The Retail Apocalypse Has Arrived

Store CLosing

At the start of 2018, America has the lowest unemployment and the best economy in more than a decade. The stock market is at new highs. It feels like the economy is strong. But… that’s not the way it looks. On your own main street, or favorite mall, or nearest shopping district… do you see empty stores? A lot of empty stores? What’s going on? How can a booming economy have a record number of empty stores?

2017 set a record for retail store closings. Radio Shack, Toys r Us, Payless, Gymboree, and True Religion were familiar names in malls across the country. Now they are either filing for bankruptcy or have already closed their doors. 2017 had 8,000 store closures, and 2018 may beat that record.

This is the “Retail Apocolypse.” But it’s not just one thing. It is the culmination of many influences, a “Perfect Storm” of cultural change. Let’s break it down…

Clothing: American clothing has changed. First, we buy less clothing. Partially because casual clothing became the norm at work. We no longer need one wardrobe for work and one for the weekend. Partially because millennials see a big wardrobe as environmentally destructive. All of that leads to the second change. In 1959, Americans spent 26% of their discretionary money on apparel and footwear, compared to 11% now.

This is more than a passing fad. American clothing is largely made offshore, regardless of the brand name. Without the cost of malls and department stores, the same items online can be sold for less.

Online: Why shop online? Convenience is a big issue. Going to the store often takes time. Waiting on a line to pay also takes time. With empty stores, line waiting is often much shorter, but we are also more impatient. Likewise, even large stores cannot stock every item in every size and color. Online, you can quickly search every store in the world for a hard to find item. And, of course, you not only get a better price, you can shop at any time of the day or night.

Ten years ago, few consumers shopped on the Internet. We downloaded videos, emailed, and just begun to try streaming media. In 2000, only half of one percent of us retail sales were online. By 2016, online sales rose to 9%. By 2022 that will double. As more sales move online, traffic in brick and mortar stores will fall. Empty stores are not about the failure of brick and mortar, they are about the success of online merchants.

Amazon is one of the most successful online merchants. But much of their success comes from their merchant services, where many formerly brick and mortar businesses sell their goods online, through Amazon. Not all of the store that closed went out of business. Some just migrated their businesses to where the customers are… online!

Walmart: Not that long ago, Walmart led the last retail expansion. They wiped out many small stores, especially in rural areas. Now, with 98% of their sales still in brick and mortar, Walmart is scrambling to develop an online strategy. It is possible for them to move 20% or 30% of their sales online in the next few years, but it will require cannibalizing and closing a large number of stores.

Bankruptcy: Other stores failed to develop an online model. Big chain stores like Toys R Us are going bankrupt in large numbers. Restaurant chains are dropping so quickly it’s hard to keep track. We can expect dozens of well-known chain stores to expire in the next year.

Malled In America: Real estate developers contributed to the Retail Apocalypse by building too many malls. Research from Cowen and Company shows that mall growth outpaced population growth in America by 40%. US malls were built at 5 times faster than malls in the UK. Ten times faster than in Germany. At some point, that bubble had to burst, and it has.

Anchors: When a new mall is built, the largest and/or best-known tenant is known as the “Anchor”.  This store attracts customers that help support smaller stores in the mall. Intelligently recruited tenants are supposed to create higher foot traffic and profitability for the entire mall. If this theory is right, however, when an anchor leaves the mall could collapse. Which seems to be happening.

Department stores have been rethinking the “Anchor” model. Big department stores have to pay for big leases and must tie up a lot of capital in inventory. And no matter how large the inventory, when you want to get a specific shoe, in your size, it may not be in the store. Online merchants have more merchandise in more sizes and colors. Smaller stores that only stock best selling items, PLUS an online presence, can be a more effective combination.

JC Penny is exploring new options. A store today averages 100,000 square feet. Like other department stores, JC Penny offers “store within store” merchants (especially in cosmetics). A 40,000 square foot store, with proportionally smaller “store within store” merchants, are being tested. If new and redesigned stores can dramatically reduce rent, staffing, and inventory, saving stores from closure. But JC Penny is often an Anchor store. If Anchors downsize, will other mall retailers have the foot traffic to survive?

Cycles: We are in the middle of a new retail cycle. But it’s not the first cycle. The first cycle was probably a bit more than a century ago when Department stores arose in Chicago and New York. The second cycle was caused by designers leaving the department store and creating their own brands in malls. The third cycle was the rise of the superstore, especially Walmart, which eliminated many smalltown stores. We are now in the fourth cycle, which started at least a decade ago when the earliest online merchants connected with customers.

What will the fifth retail cycle look like? The next cycle will kick off when most of our buying is online and mobile. We will buy a lot of products by subscription, or through smart devices that know that we’re out of something. More and more, our behavior will be monitored and our needs anticipated. Because we are ordering on like, and not shopping in a store, more of our goods will be shipped to us.

In cities, that means more urban crowding from more delivery trucks. It also means A LOT of boxes and extra shipping materials. And a much bigger carbon footprint as goods are shipped around the country, instead of carried home from a store a few blocks away.

The fifth retail cycle will be led by whoever wins the war between Walmart, Amazon, and foreign competition like Alibaba. As more millennials “cocoon” at home, working remotely, having food delivered, and generally not leaving their apartments or homes for days at a time, just about everything will be ordered online.

Post-Apocalypse: The bubble has burst and shopping centers and main streets have too many empty retail spaces. In New York City, Steinway street in Queens is a major shopping area. A decade ago, before the global financial collapse, if you wanted to open a retail store you might have to wait for years until space was available. A couple of weeks ago I make a quick survey.

Blocks in New York come in two sizes, Streets and Avenues. From street to street is between 10 and 20 blocks to a mile. Between Avenues it is just 5 or 6 blocks to a mile. Even so, when I counted stores on both sides of one block, I counted 13 empty storefronts. I knew that I would two or three, but the number did surprise me. I tried the next block and counted 17 vacancies.

Unlike other economic downturns, the businesses that remain are doing quite well. This isn’t a typical downturn. Customer preferences have changed. Services… barbers, nail shops, beauty parlors… continue to thrive. Banks are closing obsolete full-service locations, but are rolling out a new generation of more capable ATM’s. Millenials, however, have leapfrogged ATM’s instead using mobile banking apps.

The “Apocolypse” is not a single event or even a moment in time. It is an ongoing disruption and redefinition of retail. Waiting on a line in a big department store is an annoyance. Shopping for the perfect sushi knife in your PJs at 3am is great. And Sad. (Can we call it “Grad”?) New forms of business may fill the empty retail spaces. New technology from Amazon and Google that lets us walk into a store, grab what we want and just walk out, could revitalize retail.

Retail is still very much alive and growing. Over the last century, the definition of retail has changed, and it will continue to change. Just as our needs and expectations change. A few years ago I couldn’t have imagined that there could be so high a demand for “nail shops” for manicures. Who knows what sort of services are about to take over retail?


This entry was posted in Best Practices, Decision Making, Employment, Small Business and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.