Stores Are Dead, Stores Are Not Dead, Get a Grip!
Broad generalizations about the state of the retail industry absolutely, positively fudge the truth. So, let’s look beyond clickbait headlines at some hard numbers and see what they mean to retailers.
Store Closings – Not Apocalyptic But Massive
HARD DATA: 5,368 announced store closings for 2017. (Source: Fung Global Retail & Tech). Retail segments with the most announced store closings are apparel (the largest), electronics, department stores and sporting goods. Last year store closings were just 2,051, less than half of what has been announced in just the first six months of the year.
WHY IT MATTERS: Projecting to the end of 2017, the estimated store closings will be more than 9,000, which is up 360% over 2016. This is the highest number going back to the turn of the century and beyond. It exceeds the 6,164 closings in 2008.
Store closings are largely the result of overbuilding beyond the capacity of shoppers to support them. From this perspective, closings represent a correction to an imbalance. However, the number of closings in this correction is significantly higher than the established pattern, which means other factors are contributing to the magnitude.
OTHER FACTORS THAT MATTER: Retail sales overall are shifting online and reducing the share that goes to stores. E-commerce sales were 7.4% of overall global sales in 2015. It is estimated it will double to 14.6% in 2020, according to eMarketer.
Store foot traffic has been trending down for several years. Foot traffic is a closely guarded secret among retailers so no reliable industry-wide statistics exist, but comments made during earnings calls by publicly traded retailers support the multi-year downward trend.
Shopping mall traffic has been trending down for several years, which has forced many regional and strip malls to close. Again, impossible to find industry-wide statistics, but comments made during earnings calls by publicly traded mall operators support the downward trend in foot traffic shopping malls.
Interest rates are rising, which makes it more difficult for over-leveraged retailers to secure loans. Also, bankers and fund managers have become more skeptical of supporting stores for investment due to all of the factors cited above.
BEYOND THE HYPE: Anyone who says store closings aren’t a big deal is wrong. However, it is equally wrong to say stores are dead. The scales are rebalancing after a period of overbuilding compounded by tighter credit and falling foot traffic.
Store Openings – No Boom But Steady
HARD DATA: 3,267 announced store openings. (Source: Fung Global Retail & Tech). Retail segments announcing the most store openings in 2017 are discounters (dollar stores), discount department stores, grocery and cosmetics.
WHY IT MATTERS: The number of store openings for 2017 are up 53% over 2016. Since records have been kept, the normal pattern is for store openings to exceed closings except during spikes in economic uncertainty, such as a recession. This year store closings will far outnumber store openings for the first time and break the pattern. Retailers who are opening stores are actually flexing their financial muscles during a time when others are either in weak financial positions or they just believe their current store count is where it should be.
OTHER FACTORS THAT MATTER: Bargain shoppers are fueling the store growth of discounters (primarily dollar stores), discount department stores, and discount supermarkets such as Lidl and Aldi, two giant grocery chains from Germany that are sharply expanding their U.S. store count. Discounters are typically located in strip malls and discount supermarkets are typically located in their own setting, so they do not rely on shopping malls to drive foot traffic.
The success of Ulta and Sephora, two booming retailers that are sharply increasing their store counts, is also partly due to the rise of the bargain shopper trend as both chains are bringing lower prices to an underserved product segment that had previously been resistant to discount pricing.
Store growth is also partially driven by the trend for online retailers to open brick-and-mortar stores (i.e. Amazon, Bonobos, Warby Parker, Birchbox and ModCloth), although this trend is not producing large numbers of new store openings.
BEYOND THE HYPE: Anyone who says store openings are the real story and store closings are overblown has got it backward. Store openings occur every year, but until now openings always outnumbered closings. The breaking of this established pattern is a big deal, because there is no recession today to drive it. By most measures the economy is expanding. Also, consumer confidence is high, employment is strong, and retail as an overall industry is growing at a healthy pace (a recent estimate of retail growth is 3.5% for 2017, according to a projection in June by an economist for Kiplinger.)
When breaks in important statistical patterns occur like this it typically means tectonic plates are shifting. So, store closings of this magnitude are a very big deal.
The next broad retail generalization to watch for is: Retail Jobs Are Dying, Retail Jobs Are Not Dying. Expect this topic to generate major headlines in coming weeks and when it does be sure to examine the hard data, cut through the hype, and find the truth that matters.