America is having a “retail moment” – and it’s not a good one.
It’s easy to blame all of the industry’s woes on Amazon, the online giant. There’s little doubt that the fifth-largest U.S. company by market cap has been disrupting traditional retailers (I promised myself I would not use the dreaded “B&M” cliche). But online is far from the only source of retail’s problems: The large chains, the malls they usually find themselves in, and even flagship urban stores have failed to adapt to rapidly changing consumer tastes. This lag has been readily apparent for more than a decade.
Note that this is not the product of hindsight; during the financial crisis, it was clear to me that “retail shopping will emerge from the recession with a much smaller footprint than before.” In 2010, I reiterated those views, observing that “the United States still has too large of a retail footprint – 40 square feet of retail space for each person; that is the most per person in the world … that needs to come down appreciably.”
My present views are even less optimistic. We are probably closer to the beginning of that transition than the end. This is a generational realignment in the way consumers spend their discretionary dollars, and the ramifications and economic dislocations are going to last for decades.
This year alone there will be several thousand store closings. Hold aside for a moment the debacle that is Sears/Kmart -- that has as much to do with complex financial engineering as anything else – and consider the ongoing changes in retail sales trends. Many factors are driving weakness in U.S. retailing:
Too much retail. The United States has more retail square footage per capita than any other nation. By some measures, we have six times the footage per person than the United Kingdom does. TAG Group’s Dana Telsey describes many retailers as still “overstored.” (Our MIB interview is here.) The likely solution to this will be a combination of additional store location closings, further consolidation, and even more bankruptcies. Last summer, Macy’s CEO Terry Lundgren called the situation “ridiculous,” noting that the U.S. has 7.3 square feet of retail space per capita, versus 1.7 square feet per capita in Japan and France. While the United States has more land and open space than those nations do, U.S. retail stores are over-concentrated in cities and suburbs. America’s huge amounts of land in rural and exurban areas aren’t what’s driving this metric.
The build cycle. One aspect of the “overstored” issue is the mismatch between retail trends and the construction cycle. Trends change much faster than permits can be issued, buildings constructed and subsequently rented. That lag can be consequential. Look at the growth in big malls since the 1990s. Forbes notes that “since 1995, the number of shopping centers in the U.S. has grown by more than 23 percent and the total gross leasable area by almost 30 percent, while the population has grown by less than 14 percent.” All of the retail construction reflected a very ’90s shopping perspective, one that’s considerably different today. It is more than just the rise of the internet: Sport shopping, retail therapy, and conspicuous consumption offer less prestige today than they once did.
Bor-ing! Shoppers are looking for more than just a place to shop. They want experiences more than just “stuff.” These changing consumer preferences reward some firms while punishing others. The wild success of the nearly 500 Apple stores provides lessons for other retailers. At $5,546 in sales per square foot, Apple sells more goods at retail than any other store in the world. The same exact products can be purchased at Best Buy, at Amazon, or even Apple’s own website. Yet the company has hit upon a formula that sends more than 1 million visitors per day worldwide into their retail locations with money to spend. (Surveys have shown that putting an Apple store in a mall increases sales 10 percent for all the other retailers.)
Millennials shop differently. Retailers have an even bigger problem coming at them: the 20- and 30-somethings who make up the millennial generation. They have little affinity for cars, preferring to Uber wherever they go. So far, they have not been big buyers of homes (though that may change). We see this in mediocre durable goods numbers this decade. More than anything else, they value experiences over things.
Mark-ups and pricing. One last issue: price. Thanks to “showrooming” – checking out stuff in stores only to buy online after finding out how much less it costs – consumers have learned how stiff mark-ups can be in retail. When customers believe they’re overpaying, it does not lend itself to repeat business.
There are some notable exceptions to the retail malaise, as specific firms such as Costco, Porsche, and Home Depot have done well. Outlet centers have been strong performers, as consumers still bargain-hunt. For every retail outperformer you can name, there are many more underperformers.
Those warnings about excess retail space are almost a decade old. If anything, the existential threat to the consumer retail industries are even more acute today.
Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm. email@example.com, www.ritholtz.com/blog.