Earth’s mass extinctions discovered in the fossil record are tragic. For the losers. Survivors, however, benefit and thrive. The same is true in retail. Here’s a look at store closings and bankruptcies so far in 2019 – who, what and why it matters.
There are many great success stories in retail today and most would not occur without making big, smart investments several years ago that are paying off today.
The list of today’s big winners includes Nike, Walmart, Target, Lululemon, Ulta, Sephora, Costco, Warby Parker and Amazon, which is the leader and chief driver of evolution in retailing today.
However, it is also true that these stellar revenue gains are fueled by the absence of recently departed retailers (liquidated) and bankruptcies that crippled major competitors.
Here are a few big names that transferred a big chunk of their 2018 sales revenue to last year’s retail winners: Sears, Toys “R” Us, Claire’s, Nine West, Rockport, and Brookstone.
Would Walmart, Target and Amazon still have had great years without a record number of competitors exiting the marketplace or crippling themselves through bankruptcy filings? Probably. However, it is also true that the success they achieved was augmented by the mass extinction of once-thriving retail brands.
And that extinction continues in 2019. So far this year the following retailers either declared bankruptcy or announced they will close large numbers of stores: Charlotte Russe, Shopko, Gymboree, Payless Things Remembered, Beauty Brands, Performance Bicycle and Diesel.
Myth-Busting the Retail Apocalypse
Retail is not going away any time soon (or ever), so the recent Wikipedia entry on “Retail Apocalypse” is misleading if you interpret it as nuclear destruction. However, the term has caught on and appears with regular frequency in the media. Here are some facts to rely on to get a true perspective:
- Year to date, U.S. retailers have announced 5,279 store closures and 2,395 store openings, according to Coresight Research. This compares to 5,726 closures and 3,243 openings for 2018. So, this is a multi-year trend worth watching, but well short of the record number of 8,139 closings in 2017.
- While the record for store closings occurred in 2017, the record for store space closings occurred in 2018, according to the CoStar Group. Retailers closed 102 million square feet of store space in 2017, a record at the time. Then in 2018 the record was smashed by the closing of 155 million square feet of space.
- The retail industry, as a segment of the economy tracked by the U.S. Census Bureau hit a record $6 trillion in 2018, which is up about 5% year over year. While this is often interpreted to mean that retailers are operating in a healthy environment this is misleading. It is closer to the truth to say that shoppers are operating in a healthy environment and are spending record amounts of money. Those dollars are not distributed evenly throughout retail and, in fact, two thirds of retailers did not match or even come close to matching 5% year-over-year growth in 2018. A small group of retail winners scooped up the vast amount of revenue gains, according to RIS research.
While many retailers continue to struggle, the retail winners continue to make smart new investments and open new stores. These include:
Dollar General – plans to open 900 new stores in 2019, which increase its store count to more than 16,000.
Dollar Tree – opened 443 new stores last year and plans to open 550 new stores in 2019.
Aldi – has nine new stores preparing to open so far this year and plans to add 400 by 2022.
Ulta Beauty – opened 95 new stores last year and plans to open 80 more in 2019.
Target – opened 24 small stores last year and plans to open 23 more in 2019.
TJX – opened 169 stores in 2018 and has long-term plans to add 1,300 more.
Lululemon Athletica – opened 38 stores last year and plans to open more in 2019.
Urban Outfitters – opened 14 stores last year and plans more in 2019.
Costco – opened 15 new stores last year and two more in 2019 with more to follow.
BJ’s Wholesale Club – has announced plans to add 15-20 in the next five years.
Store Closings and Why
Why are there record numbers of store closings? Let us count the ways:
- National and large regional retailers have over expanded and over extended their realistic shopper base.
- Shopping-mall-based retailers are struggling because only A malls (those in high-population density, high-income and highly desirable locations) are still driving foot traffic. However, B and C malls are struggling to draw shoppers.
- Shopper patterns are shifting away from traditional practices that used to work or were at least tolerated, i.e. brand-name heavy merchandise mixes of products found in many other stores, minimal customer service, lines at checkout, and slow-to-adopt omnichannel experiences in stores in a way that is frictionless.
- Shoppers are adopting new methods that many retailers have difficulty offering: order online pick up in store, return online purchases to stores, doing multichannel orders in stores, lack of having mobile devices in the hands of associates, inaccurate inventory visibility at the store level, ship to store, ship from store, fast fulfillment, free fulfillment and many others.
- Piles of debt. Many retailers that were acquired or taken over by private equity firms have been piled with debt. Toys “R” Us is a case in point. The multi-billion-dollar debt load shifted to Toys “R” Us after it was acquired by a private equity firm destroyed its ability to invest in its stores, business model and future. Toys “R” Us continued to generate revenue but not enough to sustain its business model while simultaneously servicing its debt.
Here’s a look at the reasons behind 2019’s biggest bankruptcies:
Shopko – With assets of less than $1 billion and liabilities of as much as $10 billion, massive debt load was Shopko’s undoing and liquidation. Between 2007 and 2015 $179.5 million in dividends was reportedly paid to Shopkos private equity owners.
Charlotte Russe – Debt and plunging sales in the tricky teen fast-fashion segment drove Charlotte Russe into liquidation. Charlotte Russe had been struggling for years and while attempting a reboot to a new fashion segment, it suffered a 17% drop in sales in 2018 and could no longer service its debt.
Payless – One of the largest private companies in the U.S. with $3 billion in revenue will liquidate due to a long series of mistakes including high debt, major disruptions in the company’s supply chain, a paralyzing computer system breakdown, over supply of inventory, selling at steep markdown prices, and a limited online presence.
Store closings and bankruptcies are largely the result of overbuilding beyond the capacity of shoppers to support them and a culling of weak retailers with high debt loads and slow response rates to fast-moving changes.
So, are store closings and bankruptcies signs of the retail apocalypse? Only for the losers. Survivors will get a nice boost due to the loss of many once formidable competitors.