I have talked about national retail being challenged in the past few issues of the Independence Voice. Since not everyone reading has access to the information that we have, I want to inform the reader of the facts and trends that are happening nationally in different channels of real estate.
One trend to watch is the evolution, and perhaps demise, of the ‘Big Box’ retailer and other retailers as consumer shopping habits continue to change.
We know that future trends in the retail industry can be tricky to predict. Generally, the state of the retail industry closely follows the state of the economy, as much of retail is discretionary spending – the first thing to get cut as consumers are squeezed. Retailers have had to respond to new realities with strategies such as discount stores, factory outlets, slick websites and store closings.
While most retailers have already closed their worst performing stores and made their operations as lean as possible over the past few years, the uncertain economic climate might lead to a substantial number of store closures in the first quarter of 2012, according to an article on Retailtrafficmag.com.
In total, analysts estimate more than 5,000 stores will close in 2012, and that’s not counting closings related to bankruptcies and liquidations.
A short list of some of those that have been announced are below:
600 Fashion Bug stores (through early 2013)
500 Blockbusters (already closed through bankruptcy)
180 Abercrombie & Fitch stores (over the next few years)
137 Ritz Camera & Image / Wolf Camera stores
123 Collective Brands stores (Payless, Stride Rite) by 2013
120 Pacific Sunwear stores
113 Food Lion stores (including Sprouts stores and reorganization under bankruptcy)
103 Christopher & Banks (starting in Q4 2011)
100 Family Dollar stores
100 The Gap stores
96 Avenue stores
93 Esprit stores
60 Staples stores
50 Best Buy stores
Other department store chains like Macy’s and J.C. Penney are treading water, while apparel retailers like Gap and Talbots have fallen victim to changing fashion preferences. According to many national retail analysts as many as 150 retail chains are struggling to keep their stores open.
Make no mistake about it —retailers are having to change and the big box store are going through a thinning of the herd, as you can see plainly see above. Were it just one or two struggling to stay above water, we could probably just chalk it up to poor decision-making or off-target marketing. When a bunch of them are in dire straits, though, it’s not weak management; it’s an epidemic without a clear cure.
After fifty years of putting mom and pops out of business, big box retail is having somewhat of a mid-life crisis. A slow economy has hurt some store sales, narrowing margins. Meanwhile, consumers, armed with price-comparison technology, are visiting more stores seeking deals or exclusive merchandise rather than making one-stop, fill-the-cart excursions.
When we look at the big box retailers, they basically come in two flavors; so-called category killers such as Best Buy that focus on one type of merchandise, and discounters like Wal-Mart and Target, which sell a broader range of goods.
Since the recession, big box retailers have struggled as evidenced by their earnings. Until its third fiscal quarter in 2011, Wal-Mart had posted eight consecutive quarters of declining sales at stores open more than twelve months. Best Buy posted five straight quarters of profit decline before reporting a $2.6 billion loss on March 29 of this year, while analysts forecast declining same-store sales and profit for Target this year. All of these chains are prioritizing a return to profitability, which means looking at downsizing among other solutios.
Big box retail was born in 1962. That’s the year that Wal-Mart, K-Mart, and Target all opened their first large discount stores. As they grew, the new big boxes began offering broad selection and low prices to a growing population of suburbanites who had left the cities in their new cars, searching for their piece of the American Dream.
The big box chains boomed in the early 1990s, and began expanding from suburbs into small towns, fueled by a strong stock market and easy credit. The housing boom propelled the big box retailers into the new millennium with increase demand and further expansion. Then came the recession and consumers pulled back.
During the recession you began to see a seismic shift in retail. Consumers began cutting back and people began buying more products online. That shift of 18% to 25% of online purchases began to affect brick and mortar stores. There became a real case for downsizing stores.
Amazon.com began as an online book retailer in 1993. By the late 90’s it had gotten into other consumer goods and overnight delivery, forever changing the retail landscape. Most retail chains and mom and pop stores were not ready for this dramatic change in profit margins and access to quick delivery. Not many were ready for the level of online shopping to come.
Other forces began working against the big box model. Aging baby boomers no longer had kids at home and didn’t need to stock up on food and packaged goods or buy new appliances. Their kids are marrying later and delaying having their own children, meaning fewer are buying houses that need to be updated and furnished.
Retail developers began to see both big and small retailers push back on renewal of leases and in many cases scaling down in size rather than renewing or expanding, so there was a rush to open smaller stores. By 2016, Richfield, Minnesota-based Best Buy plans to have as many as 800 Mobile Stores, up from 305 now. It’s part of a plan to generate revenue from warranties, accessories and connections between phones, tablets and other electronics.
The hope is to have these stores support a larger network of retail channels. Between the big box, the kiosk, and online and mobile shopping, consumers will have access to retailers anytime, anywhere, anyhow they choose. This multi-channel discipline approach that they are taking will require less square footage. Stores such as Staples and Office Depot are looking at the same model in hopes of downsizing and staying profitable.
However, not all are leaving big box retail behind. Wal-Mart is sticking with big stores. While the company aims to add at least three times as many Neighborhood Markets as in 2011, it plans to add up to 150 Supercenters, compared with 122 last year.
The growth of online shopping is also hurting big box chains and all retail. A new consumer behavior has emerged – so-called ‘show rooming’. They see something while out shopping and immediately go online to see if they can purchase it cheaper. Consumers don’t even have to delay their satisfaction very long, as Amazon and other retailers offer next-day delivery. As stated earlier the biggest beneficiary of that shift is Amazon.com which continues to grab market share from Wal-Mart, Best Buy and Target and other retailers.
The retailer’s biggest challenge is increasing the consumer’s confidence in making online purchases and having a good return policy to stay competitive. When you look at this, Best Buy, Staples, Office Depot are arguably more exposed than the Wal-Marts of the world that are heavy in the food, apparel and consumables category. In the case of consumer electronics, it comes down to price over all.
If these retailers are to survive, they’ll have to evolve and do a better job of integrating their brick-and-mortar locations with their web stores. For me, a great personal example is the clothing chain Joseph A Banks. When you see something online they are ready to match the price or help you in the store with ordering it online. So while the big box retailers are struggling, they aren’t going away, but are shifting to smaller formats and investing in online retailing.
As you look at the evolution of retail over the last forty years, you can see that there are some pretty fundamental reasons why the big box retail chain and the suburban shopping center have grown up together. One of the main advantages to running retail chains was that you had the ability to identify best practices that you could spread them to scale quickly, learning faster and operating more productively than smaller outlets. There will continue to be growth opportunities in urban America (they’ve begun building an urban format mixed use Wal-Marts), but they’re not the low-hanging fruit of the past.
So when big box retail chains like Circuit City, Dillard’s and Office Depot and others began to close doors in 2008 and 2009, it made sense. The recession crimped consumer spending, and these oversized, over-staffed, and over-inventoried stores had to shed some dead weight in order to survive. A funny thing happened on the road to recovery in 2010 and 2011, though: retailers didn’t pull out of their nosedive. More casualties are on the way, and unfortunately these retailers are powerless to prevent their own demise.
What separates the survivors from the also-rans? It’s not an easy answer, but there is an answer. Investors, take note, because the men are about to be separated from the boys in a contest that really should have happened a long time ago.
So, what does this matter to you? As we have discussed before, retail is doing OK here in Texas in almost all metros and towns. Austin leads with its growth and is having great success with less than 7% vacancy and most of the other Texas metros are in the low 90% of occupancy which typically would cause retailers to look to expansion. However, with the challenges of the national retail market and harsher lending standards, don’t expect to see new malls and neighborhood retail expanding. You may see some remodels, and some moving of stores into older space. But presently the challenge is to survive the slow turn around, changing tastes of consumers and learning how to give the consumer that low-price and near immediate gratification that Amazon.com and others have trained the market to expect.
Those who think ‘outside the box’ (pun intended) will have a greater chance of succeeding.