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America has too many retail stores
It’s not a new story. Retail sales are up, but operators continue to shutter large numbers of stores as more consumers go online to buy goods and ill-managed and/or debt-burdened businesses fail to overcome the hurdles in front of them.
A new report by Coresight Research said mass store closings are in the offing again this year, following 2018 when 5,524 turned off their lights and 2017 when 8,139 closed. So far in 2019, retailers have announced 2,187 store closures, Ascena Retail, Charlotte Russe, Gymboree and J.C. Penney locations among them.
Retailers have closed stores in recent years despite a strong sales environment for the industry overall. Last year, according to the National Retail Federation, retail industry sales were up 4.6 percent. This year, the group is expecting growth between 3.8 percent and 4.4 percent. As Coresight’s report points out, sales growth for retail is outpacing U.S. gross domestic product as a whole.
While store closings may not be a positive for employees put out of a job, having a weak business fail can open room for stronger ones to move in.
“With any vacant department store, an owner has the opportunity to increase their rent, to reinvigorate or reinvent the space,” Brandon Famous, senior managing director at CBRE, told CNBC. “In many cases a landlord looks forward to the opportunity of getting that space back. In many cases it will be a positive thing.”
Shopping center landlords have turned to consumer-direct brands, pop-ups, food courts and non-traditional tenants, such as shared work space services, to reinvigorate vacant spaces. Some mall operators have even repurposed entire facilities to serve as online fulfillment centers.
While department stores and some specialty operators struggle, discount and dollar store operators continue to add locations. Retailers, according to Coresight, have announced 1,411 new store openings, offsetting almost two-thirds of those being shuttered.
- US Store Closures 2019 Outlook: No Light at the End of the Tunnel – Coresight Research
- Another wave of retail store closures coming. ‘No light at the end of the tunnel’ – CNBC
- Are malls better off as fulfillment centers? – RetailWire
- Are new brick and mortar solutions the key to digital brand growth? – RetailWire
- Why do landlords say they’re happy that Sears is shuttering stores? – RetailWire
- Will foodie culture save the mall? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Are there too many store locations in the U.S., or are retailers dealing with a more nuanced problem? Do you see better ways for landlords and retailers to align store counts/locations with demand?
Poll
BrainTrust
Dick Seesel
Principal, Retailing In Focus LLC
Sterling Hawkins
Co-founder, CART
It’s a documented fact that the U.S. has significantly more retail space per capita than any other industrialized country. Yes, U.S. retail is over-built and the store closures we’re seeing amount to “pruning for excellence” as retailers rightly rationalize their store base to ensure they remain strong and profitable.
On one hand there’s the shopping center real estate boom of the 1980s-2000s as populations were thriving in suburban areas. Like any boom, there was excess. The other hand tells the tale of younger generations (and increasingly retirees) moving into urban areas for economic opportunity. As the population has shifted, the viability of the B- and C-grade suburban shopping malls have gone with it.
The customer is the new Point of Sale. They no longer need a store to learn about products or purchase one. To survive, stores must create relevancy for the customer beyond being a depot for displaying products. The customer expects and demands convenience, personalized experience — plus value. The stores that create relevancy for today’s customer are thriving. Those that sell products are doomed.
What Chris said.
The answer is well-documented. There are more U.S. retail stores per capita than in any other country in the world. So yes, we’re over-stored. Stores are also changing and there have been many new formats launched in recent years (think Indochino or Nordstrom inventoryless showrooms or B8ta marketplaces) that require smaller footprints. This will continue to evolve as shopper behavior changes. The role of the store has also expanded so for example, retailers that have spaces that are too large for current shopper preferences can use some of that space for more efficient fulfillment for online orders, etc.
While,like everything at retail it is a nuanced problem, compared to Europe and other developed countries we are over-retailed. The U.S. has a higher per capita percentage of commercial real estate devoted to retailing. The appetite for risk for U.S.-based retailers is also greater (i.e. less conservatively managed and higher-leveraged financing). This leaves many retailers more vulnerable to falling sales and economic issues, all at a time when shoppers are shifting a percentage of their buying to online.
This is a complex issue that is informed by a lot of very misleading data. The U.S. does have more floor space per capita than many other developed economies, but the low population density necessitates this while the more favorable economics of running stores (compared to other countries) facilitates it.
What we should be focusing on is how much bad floorspace the U.S. has. The answer is a great deal. There are so many under-invested in properties, weak retail propositions, and irrelevant retailers. That’s mostly what leads to store closures and floorspace reduction.
“What we should be focusing on is how much bad floorspace the U.S. has” – YES! I’ll add another point to this – is the floor space in use in the right geography to best reach shoppers? The very widespread geography of the U.S (especially toward the interior, away from the coasts) necessitates more stores simply to provide shopping alternatives to consumers. How many counties across the U.S. only have a Walmart and few, if any, other national retailers within a reasonable drive? Does that mean there are too many Walmart stores? No. The formula is much more complex than just floor space per capita.
Yes – there were too many cookie cutter stores in the U.S. These past years, we have seen a mass decline, yet also a rebirth in innovative new approaches. The store and retailer of the future needs to embrace digital commerce. Omnichannel retailing is no longer an option – it is the starting point. IHL pointed out that BOPIS was up by 46 percent over the holiday season, despite only 27.5 percent of U.S. retailers offering the service. Anyone see an opportunity gap here?
The new era of retail means you will have larger stores (flagships and core stores) that have more goods and are setup for ship-from-store fulfillment. Other locations will be smaller format and even popup stores. The future of retail looks much more fluid and adaptive than ever before. Most importantly – keep your eye on customer service beyond all else.
As Steve Dennis pointed out “Retail is not dead – Boring Retail is.”
The issue of excess square footage has been well-known for years, long before physical stores began losing market share to e-commerce. The escalation in online shopping has only made matters worse.
But let’s face it: As a retailing professor put it to me over 40 years ago, “America isn’t over-stored, it’s under-retailed.” (And this was long before e-commerce or the peak of suburban mall-building.) His point then is even more true today — there are far too many retail chains, especially department stores and mass merchants, who have died a slow death because of their own missteps and failure to reinvent themselves.
Those rosy NRF and other sales reports just don’t align with the quarterly data as reported by retailers. It’s clear that the gulf between winners and losers (and between online and brick-and-mortar) is getting wider in a hurry.
Store closures are nothing new. Despite the number of stores closing, there is double the number of stores opening. What really is happening is a shift. The old, tired retail stores are closing in large numbers either from companies going out of business like Bon Ton Stores and Toys “R” Us or they are cutting back significantly attempting to stay in business. There is a surge of new stores coming from once pureplay e-commerce businesses who offer a whole new retail concept and way of shopping. Going forward this trend will continue, and we will also be seeing smaller stores with the sole purpose of letting the customer view, try and purchase the item but not leave the store with it because the purchase will be waiting for them by the time the customer comes home. We are going through a retail evolution with a blend of technology, new concepts, new shopping demands and no doubt many different types of new customers. It’s exciting and fun to watch as it unfolds.
Let’s put this in context. If you had a jar of 1,000 pennies and five fell out while three more were put in later that day- would it matter? The top 500 retail chains alone in the U.S. have in the range of 180,000 stores. The minute changes we’re seeing are part of the regular updating and optimizing of store locations. These are part of the regular operations of real estate teams at most retailers. A better look would be square footage of stores- especially as we’ve used metrics like dollars per square foot and comp. store sales usually based on similarly-sized stores to measure performance. The store sizes are what’s changing far more than the count. It will be interesting to see if we can move towards elasticity and on-demand stores or store space in the future.
Yes we are over-stored AND yes there are more nuanced problems in the market. Retailers are proving to have a very wide range of skill levels in interpreting and executing the proper evolutionary moves for this new market. Weaving together the right combination of human and tech solutions is going to be messy, and each retailer is going to have to come up with the appropriate solution for their category and demographic. Apparel, tech, grocery — all deal with different levels of knowns and unknowns.
The ongoing shift in the role of the store is likely to aggravate the “over-stored” syndrome. The problem with any ratio or index on retail square footage per capita is that the number hides jewels and sins equally well.
I like to think of the situation as being more about having the right mix of the location, type, size, and format of the retail store, how it’s connected to the lifestyle of consumers, and its use of technology to deliver a unique value with great convenience. This requires a far more nuanced approach rather than application of blunt force.
The answer is a clear and definitive “both.” There are too many stores — or, at the very least, too much retail square footage — and retailers are dealing with a more nuanced problem. Let’s take those in order. The square footage/store count problem has two root causes. First, too many retailers are still operating on — or living with the legacy of — strategies that equated scale with competitive advantage, basically a real estate approach to retailing that held that if you get get your store on the corner, in the strip mall or in large freestanding malls, then your competition couldn’t and, sooner or later, you’d win. The second cause was a subconscious response to historical pattern where expanding birth rates and moves to suburbia in the 1950s through 1980s created a need for more and more stores. But things have changed. The shopper is now the center of the retail universe and they can buy however, whenever and wherever they want and never enter a physical store if they so choose. Also we are in the middle of a “babyless” economic boom. Traditionally strong economies are mirrored by increased birth rates, one of the classic excuses for building more stores. But retail remains frozen — partially in the past, with one toe in the present, and largely in denial. Times have changed and they will continue to change. Retailing is going strong, but that doesn’t mean we will ever need as many stores as we have.
First of all, I don’t feel today’s (Feb. 14) retail performance news is a long-term indicator. One inning doesn’t make a ballgame. However, to answer the question posed, YES, it’s still “Location, Location, Location.” The physical store is alive and well. Otherwise, so many online natives wouldn’t be exploring bricks.
There is no nuance to this issue. For decades, retailers’ solution to generating growth was to open another store. It allowed them to ignore the real and long term challenges of growth and now they are paying the price.
I have seen multiple numbers reporting the percentage of all retail sales that are now online. They range from 12 percent to 16 percent. Apparel is reported at 27 percent. If you understand the business model of a retail store, and take anywhere from 12 percent to 27 percent off the top, you end up with a loser. The current structure can not continue.
Darwin is often misquoted. People attribute the saying, “Only the strong survive,” to Darwin. In fact, what he said was “In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment.” Neither the economy or competitors are often the reason for a store’s demise. It is customers that retain or remove retailers from the market. Too many stores? Perhaps. Too many inefficient or irrelevant retailers. Certainly.
This is a more complex question than it appears. Yes, it’s well documented that the U.S. has the highest retail floor space per capita of any Western nation. However, the very wide geographic distribution of the population necessitates this. That doesn’t mean that wise retailers shouldn’t evaluate the performance of their stores and close those that underperform. At the same time, retailers will want to open stores closer to their consumers. Many digital native brands have found that anytime they open a store in a new zip code, online sales from surrounding zip codes increase dramatically. Not to mention that looking at raw store closing numbers says nothing about the quality of the retail brand closing those stores – it’s equally well documented why Toys “R” Us failed and closed their stores and it has nothing to do with a retail apocalypse or competitor online sales driving them under. Financial positions of retail brands must be considered as well when evaluating store counts. There is much more than meets the eye to this question!
Yeah, we kind of went nuts in the ’90s, didn’t we? There are more than 2,000 Home Depot’s as an example. That’s 40 per state, and you know some states have fewer meaning some states have more than 40 Home Depots! One-hundred eighty-thousand square feet each! The ironic part about that example is that Home Depot is doing well! But why?
Because they’re smart enough to know that their stores need to evolve as their BOPIS orders skyrocket and their “ship to site” program goes bananas. Essentially, Home Depot’s stores are becoming fulfillment centers, which, given the current track of online shopping vs. physical, needs to happen to most of retail within the next 10 years.
Stores are still a great asset because they’re close to the customer, but unless they evolve, a la Home Depot, the huge closing numbers will continue.
Retailers need to be very cautious about these closings for one reason: Clicks and online sales are always higher in a geographic area when there is a physical store in that area.
So yes, they overbuilt. But each single store closing can have more than one store’s worth of hit on retailer profits and revenues.
I’ve written about the mere advertising value of a store in an area. That’s not enough on its own to justify a store. But it’s a significant value that must be added into the considerations of closings.
My recent blog post on Bricks & Clicks looks at some of the reasons for higher sales with physical presence.
It is not that we simply have too many retail stores, we most certainly do. Exacerbating the problem is that many of the existing store footprints are too large to remain economically viable as the revenues continue to fragment across smaller, more convenient stores and online alternatives. To the point, if I were any of the retailers whose signature footprint is over 100,000 square feet, I would be looking at contingency plans to get smaller, faster. While there will always be a market for smartly-located big box stores, the number will undoubtedly continue to shrink as shoppers evolve to more efficient alternatives.
In one sense, many marketplaces have too many supermarkets; that is, when two or three traditional chain stores are within a few miles of each other. They essentially cancel each other out. It’s another situation if one chain store, an ethnic independent, a Trader Joe’s and Aldi compete in the same locale. That gives consumers a choice of shopping experience and product assortments.
There is no question that the U.S. is over-stored, especially if you look at the retail square foot per capita in the U.S. vs all other countries. In the latest survey I have seen, the U.S. space (sq. ft.) per capita is 23.5 and the next highest is Canada with 16.8 and the highest for any European country is the UK at 4.6. We will still see a lot of store closings, especially at underperforming malls. On the flip-side, for the past few years, we have seen a net increase in stores (more openings than closings) as retail is still growing. However, how many stores do we really need?
Retailers will eventually need to look at underperforming/unprofitable stores and close them or move them to areas with better demand. The reality has been that as retailers get hit with online competition and take on more and more debt, as many have done in private equity investment deals, they can no longer support the lower sales volume “C” and “D” store locations.
It is a simple supply and demand issue.
“With any vacant department store, an owner has the opportunity to increase their rent…” Huh? I suspect only a broker would have this non-sequitur be the first thing to pop into his head.
Anyway, we’re frequently told that there is “too much” space because of comparisons to Europe, where the per capita levels are lower; OTOH, it is also pointed out that Europe “is different” and strict comparisons aren’t meaningful. So my compromise opinion is that there is too much, just not quite as much as some fear. Natural obsolescence — accelerated by the shift to online sales — should gradually winnow the surplus.
There’s this dichotomy of more stores closing than ever before in history at the same time as more stores opening than ever before in history. While the US is overstored, this isn’t a function of locations. We’ve spent the better part of 100 years as an industry specifically putting stores around the people that buy stuff. It’s how those stores are being used (in coordination with technology) to create a relevant consumer experience.
The number of store locations does not really reflect what is going on the retail industry. Online purchasing, Buy Online and Pick Up In Store, home delivery, reward points, a more demanding shopper, and SKU proliferation are trends that are having a huge influence causing huge changes. Some retailers have reacted successfully and are expanding stores and others have not and are closing stores. 70% of shoppers still want to go to the stores so they are not going away any time soon. Retailers need to move their businesses to meet the requirements of their customers. Landlords should work with retailers to aid them make any modifications required to help their retailers modify their businesses. In addition, landlords can look for new kinds of tenants, like recreational or game companies to draw new kinds of shoppers.
The “too,” is too much focus on the supply chain, and not enough on the shopper, and THEIR behavior. The reality is that shoppers basically use CPG/FMG stores as neighborhood pantries. The industry absolutely refuses to face the fact for supermarkets, ONE is the dominant NUMBER of items to be purchased. Even for a Walmart SuperCenter, the dominant NUMBER of items purchased is TWO!
NEIGHBORHOOD PANTRIES! Spit in the face of reality all the way to collective bankruptcy. But there ARE bricks retailers who are built on this reality, and don’t play in the “Everything Store” philosophy. However, ignoring the long tail is not the ideal approach either.
I favor an “ideal” approach.
Clearly the US is way over-stored in aggregate. This has been true for over a decade as cheap money and unwarranted optimism fueled over building. But the biggest issue is the misalignment of space with consumer demand and the rampant excess of mediocre retailers. Physical retail isn’t dead. Boring retail is.