Could Retail Closures Actually Be Good for Your Community?

Transcription

1 ( Could Retail Closures Actually Be Good for Your Community? by Lacy Beasley, President & COO of Retail Strategies Is retail dead or simply evolving? With a record number of store closings in 2017, what can we expect in 2018 and how will it impact our communities? Is Retail Healthy or Dying? Christmas spending was the highest in at least twelve years this holiday season with shoppers spending more than $900 on average. When people feel optimistic about the economy, they loosen their wallets and splurge on replacing items and buying for others. Through 2017, consumer confidence eclipsed its highest point in seventeen years. The average American is optimistic about the economy and feels that tax reform will have a positive impact on the country. In December 2017, the unemployment rate remained at a low 4.1 percent for the third consecutive month. Retail same store sales year over year are estimated to be up 4 percent over the previous year. Christmas spending in 2017 exceeded expectations by being up 5.5 percent from Despite 2017 s remarkable difference in economic indicators from the Great Recession, more chain stores closed in 2017 than in In 2017 approximately 7,795 U.S. retail chain store closures were announced, exceeding the 6,163 closures during the Great Recession in For comparison, in December of 2008, unemployment was at 7.2 percent, the consumer confidence index had hit an all time low and retail same store sales were down 9 per

2 cent. With all signs currently pointing to an improved economy, why so many closures in 2017? What are the factors contributing to the changing retail landscape driving store closures? According to the IHL report Debunking the Retail Apocalypse, When it comes to chains shuttering stores, only 16 chains account for 48.5 percent of total number of stores closing. Five of these chains (Radio Shack, Payless Shoes, Rue21, Ascena Retail and Sears Holdings) represent 28.1 percent of the total stores closing. Box or Bag? Publicly traded companies must keep stockholders committed to investing in their brand. This forces these companies to report earnings on a quarterly basis. Traditionally, in retail businesses, there have always been two ways to grow profit and please investors: Increase same store sales, or increase the number of stores. Today, an additional source of revenue impacting profit is e commerce. However, development and implementation of an online platform that complements brick and mortar locations is slow to produce attractive returns. At the same time, retailers that have not invested in integrated IT systems, consumer experience and employee training have been punished. Where many like to point specifically to online sales as being the death of brick and mortar, it may not be capturing the full story. E commerce accounts for only 9.1 percent of overall retail sales, and Amazon accounts for about half of those sales. And, while e commerce is still a small percentage of overall retail sales, it s the fastest growing trend in the industry. Retailers must adapt or die. Retailers who have continued to offer their customer an average product at an average price are struggling to remain relevant. Without exceptional value, convenience, service or customer experience; the consumer will seek out better options. Sears and Walmart, once considered powerhouse retailers, cannot rest on their laurels. Sears lost touch with their rural consumer and became irrelevant. Since 2010, Sears will have gone from more than 3,500 physical stores to 555 by April Sears was then what Amazon is today. In 1990, America had four Wal Mart Superstores. By 2000, more than 1,500 locations were open changing the retail landscape of America. Retailers opened new locations clustered around Walmart rather than downtown.

3 At that time, a common discussion was that Walmart would kill communities local retail businesses. The reality is that more businesses opened. A similar conversation is buzzing today about Amazon killing brick and mortar. The reality is that more business will result because shopping is now more convenient and affordable for consumers. Walmart is fighting to not follow the same fate as Sears. In August of 2016, Walmart acquired Jet.com to take on Amazon in the e commerce battle. While Walmart places investment in online sales, Amazon fights back by establishing a brickand mortar presence. Amazon purchased Whole Foods for $13.7 billion in August Amazon still nearly doubles Walmart s online presence in sales volume. However, Walmart is in a race to catch up. They reported increase in online sales was 50 percent in the third quarter of This holiday season Walmart finally pulled ahead of Amazon in post Cyber Monday holiday sales, leaving Target and Kohl s, third and fourth respectively, far in their dust. While online retail is only a small piece of the total pie, its growth cannot be ignored. The most successful retailers will compete by having a complementary online and brick and mortar strategy. Omni channeling, as it s referred to, requires having a seamless integration between brick and mortar and online presence so that the customer can interact with the retailer when they want, in the way they want. Retailers must have both to survive. While investors once discouraged investment in online retail due to lengthy or unproven return models, now it is a critical component for assurance that a brand is sustainable. Several retailers are pivoting, taking investments, they traditionally placed in new store growth and applying those funds to enhanced e commerce platforms. Bringing it Home If investors are preferring to place capital in e commerce growth rather than in brick and mortar, then who is filling up the vacant space from store closures, and what does that mean for our communities? Now is a good opportunity for communities to recognize the chance to increase their overall economic impact from the changing retail landscape. There are three main areas to watch.

4 The first includes more sales per square foot. Losing a big box retailer and gaining a few fast food restaurants could generate higher returns. The majority of the expansion currently is in the restaurant category, while most of the closures are in department and apparel stores. The average sales per square foot for restaurants such as Wendy s, KFC or Papa John s would be close to $500 per square foot versus a department store such as Sears or JCPenney which may be collecting $150 per square foot. Therefore, less space is generating higher returns. Second are the large retail vacancies that still need to be backfilled. Obviously, KFC is not going in the former Kmart box, so what is? Nontraditional concepts, which in the past may have been ignored by landlords, are filling the space. Storage, office, fitness, churches, entertainment, education and municipal services are taking big chunks of large boxes. In many cases, finding large single users can yield a better return for the landlord, avoiding the hefty expenses of carving out spaces for multiple tenants. Although this may negatively impact the sales tax roll to the municipality for that specific retail space, the new use may increase foot traffic and cross shopping to increase the net gain property wide. In addition, the new use may yield a higher number of jobs. Finally, municipalities need to monitor the progress of the Marketplace Fairness Act. This is federal legislation proposed to collect sales tax at the time of purchase for online sales. Millions in tax revenues are lost annually due to this loophole in the current law. Once the law passes, local governments will be able to begin collecting on revenue currently lost. With e commerce being the fastest growing trend in retail sales, it will be important for this legislation to pass to assist local governments during future budget shortfalls. The retail is dead narrative that is hyperbolic. Yes, retail is changing, but all industries undergo evolution over time. Those who have the right vision, a flexible approach, and a constant eye on the consumer will win in the end. These overarching industry changes can also have a positive impact on municipalities, so long as they are able and willing to anticipate trends, maintain an open mind, and prepare for this next generation of retail.

5 ( Conway, Inc. 2018, all rights reserved. Data is from many sources and not warranted to be accurate or current. For information contact