When well-known retailers close large numbers of stores, we take notice. Parents couldn’t miss it when “Toys R Us” went bankrupt. Whether or not you’ve shopped at a “GAP” lately, you certainly know it has shrunk massively, and that “Victoria’s Secret”, “Barney’s”, “Macy’s”, “Shopko”, and other stalwart brands have shuttered many of their locations. Some chains are flirting with total closures. Others (farewell, “Radio Shack” and “Bon-Ton”) have already disappeared. Some of the United States’ most prominent retailers are shuttering stores or declaring bankruptcy in recent months amid sagging sales in the troubled sector.

The New Jersey-based women’s footwear company “Aerosoles”, filed for bankruptcy and announced plans to move forward with a “significant reduction” of its retail locations, planning to keep four flagship stores operational.

Retailer “Forever 21 became the latest retailer to file for bankruptcy protection.  According to a court filing, it has listed assets and liabilities in the range of $1 billion to $10 billion. 

Bankruptcy filings picked up steam in the first half of 2019. It’s gloom for the weaker retailers with too much debt who are missing the boat with consumers

What’s happening?

The retail apocalypse is the closing of a large number of brick-and-mortar retail stores, especially those of large chains, starting in 2010 and continuing onward. Over 12,000 physical stores have been closed. The term began gaining widespread usage in 2017 following multiple announcements from many major retailers of plans to either discontinue or greatly scale back a retail presence. The retail apocalypse has had a domino effect on suppliers, leading to unending losses, shutdowns and debts.

Why?

  • The main factor cited in the closing of retail stores in the retail apocalypse is the shift in consumer habits towards online shopping, especially the ever-growing superstore Amazon. The rise of e-commerce outlets has made it harder for traditional retailers to attract customers to their stores and forced companies to change their sales strategies. Many companies have turned to sales promotions and increased digital efforts to lure shoppers while shutting down brick-and-mortar locations.
  • Many of these retailers hadn’t innovated in terms of the retail experience they were offering in their brick-and-mortar stores. While larger fast-fashion corporations like H&M have had a financial buffer to pivot and focus on quality, sustainability, and durability, smaller brands like Charlotte Russe, Wet Seal, The Limited, and Aeropostale have had a harder time reinventing themselves for a new kind of consumer. The factor in poor brick-and-mortar sales performance is a combination of poor retail management coupled with an overcritical eye towards quarterly dividends: a lack of accurate inventory control creates both underperforming and out-of-stock merchandise, causing a poor shopping experience for customers in order to optimize short-term balance sheets, the latter of which also influences the desire to understaff retail stores in order to keep claimed profits high.
  • Another major reported factor is the “restaurant renaissance,” a shift in consumer spending habits for their disposable cash from material purchases such as clothing towards dining out and travel. The upturn of the “experience economy” is supplemented by the individualization of consumption, where the consumer prefers social gains over material ones.
  • Another cited factor is the death of the American middle class,” resulting in large-scale closures of retailers such as Macy’s and Sears, which traditionally relied on spending from this market segment. Particularly in rural areas, variety stores such as Dollar General, once thought to be unaffected by the apocalypse since they have continued growing rapidly, are now perceived as being at best a symptom of the phenomenon, and at worst a direct cause of rural, independent retailers collapsing, unable to compete with the lower margins that national chains can sustain.
  • Yet another reason for store closings is the leveraged buyouts of retail companies by private-equity firms that saddle the retailers with tremendous amounts of debt.  Those firms are known for their aggressive investment style: they are seeking quick restructuring with the intent on reselling the company or what is left of it. The interest of private equity to troubled companies is associated with a large portion of liquid assets in the retailer’s capital, which could be reinvested in the business or paid in dividends. Retail business with large cash reserves became easy prey for vulture investors.

The other side:

The truth of brick and mortar

For every retailer that’s closing stores, 5.2 are opening new locations.  And that pattern holds true across the board: more companies are opening stores than closing them in all retail segments – even department stores. The reality is that the wave of store closures seen in recent times is being driven by a handful of companies, just 16 retailers are responsible for 73% of retail store closings so far this year. Of course, the raw number of stores may not reflect the visual landscape that consumers inhabit. If your mall added a Casper Mattress, Warby Parker, and three other small stores –but lost an anchor department store like Lord & Taylor -yes, it gained four stores, but those new arrivals occupy much less space overall. What’s interesting is that the increase appeared to be driven by smaller stores, stores with fewer than five employees were the big gainer.

It’s a retail shakeout

The trend toward smaller stores makes sense. In some cases, retailers are using their physical locations less for immediate sales and more as a way to offer consumers a chance to get a feel for their products before they order them online. That does not mean that there’s no market for larger-format stores. But consumer needs have changed. Retailers have to give shoppers a reason to leave their home. It might be as simple as letting them test an expensive product (like a mattress), or it could be to enjoy the “treasure hunt” experience offered by department stores like the various TJX Companies brands (Marshalls, T.J. Maxx, HomeGoods) or warehouse clubs like Costco.

To conclude, poorly run retailers – especially those that have had to navigate the e-commerce revolution while carrying heavy debt loads – have struggled, and many of them will eventually fail, especially at a time when the economy is strong. It’s gloom for the weaker retailers with too much debt who are missing the boat with consumers. Brands with better management that adapted their stores to today’s omnichannel reality are not just surviving but thriving. Those companies will be joined by new, digital-first retailers built to capitalize on emerging technologies and evolving consumer preferences, driven by strong topline growth for larger, stronger e-commerce capabilities and for retailers that offer a compelling value and convenience proposition to consumers. Shopping may look different than it used to, but stores aren’t going anywhere. It’s the survival of the fittest, it doesn’t mean retail is going away. It’s a repositioning of retail. The death of a brand is not an apocalypse. It’s just proof that capitalism is, in fact, the “gale of creative destruction”. Adapt or die. In the end, the retail apocalypse turns out to be less of a new phenomenon and more of a variation on an old lesson for badly managed businesses: Lead, follow or get out of the way.

 

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