The next seven years are going to be tough for retail. A sweeping restructuring and downsizing of physical retail will occur through 2026, as the penetration of online retail rises to 25% from its current 16% market share. Called “store rationalization” in an analysis from UBS, it finds that with each 1% increase in online penetration, some 8,000 to 8,500 stores will need to close.
At its current rate that means some 75,000 stores will be forced out of business by 2026, or about 7% of the 1,044,754 retail establishments in the U.S. today, according to data from the Bureau of Labor Statistics.
The sword will fall unevenly depending upon the retail sector and the rate of penetration online sales are expected to have.
Clothing stores will take the biggest hit, losing an excess of some 21,000 stores out of the current 82,200, or some 25%. Consumer electronics stores will drop by 10,000 stores, or 25% of the 39,000 currently standing.
Home furnishings will lose 8,000 stores (32% of its current 25,300) and home improvement stores will drop by 1,000 (about 7% of the nation’s 14,500 hardware stores).
And the number of grocery stores will fall by 7,000, or 8%, from current 89,500 levels, if online penetration rises to 10% from its current 2% level.
Pace of closing will accelerate
With 75,000 stores closing over the next 7 years, that translates to nearly 11,000 stores shuttered per year—or nearly double the rate of store closures recently.
Through the first 26 weeks of 2019, Coresight Research reports its sample of select retailers announced 7,037 store closures. That exceeds the 5,864 stores closed in all of 2018. The company further estimates the number of store closing could exceed 12,000 by year end.
The U.S. is historically overstored, with an estimated 23.5 square feet of retail for every American, as compared with 16.4 in Canada, 4.6 in the U.K. and 3.8 in France, according to financial services firm Cowen.
This led Cowen’s analysts to declare the data “suggests that the sector remains in the early innings of reduction in unproductive physical retail.”
In other words, the retail apocalypse is only beginning, as the world of retail as we have known it dies and the new world ascends.
Retail bankruptcies and closing announcements have been rife through the first four months of this year.
Signet, which operates Kay, Zales and Jared jewelers, recently announced another 150 stores will close, following 262 closures last year. Samuels Jewelers will close its website and 122 locations after filing bankruptcy last August.
Italian luxury fashion brand Roberto Cavalli just filed for bankruptcy, as it shuttered all 12 US locations in tony shopping areas.
This year going-out-of-business signs have impacted some 2,500 Payless shoe stores, 805 Gymboree kid clothing stores, 251 Shopko discount stores, 500 Charlotte Russe fashion boutiques, 159 Fred’s pharmacies and 102 Performance Bicycle shops.
Home furnishings brand Z Gallerie filed for bankruptcy protection this year, but will only close 17 of its 76 stores while it seeks to restructure.
Ongoing concerns have also taken a knife to oversized retail operations this year. L Brands will shut 53 Victoria’s Secret stores, picking up the pace from 30 closures last year. Dollar Tree will close 390 of its Family Dollar stores. Beauty Brands will shutter 25.
J.C. Penney will close another 18 department stores and Macy’s will close eight. Hudson’s Bay Company will shutter 20 of its 133 Saks Off Fifth Avenue stores.
Chico’s women’s fashion brand will shut between 60 to 80 stores this year, with the intention of closing at least 250 stores over the next three years.
Destination Maternity, Christopher & Banks and Sears/Kmart are also in downsizing mode.
Others are right-sizing their fleet, weeding out less productive stores to give the ones that remain room to grow.
For example, Gap will close 50 of its company-owned stores this year to a total of 250 over the next two years. But at Shoptalk CEO Art Peck said it would continue to open new locations, explaining the closures reflect “the wrong stores in the wrong locations.”
Abercrombie & Fitch will eliminate up to 40 stores this year, following 29 closures last. However, it is also opening 40 new stores this year and expects to have a flat to increased store count by year-end.
These closures will bring collateral damage to shopping malls. Cushman and Wakefield estimates that the number of U.S. malls will drop from 1,150 today to about 850 within the next several years.
Real estate research firm Green Street Advisors puts the current state of mall’s overcapacity in perspective. It says that all the department stores still open in the U.S. could fill 350 average-sized malls alone. Macy’s holds the largest share of square footage in malls, followed by Penney, Sears, Dillard’s and Belk, based on Green Street’s analysis.
Retailers on the fence
Excess capacity and heavy debt burdens will continue to put more retailers at risk. CreditRiskMonitor assigns a “FRISK” score to company’s with publicly-traded debt or bonds. The score predicts the probability of bankruptcy within the next twelve months.
Claiming a 96% accuracy rate, it reports Neiman Marcus, J. Crew, Francesca’s and Rite Aid top the list of at-risk retailers with a FRISK score of 1, which indicates a 9.99% to 50% chance of bankruptcy.
Less likely candidates, but no less threatened with a FRISK score of 2 with a 4% to 9.99% chance of bankruptcy over the next 12 months, are J.C. Penney, Pier 1, Ascena Retail Group (Ann Taylor, Loft, Dress Barn and Lane Bryant among others), Destination Maternity, Camp World Holdings (Gander Outdoors), Overstock.com, Stein Mart, Tailored Brands (Men’s Warehouse and Jos. A. Bank), Blue Apron and Steinhoff International Holdings (Mattress Firm).
Confronting retail’s future with eyes open
Retailers large and small are in real danger of getting swept under by the rising tide of e-commerce, especially by Amazon, which is predicted to account for nearly half of U.S. e-commerce sales by 2026, according to UBS.
To help avoid that fate, BDO recently published a study reporting the results of a survey of 300 C-level retail executives.
“Industry dynamics will inevitably favor those who are thinking long-term,” writes Natalie Kotlyar, BDO’s partner and retail and consumer products practice leader.
With an inevitable market correction predicted, she contends, “What worked to keep businesses afloat in 2018 may not be enough once that correction hits and retailers that are just surviving today could find themselves in trouble.”
The BDO analysis divides retailers into two groups: Thrivers (37% of those surveyed) and Survivors (the majority or 54%). The differences between the two are stark.
Survivors are avoiding risk and are keeping their eyes on traditional competitors, as they lag in technology implementation. Survivors operate in a wait-and-see mode, not thinking beyond the next quarter or two. Tellingly, some 68% of Survivors believe bankruptcy activity will remain on par in 2019 as compared with 2018.
Thrivers on the other hand are actively planning for the next market correction with 41% of them thinking bankruptcy activity will pick up pace in 2019. Thrivers characteristically are described as “e-commerce-centric” and early adopters in technology. They are investing in their future and anticipating consumer needs and desires ahead of the curve.
Survivors need to make a quick course correction, or as the report states, “make the hard choices before they’re made for you.” Thrivers have seen the future and are well on their way to adapting to the post-apocalyptic retail world. For Thrivers it is out with the old, in with the new.
“The majority of retailers are stuck in survival mode,” Kotlyar warns. “Playing catch up in perpetuity is preventing retailers from seizing new opportunities and leapfrogging the competition. It’s time for retailers to get rational: Scale with stability. Focus with foresight. Invest with intention.”