Retail Woes Are Not all About Amazon

SAN FRANCISCO—Total e-commerce growth is healthy, but it’s always lagging Amazon’s total, with the e-commerce behemoth still taking the largest share of a growing pie, some 45% of the total e-commerce game. Home building professionals at PCBC 2018 learned more about this stark realization in the session, Retail Realities in the Age of Amazon, led by Garrick Brown, national retail research director and vice president of Cushman & Wakefield. In the second of a two-part exclusive, GlobeSt.com outlines the structural issues at play, along with the losers and retailers that have staying power.

Outside of the 2009/2010 downturn in consumer spending during the Great Recession, consumer spending has been consistently on the rise, even as retail bankruptcies and closures have accelerated.

This has resulted in a retail apocalypse mentality or the mainstreaming of doom. Of course, there are real challenges, but the perception is becoming worse than the reality, Brown pointed out. And eventually, those perceptions will contribute to the reality by harming healthier retailer and REIT values.

“Perception has become worse than reality,” Brown said. “But not all retailers are Sears. Consumers are spending. There is a retail rebound with sales up, but so are store closures.”

The top contraction categories are consumer electronics, apparel, department stores, consumer electronics, media (books, video, music, etc.), office supplies and sporting goods. And the bankruptcies within some of those categories were numerous in 2017: Aerosoles, BCBG Max Azria, Charming Charlie, Gordman’s, Gymboree, HHGregg, Payless, Perfumania, RadioShack/General Wireless, Romano’s Macaroni Grill, Rue 21, Sports Zone, Toys R Us, True Religion, Vanity, Vitamin World and Wet Seal.

Brown said bankruptcies will persist in 2018 and beyond. On the 2018 list thus far are Charlotte Olympia, Bon Ton, Kiko USA, Walking Company, Claire’s, Nine West and Bertucci’s. On the 2018 bankruptcy watch are the following stores: 99 Cents Only, Academy Sports, Anna’s Linens, Charlotte Russe, David’s Bridal, Eddie Bauer, Fresh Market, Guitar Center, Hot Topic, J. Crew, Lands’ End, Neiman Marcus, Payless, PetSmart, Savers, Sears, Spencer’s Gifts, Spirit stores, Value Village and Steak ‘n’ Shake.

The problem for these retailers is leveraged buyout debt, not relevance or e-commerce, Brown said. In the past 20 years, private equity groups increasingly borrowed money to acquire retailers and then put that debt on the retailer balance sheets. This is creating issues for relevant retailers and many of the latest bankruptcies (Toys R Us, etc.) have come about from this risky practice.

According to Brown, it is not all about Amazon. There are structural issues in retail that are driving today’s wave of consolidations. Simply put, the US is over-retailed. It has most retail space per capita, 25 square foot per person, and the lowest sales per square foot.

Recent positive signs are helpful, such as discounting, the rise of off-price and the growth of dollar stores, but won’t save many troubled retailers in slowing closures and bankruptcies heading into 2018. In addition, there has been a major shift in consumer spending patterns with the largest consumer group, Millennials, spending less than previous generations. And, Millennials are spending differently, valuing experience over possessions.

This is why food halls and breweries are hot. In addition, cool streets, an emerging urban retail market or neighborhood, have been a catalyst for growth with the influx of Millennial residents. Cool street neighborhoods often are noted for unique architecture, historic homes and proximity to artistic, educational or cultural points of interest.

One thing is certain: mediocre retail isn’t resonating with the younger age group. This nonconformist group values authenticity, uniqueness/cool, choice and variety. They look for intimacy in shopping experiences and curated retail, not commoditized.

“We are not experiencing the death of retail,” Brown said. “The death of homogenous, mid-price point commodity mega-chain retail perhaps, but not the death of retail.”

To illustrate that point, Brown pointed to store openings in 2017, with 4,080 more stores opened than closed, with 14,239 opening and 10,123 closing. The top expansion categories are neighborhood centers, home improvement, dollar stores, discount grocery, off-price apparel beauty/cosmetics, super stores (but often in smaller sizes such as how Target has done it), fitness/health clubs, fast food, coffee and fast fashion. 2018 will continue with more of the same.

While malls and power centers have been most impacted by the current wave of closures, malls only account for 8.4% of all US retail and power centers account for 7.1% of all US retail. In terms of actual shopping centers, malls only account for 0.5% of all shopping centers. Shopping centers (neighborhood, community and strip centers) have actually recorded vacancy declines.

But not all malls are in trouble. It’s about class. Class A and above malls accounted for more than 70% of all mall retail sales in 2016. There are roughly 670 class-B and -C malls in the US, but those only accounted for 28% of all mall sales last year. Class-D malls accounted for less than 0.2% of all mall sales last year.

“People gravitate to new and shiny,” Brown said. “Class C was new once but these malls are dying. In two years, they will be dead and will need to be redeveloped with product such as mixed use, hospitals or hotels.”

In the age of new commerce, centers must give shoppers a reason to visit, he pointed out. If a center is the center of a community, it will thrive. And, dead suburban malls can be redeveloped into mixed-use lifestyle centers with substantial housing, office, medical and/or hospitality or e-commerce distribution centers, Brown said.

In addition to Millennials, empty nesters are also driving development. Florida and Texas continue to lead the nation in population growth. There, ground-up developments, particularly of neighborhood/community centers, are following patterns of growth. Most of the growth will be in the South, with 5.3 million more homeowners and 7.2 million more renters.

The current landscape is increasingly becoming a buyer’s market but the overall buyer pool has shrunk. Most remaining are looking for safe bets, i.e. class-A urban or malls, Brown said. Every property must be looked at individually for fundamentals. The financial health of current tenants, possible re-tenanting scenarios and an understanding of perceived risk vs. likely actual risk/due diligence is a must, said Brown.