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Supply Chain News: Retail Landscape Transforming before Our Eyes, as Store Closings Continue at Breakneck Pace

 

eCommerce is Key Factor, of Course, but Not the Only One

April 24, 2017
SCDigest Editorial Staff

What the brick and mortar retail world will look like in 10-20 years is anyone's guess. The traditional retail sector is transforming before our eyes, with a big impact on retail and consumer goods manufacturers' supply chains in the end.

With previous announcements earlier in the year by Macy's, JCPenney, Sears and more, just last week women's apparel chain Bebe Stores said it would close its remaining 170 shops and sell only on-line, while teen retailer Rue21 announced plans to close about 400 of its 1,100 locations.

Supply Chain Digest Says...

The over-stored scenario also resulted in brutal price competition, as retailers fought for a relatively small pool of consumer dollars versus the number of stores.


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Just a month ago, in filing with the SEC, Sears Holdings wrote: "Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern."

The Wall Street Journal reports that through April 6, closings have been announced for 2,880 retail locations this year, including hundreds of locations being shut by national chains such as Payless ShoeSource and Radio Shack. That is more than twice as many closings as announced during the same period last year, according to analysis by investment firm Credit Suisse.

Based on historical patterns, Credit Suisse further estimates retailers will close more than 8,600 locations this year in total, which would exceed the number of closings during the deep 2008 recession.

Further, at least 10 retailers, including Limited Stores, electronics chain HH Gregg and sporting-goods chain Gander Mountain, have filed for bankruptcy protection so far this year. That compares with nine retailers with at least $50 million liabilities that declared bankruptcy for all of 2016. And this in relatively decent economic times. Who knows what would happen in a recession.

The impact of ecommerce is certainly a factor here, but perhaps surprisingly not the only one.  Some of the current closing are the result of retailers adding outlets and selling space in the late 1980s and 1990s far beyond the growth in consumers.

"Thousands of new doors opened and rents soared," Richard Hayne, CEO of Urban Outfitters, told analysts last month. "This created a bubble, and like housing, that bubble has now burst."

Indeed, retail sector analysts have been warning for many years that the US was "over-stored."

Earlier this year, investment firm CoStar produced the chart below, showing average US retail sales per square foot since 1984, versus consumer buying power per square foot since 2004.

As can be seen, in constant dollars sales per square foot were over $400 at a couple of points before 2000, from which point they fell to just $300 per square foot shortly after the Great Recession. Since that bottom, sales and consumer buying power per square foot have risen modestly and largely in lock step, with sales now back to almost $350 per square foot.

 

"Simply put it all comes down to productivity," noted Suzanne Mulvee, director of US research, retail for CoStar. "Retailers on average are generating fewer sales per square foot than they did during the decade leading up to the recession." Lower sales productivity among retailers results from a variety of reasons, ecommerce one of them, but the bottom line is that today fewer stores are economically viable. That is leading to the wave of retail closings and a trend of seeking rent relief from mall operators, said Mulvee.


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The over-stored scenario also resulted in brutal price competition, as retailers fought for a relatively small pool of consumer dollars versus the number of stores, so retailers saw little of the usual positive impact of inflation in their sales numbers over time.

"A pair of men's dress pants costs less today than they did a decade ago," Manny Chirico, CEO of Calvin Klein and Tommy Hilfiger parent PVH Inc., observed in a recent interview. Adding to the impact of too many stores of course has also come ecommerce in terms of adding another powerful factor in keeping prices - and margins - low.

Consulting firm AlixPartners fund some evidence that the growth of ecommerce is connected with falling retail margins. Alix recently looked at 20 publicly traded retailers which break out on-line sales penetration. As a group, while on-line sales grew from 10.5% of total sales in 2012 to 15.5% in 2016, EBIT margins have steadily declined by 150 basis points (1.5%) to 9.0%.

There is no question that consumer shopping habits are changing. Much of that driven by ecommerce, but that change is being fueled by broader trends, such as a big drop in consumers spending time wandering shopping malls, which are as a category in deep financial trouble.

For example, three years ago, CBL & Associates Properties announced plans to prune its mall portfolio and so far it has unloaded 14 malls, eight of which it sold and six it handed back to lenders. It turns out that just as in the housing sector, mall owners with dismal prospects for a property can often simply default on the loan, giving the property back to the lender - and the trend is growing.

Not all retailers are shrinking. For example, off-price retailer TJX is opening hundreds of stores under its Marshalls, T.J. Maxx and HomeGoods banners, as it takes share from many traditional retailers. Fomer on-line only retailer Duluth Trading Company is opening some 20 brick and mortar locations.

Many believe that after some pruning - maybe deep - to get retail square footage back to where it should be that brick and mortar retail will be just fine in the end. But just what is that new equilibrium point?

"We're planning as if the environment is not going to improve," Jerry Storch, CEO of Saks Fifth Avenue and Lord & Taylor parent Hudson's Bay Co., told analysts earlier this month.

 

What do you see as the prospects for brick and mortar retail? Will things return to steady state after a deep round of store closings?  Let us know your thoughts at the Feedback section below.

 

 

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