Last week was a bad one for traditional retailers. What’s going on?
That is right. The earnings last week from major retailers – Macy’s, Kohl’s, JC Penney, and others – were dismal. And it is a sign of things to come. The decline in this sector is secular, not cyclical. In a time of economic expansion, wage growth, high consumer confidence, and low oil prices, these big retailers should be seeing strong growth. The opposite has been true. The reason: the old model is no longer working, and these companies have been slow to realize this and react.
Is this just another example of online retailers eating brick and mortar stores’ lunch?
There is no doubt that online retailers – and Amazon in particular – are hurting retailers like Macy’s or JC Penney. But this is not simply an online versus brick and mortar story. Yes, they are up against a booming sector dominated by a savvy behemoth in Amazon, a company that comprises nearly 45% of online sales in the US. But, online retail still only accounts for about 15% of total retail sales in the US, so these traditional retailers cannot place all their woes at the feet of Jeff Bezos.
These companies are getting hit from all sides. Aside from shoppers moving online, big traditional retailers are seeing their pricing strategy undercut, their consumer changing what they spend money on, and they are reaping the bad harvest of decades of overexpansion.
In terms of pricing, mandated minimum wage and higher rent, especially in cities, have driving up operating costs, while price competition and cheaper alternatives have taken them by surprise. For example, fast-fashion companies like Zara and H&M have had great success offering customers a lower price point than Macy’s or Nordstrom’s.
Combine that with a growing propensity for consumers – especially younger consumers – to spend money on experiences rather than material goods, and you begin to understand the threat to these companies’ balance sheets.
You mentioned overexpansion. How are retailers responding to this?
They are shuttering huge numbers of stores. In March, we saw a historic number of store doors closed, from Sears to Payless. We are likely to see nearly 9,000 closing over the course of 2017. Put simply, there are too many malls after decades of overexpansion. Between 1970 and 2015, the number of malls grew at a rate twice that of population growth.
The U.S. has 40 percent more shopping space per capita than Canada, five times more than the U.K., and 10 times more than Germany. That was not a problem until you could buy things with a click of your mouse. But since 2010, foot traffic at malls has collapsed, and it down more that 50%.
What we are seeing now – with the recent waves of store closings – is the bursting of the mall bubble. Now that is not to say that all malls are suffering. Tier A malls – think newer, modern malls with higher-end offerings – are in many cases thriving. It is the tier B and C malls that have not been updated, and which have fewer offerings, that are bearing the brunt of this consolidation.
Source: Black America Web | Mellody Hobson