What's Causing the Death of the Retail Store?

In early 2015 I wrote about the major troubles of malls in general and the retailers that occupy them. I asserted that:

  1. High-end stores and high-end malls were doing well
  2. Mid- and lower-tier (Class B, C and D) malls were doing poorly because their middle-class customer base had endured stagnant wage growth for two decades; and,
  3. The country had too many malls.

Two years later, it appears that the denial that engulfed so many retail operators and investors is finally lifting, and the flood of closings has begun.

With the first third of 2017 complete, we appear on pace to see the closing of more than 8,000 stores this year nationwide from various chains. To provide some perspective, in the Great Recession year of 2008 only 6,200 stores closed, and in 2009 slightly more than 4,500 closed.

In fact, many in the retail and mall industry now see the need for at least 10% of all mall space to be closed, repurposed or have significant rent reductions within the next few years. That 10% is roughly one billion square feet of space. 

What Is Causing Malls to Close?

While e-commerce (aka “the Amazon effect”), merchandising trends among millennials and a shift to less formal business attire are often cited, these are secondary factors in the phenomenon of mass closings. The primary cause? Excess capacity—or more simply, too many stores, whether it’s the bankruptcy filing of Payless Shoes or Rue21, the shrinking of once-common chains such as Kmart or Macy’s, the closing of Ralph Lauren’s store on Fifth Avenue in Manhattan or the recent announcements of widespread shuttering by Sears and JCPenney. (For related reading, see: 2017: The Year of Retail Bankruptcies.)

In the words of Urban Outfitters' CEO, Richard Hayne, in his recent communication to analysts and shareholders (reported by Bloomberg), “Malls added way too many stores in recent years—and way too many of them sell the same thing: apparel. 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.”

E-commerce, growing in popularity with shoppers and often cited as the biggest reason why so many stores are closing, is actually not the culprit (even taking into account Amazon’s monster sales report for the 2016 holiday season). Online sales still only account for less than 10% of total retail sales. In fact according to the Census Bureau in the Fourth Quarter Retail E-Commerce Sales Report, online sales were about 8.1% of all retail sales in 2016. So most retail is still done via a store, not on our computers. (For related reading, see: E-commerce Earnings on the Rise.)

Rather, there were just too many malls with too many stores, all fueled by the expansion of credit to consumers to purchase goods and to developers and retailers to build and stock the stores. That party is over.

E-Commerce Jobs

Perhaps more importantly, e-commerce jobs being created will not replace all of the retail workers who are being displaced. Most warehouses are regional and typically located far from residential areas, not within a reasonable commutable distance for displaced workers. Retail stores, on the other hand, are typically near residential communities. E-commerce warehouses also employ people on a much more limited scale than retail stores because, like the auto and manufacturing industries, they are rapidly making greater use of robots in lieu of workers. 

Unfortunately for mall owners, retailers, shoppers, retail workers and citizens at large, this crisis is just beginning and will not dissipate anytime soon. Little business or political will exist to make the changes to stop it. Business leaders tend to focus on maintaining or increasing sales while cutting costs and helping the bottom line—two factors usually buoyed by getting rid of brick and mortar. Washington’s idea of economic stimulus, of course, usually pivots around manufacturing.

Ultimately only one source can save brick and mortar. Says EY’s recent report, “Implications for Retailers and Brands,” regarding store closings: “The challenge for retail companies is how well they can adapt, how wisely they can make spending decisions on new technology, and how best they can use technology to continuously connect with their greatest asset—the consumer.”

Consumers seem to be meeting similar challenges when it comes to shopping. As the stores keep closing, more workers are displaced, tax revenue is lost and anxiety is rising in more communities.

(For related reading, see: Why Investors in Retailers May Bleed Even More.)

Sources: 
Bloomberg
U.S Census Bureau News 2-17-2017