Growing Share of Retailers Plan to Cut Physical Footprints This Year

More retailers will cut their physical footprints in 2021, according to a new survey of retail CFOs by global accounting firm BDO. Approximately 40% of CFOs surveyed say they are reevaluating their real estate footprint this year, as high unemployment rates and stalled COVID-19 vaccination strategies have brands girding for a lengthy period of reduced consumer spending.

A mere 37% of middle market retailers anticipated increased revenue this year, a sharp decline from 83% of respondents last year in the same category. And only 49% of those polled have enough cash reserves to cover the next three months or less of expenses. Over the last six months, 94% of retailers secured external financing – a significantly higher percentage than expected –and 93% say they plan to in the next six months, with proceeds from a sale or divestment the most likely sources of outside capital.

The US remains “over-stored” – compare an average of 24 square feet per person versus 4 square feet per person in Western Europe – a trend exacerbated by COVID-19 and shelter-in-place orders shuttering brick-and-mortar sales. Temporary rent relief had the ultimate effect of kicking the can down the road, with retailers of all sizes taking a major hit from the fixed costs associated with an extensive physical presence. 

The BDO report says a “real estate reset” is due, and predicts that portfolio restructuring will be a bolder, more sustainable solution than mere rent relief. To weather the COVID storm, retailers should shed underperforming locations and consider converting or rebuilding new warehouse and fulfillment spaces to support an improved e-commerce strategy and quicker, more efficient delivery processes. 

The report also takes aim at malls, noting they’ve become less attractive both for brands and consumers alike. To survive, retailers will need to make necessary investments to ensure customer safety and hygiene and to reduce crowding and physical interaction. Mall traffic was declining even before the pandemic threw a wrench into physical shopping and enclosed spaces, and vacant or underperforming stores may be best utilized to support last-mile delivery. For Class C malls and other defunct properties, conversion to industrial space may be the best option, though certain types of redevelopment strategies may also have the downside of reducing property values significantly.