A Changing Economy and the Impact on Retail

I love to talk about fashion but what and where you buy your clothes is being effected by a changing economy and its impact on the retail sector.  In case you haven’t noticed, the number of retail store closings is growing along with the increasing number of empty and boarded up malls, Here is a brief summary according to Fox Business (not all inclusive):

Store closings effecting the retail sector

  • Abercrombie & Fitch: 60 more stores are charted to close
  • Aerosoles: Only 4 of their 88 stores are definitely remaining open
  • American Apparel: They’ve filed for bankruptcy and all their stores have closed (or will soon)
  • BCBG: 118 stores have closed
  • Bebe: Bebe is history and all 168 stores have closed
  • Foot Locker: They’re closing 110 underperforming stores shortly.
  • Guess: 60 stores will bite the dust this year.
  • Gymboree: A whopping 350 stores will close their doors for good this year
  • HHGregg: All 220 stores will be closed this year after the company filed for bankruptcy.
  • J. Crew: They’ll be closing 50 stores instead of the original 20 they had announced.
  • J.C. Penney: They’ve closed 138 stores and plan to turn all the remaining ones into toy stores.
  • The Limited: All 250 retail locations have been closed and they’ve gone digital in an effort to remain in business.
  • Macy’s: 7 more stores will soon close and more than 5000 employees will be laid off.
  • Michael Kors: They’ll close 125 stores this year.
  • Payless: They’ll be closing a whopping 800 stores this year after recently filing for bankruptcy.
  • Rue 21: They’ll be closing 400 stores this year.
  • Sears/Kmart: They’ve closed over 300 locations.
  • Wet Seal: This place is history – all 171 stores will soon be closed.

And just announced, the Bon-Ton stores which include Bon-Ton, Carson’s, Bergner’s, Boston Store, Elder-Beerman, Herberger’s and Yonkers, is going out-of-business. Those highlighted in red are stores on Sister House too.

A deep recession might explain an extinction-level event for large retailers, but that is not what is happening.  So, what the heck is going on? The reality is that overall retail spending continues to grow steadily, if a little meagerly. But several trends—including the rise of e-commerce, the over-supply of malls, and the surprising effects of a restaurant renaissance—have conspired to change the face of American shopping.

E-commerce (online shopping) is changing the face of retail

People are simply buying more stuff online than they used to. The simplest explanation for the demise of brick-and-mortar shops is that Amazon is eating retail. Between 2010 and last year, Amazon’s sales in North America quintupled from $16 billion to $80 billion. Sears’ revenue last year was about $22 billion, so you could say Amazon has grown by three Sears in six years. Even more remarkable, according to several reports, half of all U.S. households are now Amazon Prime subscribers.

Share of online sales in the retail sector

But the full story is bigger than Amazon. Online shopping has done well for a long time in media and entertainment categories, like books and music. But easy return policies have made online shopping cheap, easy, and risk-free for consumers in apparel, which is now the largest e-commerce category. The success of start-ups like Casper, Bonobos, and Warby Parker (in beds, clothes, and glasses, respectively) has forced physical-store retailers to offer similar deals and convenience online.

What’s more, mobile shopping, once an agonizing experience of typing private credit-card digits in between pop-up ads, is getting easier thanks to apps and mobile wallets. Since 2010, mobile commerce has grown from 2 percent of digital spending to 20 percent. I read one statistic that said 19,000 retail jobs were lost for every 1% growth in online shopping with the potential loss of over 800,000 retail jobs in the next decade,

People used to make several trips to a store before buying an expensive item like a couch. They would go once to browse options, again to narrow down their favorites, and again to finally pull the trigger on a blue velvet love seat. On each trip, they were likely to make lots of other small purchases as they wandered around. But today many consumers can do all their prep online, which means less ambling through shopping centers and less making incidental purchases at adjacent stores (“I’m tired, let’s go home … oh wait, there’s a DSW right there, I need new sneakers”).

There will always be a place for stores. People like surveying glitzy showrooms and running their fingers over soft fabrics. But the rise of e-commerce not only moves individual sales online, but also builds new shopping habits, so that consumers gradually see the living room couch as a good-enough replacement for their local mall.

Interestingly, here in Merida, there are five major malls within 15 minutes driving distance of my house. Two more malls are opening, one now and one by end of the year, that are touted as the largest shopping malls in the Yucatan. However all is not rosy because Altabrisa, branded as a luxury mall, lost (closed) several apparel retailers in the last quarter and they have not being replaced.

Four people and a skeleton in grocery store lineup or why self checkout is a negative influence in retail

And don’t underestimate this change in buying habits. When shopping at Myers, a big box store like Target, I noticed long lines at self checkout counters with much smaller lines at counters with checkers. I was a bit surprised but thought no more of it until a family member commented on Facebox. A lengthy discussion ensued and I was blown away by repeated comments that people didn’t want to talk to the checkers…whataaaaaaa?? What is happening in America that we decline social interaction with others or is it part of the phenomena that social interaction is all on our cell phones today. This is really sad!! And not a good indicator for cashier type jobs in any industry.

America built way too many malls.

There are about 1,200 malls in America today. In a decade, there might be about 900 or less. That’s not quite the “the death of malls.” But it is decline, and it is inevitable. Of those that remain, it’s predicted that about 250 will thrive and the rest will continue to struggle.

The number of malls in the U.S. grew more than twice as fast as the population between 1970 and 2015, according to Cowen and Company’s research analysts. By one measure of consumerist plentitude—shopping center “gross leasable area”—the U.S. has 40 percent more shopping space per capita than Canada, five times more the the U.K., and 10 times more than Germany. So it’s no surprise that the Great Recession provided such a devastating blow: Mall visits declined 50 percent between 2010 and 2013, according to the real-estate research firm Cushman and Wakefield, and they’ve kept falling every year since.

Closed mall - the negative impact on our retail sector

In a long and detailed paper this week on the demise of stores, Cowen and Company research analysts offered several reasons for the “structural decay” of malls following the Great Recession. First, they said that stagnating wages and rising health-care costs squeezed consumer spending on fun stuff, like clothes. Second, the recession permanently hurt logo-driven brands, like Hollister and Abercrombie, that thrived during the 1990s and 2000s, when coolness in high-school hallways was defined by the size of the logo emblazoned on a polo shirt. Third, as consumers became bargain-hunters, discounters, fast-fashion outlets, and club stores took market share from department stores, like Macy’s and Sears.

Finally, malls are retail bundles, and when bundles unravel, the collateral damage is massive. In retail, when anchor tenants like Macy’s fail, that means there are fewer Macy’s stragglers to amble over to American Eagle. Some stores have “co-tenancy” clauses in malls that give them the right to break the lease and leave if an anchor tenant closes its doors. The failure of one or more department stores can ultimately shutter an entire mall. Note Sears and Macy’s in the stats above.

Americans are shifting their spending from materialism to meals out with friends.

Even if e-commerce and overbuilt shopping space conspired to force thousands of retail store closings, why is this meltdown happening while wages for low-income workers are rising faster than any time since the 1990s?

First, although rising wages are obviously great for workers and the overall economy, they can be difficult for low-margin companies that rely on cheap labor—like retail stores. Cashiers and retail salespeople are the two largest job categories in the country, with more than 8 million workers between them, and the median income for both occupations is less than $25,000 a year. But recently, new minimum-wage laws and a tight labor market have pushed up wages for the poorest workers, squeezing retailers who are already under pressure from Amazon.

Second, clothing stores have declined as consumers shifted their spending away from clothes toward traveling and dining out. Before the Great Recession, people bought a lot of stuff, like homes, furniture, cars, and clothes, as retail grew dramatically in the 1990s. But something big has changed. Spending on clothes is down—its share of total consumer spending has declined by 20 percent this century.

What’s up? Travel is booming. Hotel occupancy is booming. Domestic airlines have flown more passengers each year since 2010, and last year U.S. airlines set a record, with 823 million passengers. The rise of restaurants is even more dramatic. Since 2005, sales at “food services and drinking places” have grown twice as fast as all other retail spending. In 2016, for the first time ever, Americans spent more money in restaurants and bars than at grocery stores.

retail is being effected by social habitsThere is a social element to this, too. Many young people are driven by the experiences that will make the best social media content—whether it’s a conventional beach pic or a well-lit plate of glistening avocado toast. Laugh if you want, but these sorts of questions—“what experience will reliably deliver the most popular Instagram post?”—really drive the behavior of people ages 13 and up. This is a big deal for malls, says Barbara Byrne Denham, a senior economist at Reis, a real-estate analytics firm. Department stores have failed as anchors, but better food, entertainment, and even fitness options might bring teens and families back to struggling malls, where they might wander into brick-and-mortar stores that are currently at risk of closing.

Another aspect of this changing social environment is social shopping. Brands are treating social media as a sales platform now more than ever. Nearly 25% of business owners are selling through Facebook and 40% are using social media as a whole to generate sales. Not only does social media influence what people buy through recommendations (23%), a fully 30% of consumers say they would make purchases through Pinterest, Instagram, Twitter, or Snapchat. Actually Pinterest is becoming the media of choice because it is not controlled by advertisers, but by the repinners and you get to see 100% of the repined content. More details here.

The political factor

The most substantial policy idea that will affect retailing will probably not become law. That’s just as well. Congressional Republicans’ tax plans include a border-adjustment tax, which retailers say would raise the price of imports, thereby crunching margins or forcing price increases. Any other intervention seems unlikely. Americans, so used to visiting shops packed with enticing goods, may have to get used to many more empty ones. Least you be too surprised, you need only read about the pending trade war with China, a major supplier of apparel to America, by the Trump Administration.

What’s to come for retail

There is no question that the most significant trend affecting brick-and-mortar stores in our retail sector is the relentless march of Amazon and other online retail companies. But the recent meltdown for retail brands is equally about the legacy of the Great Recession, which punished logo-driven brands, put a premium on experiences (particularly those that translate into social media moments), and unleashed a surprising golden age for restaurants.

There’s another element that was not discussed in our source articles but mentioned in a similar discussion on Linked-In. One commenter said this:” If the quality of the clothing was better!, if there were staff to serve one, If you could find someone in Myers to serve you, just maybe people would go back in droves to shop fronts. It is technology that has not helped most industries. To quote Stephen Hawkins, “One day there will be no need for humans”. I did find that service in some boutiques was exceptional, but the quality and selection of clothing often leaves a lot to be desired

Supply Chain Dive said this:”To survive the apocalypse, retailers must think of retail as a service“. This means that both back end services and the customer experience must exceed customer expectations. We have a long way to go.

Finally, a brief prediction. One of the mistakes people make when thinking about the future is to think that they are watching the final act of the play. Mobile shopping might be the most transformative force in retail—today. But self-driving cars could change retail as much as smartphones.

the new face of retail - the self-driving car

Once autonomous vehicles are cheap, safe, and plentiful, retail and logistics companies could buy up millions, seeing that cars can be stores and streets are the ultimate real estate. In fact, self-driving cars could make shopping space nearly obsolete in some areas. CVS could have hundreds of self-driving minivans stocked with merchandise roving the suburbs all day and night, ready to be summoned to somebody’s home by smartphone. A new luxury-watch brand in 2025 might not spring for an Upper East Side storefront, but maybe its autonomous showroom vehicle could circle the neighborhood, waiting to be summoned to the doorstep of a tony apartment building. Autonomous retail will create new conveniences and traffic headaches, require new regulations, and inspire new business strategies that could take even more businesses out of commercial real estate. The future of retail could be even weirder yet.

Resources:  The Atlantic Monthly     The Economist

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