Category Killers are Officially Dead

While the high yields, relative to grocery-anchored shopping centers may look attractive, shopping center investors should give much thought to whether the risk is worth the potential reward.

Gabriel Navarro is principal of MMG Equity Partners.

Growing up in the family retail drugstore business, I was fascinated by the emergence of “category killers” in the 80’s and 90’s and followed their growth very closely.  As I drive by their stores today and see their ongoing liquidations, and leases being auctioned, I am reminded me of a book that I read in 2005 titled “Category Killers – The retail revolution and its impact on consumer culture”.  I thought it a good time to pull it off my shelf and skim it over.

In 2005, the “category killers”, or “big box” retailers, were all the rage and their growth seemed unstoppable.  The book chronicled the growth of these chains, crediting the birth of category killers to when Charles Lazarus converted his fathers bike shop in 1923 to what would become Toys R Us.

What Toys R Us did for toys, Lowe’s and Home Depot did for hardware; Circuit City and Best Buy for electronics: Borders and Barnes and Nobles for books; Staples, Office Max, and Office Depot for office supplies: and Bed, Bath, and Beyond and Linen’s and Things for home goods.  The rise of these chains in the 1980’s accustomed consumers to unprecedented variety.

Some of the chains highlighted in the book included:

While many of these chains have ceased to exist, and others are on life-support, a few do remain.  One can’t help but wonder whether that will be the case several years from now.  “Category Killers” highlighted how mass-market retailers were beginning to take a large bite out of the category killers.  With large bites being taken today by Amazon, their future is no doubt in peril.

The 80/20 rule, or the Pareto principle, has a great deal of relevance to retailers as it is commonly accepted that 20% of a stores items will make up 80% of the sales.  With mass market retailers (Walmart, Target, etc.) generally stocking the 20% of items in any category that make up 80% of the sales in a “big box” store, the reasons to make the trip to the category killer become less and less.  With Amazon stocking virtually all of the items found in those stores, the trips become even fewer.

The only constant in retail has always been change, so the fact that changes are occurring is not surprising.  The pace of the changes, however, is impressive.

With REIT’s today divesting a large amount of shopping centers anchored by these big box stores, shopping center investors need to give a lot of thought to what the future holds for those chains that remain.  While the high yields, relative to grocery-anchored shopping centers may look attractive, shopping center investors should give much thought to whether the risk is worth the potential reward.

Gabriel Navarro is principal of MMG Equity Partners. The views expressed here are the author’s own and not that of ALM.

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