Clicks Overcome Bricks as Retail Stores Crushed Under the Weight of Amazon
Runaway results from Amazon pile onto recent reports of record store closings. A new generation of greyfields is born.
After the bell yesterday, Amazon reported its first-quarter earnings and blew away analyst estimates. The online juggernaut's e-commerce and cloud-computing businesses continued to take market share. Retail sales jumped 23% to $35.7 billion last quarter (its annual sales were only $16 billion way back 2010). Small businesses and large enterprises are also migrating en masse to its cloud platform, Amazon Web Services (AWS). AWS sales increased 42% to $3.66 billion. And unlike Amazon's retail business, AWS turns a big profit, giving Amazon even more cash to aggressively price Amazon Prime and other retail innovations.
If you felt the ground shake late yesterday afternoon, it might have been Amazon CEO Jeff Bezos spiking a football somewhere—or dropping a football from orbit in one of his new rockets.
Amazon’s online gain comes with a lot of pain in brick and mortar retail. Is 2017 the year of the great retail apocalypse? Reading the headlines, it would seem so.
There’s truth to it in the data. So far, there have been nine major retail bankruptcies in 2017—as many as all of 2016. Retailers are closing stores faster than ever, even faster than the 2008 meltdown, on pace for roughly 8,640 store closings this year according to some projections. J.C. Penney, RadioShack, Gamestop, Macy’s, Sears, the Limited, and American Apparel have all announced closing 100+ stores. Sports Authority and hhgreg (appliance chain in business for more than 60 years) liquidated. Payless, Gordman’s and Rue21 filed for bankruptcy.
Last week, Bebe announced it was closing all of its 175 stores, and several apparel companies’ stocks hit new multi-year lows, including hot brands like Lululemon and Urban Outfitters (whose CEO recently called U.S. retail store space a bubble that’s popping). Ralph Lauren announced he is closing his flagship Polo store on Fifth Avenue—joining a growing list of brands abandoning the iconic retail mecca. The 1,200 malls still operating in the U.S. are coming under extreme pressure, and analysts are predicting between 300-400 will close in the next decade.
What explains this carnage? Is the U.S. consumer dead? Far from it. Is this a temporary cyclical retail recession? No, this is structural.
Retail sales are hitting new all-time highs. All of the last five holiday shopping seasons were doorbusters (and big enough to cause shipment failures as the major parcel-delivery companies couldn’t keep up). Consumer confidence is high, gas prices are low, unemployment is under 5% and unemployment claims hover at 50-year lows. Even wages have started rising meaningfully, especially in the last 18 months—now even for middle- and lower-income Americans. There are labor shortages in many sectors and geographies. And, in spite of the retail apocalypse, some mall owners with class A properties are actually having no trouble raising rents. You can make the case that the U.S. economy is stronger than ever.
So, what’s going on?
First, America is hopelessly overstored. The U.S. has roughly 23.5 square feet of retail space per capita, compared to Canada's 16.4 and Australia's 11.1, the next two on a list compiled by Morningstar. By shopping center “gross leasable area”—the U.S. has 40% more space per capita than Canada but five times more than the U.K., the next highest on the list compiled by Cowen and Company.
Malls grew more than twice as fast as the population between 1970 and 2015, again according to Cowen and Company. When the Great Recession caused consumers to retrench, mall visits took the brunt of the pain. Mall traffic declined 50% between 2010 and 2013, according to Cushman and Wakefield research, and has continued falling—already leaving a long trail of greyfields behind.
Earlier this year, Urban Outfitters' Chief Executive Officer Richard Hayne used the dreaded “b” word: bubble. “The U.S. market is oversaturated with retail space and far too much of that space is occupied by stores selling apparel,” he said. “Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce.”
In his view, way too much square footage was added in the 1990s and early 2000s. “This created a bubble, and like housing, that bubble has now burst. We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”
That should flash a huge red light to local governments who have pegged their budgets on retail performance—especially those using “old normal” projections from retail’s heyday. We’re now a decade away from the sector's peak, and storefront closures are accelerating at historic clips. Uncertainty abounds, but one thing is clear: Taxpayers are in line to pay a heavy price as these structure adjustments in retail play out.
Plummeting sales tax revenues are followed by lower property taxes and fees as shop owners chase lower assessment values. Then come job losses, vacancies and the potential for the hollowing out of retail clusters that once anchored area economies and powered local budgets.
According to the New York Times, almost 90,000 jobs have been lost in general merchandising just since October, 2016—though this holiday shopping season was strong. That’s more than all the people employed in the entire U.S. coal industry. So, while headlines are busy reporting on the “death of malls” and retail apocalypse, reaching beyond the retail tipping point is a doomsday scenario for too many municipalities.
But we’ve seen this coming since the internet first promised consumers the shop-at-home experience in the 1990’s. Former CEO of Starbucks, Howard Schultz, called a “sea change” for online retail after the 2014 holiday shopping season, so it’s not catching us completely off-guard.
The retail greyfields are coming and there will be pain. There are adaptive reuse strategies, and new sources of demand for space are emerging, but the disruption may destroy more than it creates in many markets for some time to come. There's a lot of redevelopment work to be done.
Next week, we’ll dive deeper into retail greyfields, examining how we got here, how and why demand is shifting to meet changes in consumer preferences and behavior, and in future installments consider what we might do with all this excess retail inventory.
If your greyfield requires adaptive reuse contact BL about reinventing your site.