard Hayne, CEO of Urban Outfitters, perfectly highlighted what happened during a quarterly earnings conference call in March. He explained that retail square feet per capita in the U.S. is currently six times greater than in Europe or Japan, which is a trend that commenced in the 1990s and early 2000s when too much square footage capacity was added.
Essentially, the American retail landscape has an over-store problem – the epitome of a real estate bubble:
This created a bubble, and like housing, that bubble has now burst. We are seeing the results: doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.
Unfortunately, retail stores may not necessarily survive by simply trimming the number of stores they maintain. Stores have failed to adapt to changing market conditions, whether it is through technological innovation or tumbling sales.
Reported sales at general merchandise stores in February 2017 were the same as they were in August 2014. Department store sales in February 2017 were down 15% compared to the same time in the prior year, which is the biggest drop in U.S. history. Retail comparable-sales growth have been at their weakest since the ’08 Great Recession. As of May 2017, the monthly sales rate was down about 30% from the pre-recession peak – retail store sales have cratered more than 50% since the early 2000s. When sales are adjusted for inflation, the nominal sales rate is sitting in recession territory.
That’s a lot of negative data to swallow. Simply put: department stores are hemorrhaging red ink.
If vendors aren’t generating sales then how can they pay the rent? Spencer Levy, global head of research for CBRE, says this is a major issue for companies still relying on the brick-and-mortar business model:
[Rents] are at a price point now that exceeds what retail sales can perform.
Will the consumer eventually bail out these stores? Not quite; they’re broke and going digital.
There are two things to consider in this regard: first, shoppers are beginning to be tapped out as total credit card debt will top $1 trillion this year, notes WalletHub. Second, customers are heading online for a lot of their shopping needs with U.S. e-commerce sales jumping nearly 16% last year to just under $400 billion - much of these gains went to Amazon.
The rise of digital commerce has immensely affected brick-and-mortar stores. The market capitalization of Amazon is eight times the value of the entire U.S. department store index.
Shopping malls will be a thing of the past. And not even monetary Keynesianism will bail them out.
Watching the 1995 film “Mallrats” will elicit a sense of nostalgia in the future. Generations from now will be sitting at the holographic dining room table reminiscing about the time they held a giant soda bottle and fries in one hand and several shopping bags in the other. Maybe families will even tell their great-grandchildren of the fanny pack if you go back to the 1980s or 1990s.
Get ready. The retail apocalypse is coming, and there isn’t anything you can do to stop it. That’s bad for the 16 million Americans working in the retail industry.
Well, at least Lidl, a German grocer, is opening its first U.S. store this month.
