Has the retail industry’s real estate bubble burst?
Richard Hayne, CEO of Urban Outfitters, believes the reason so many stores are closing is because retail is finally facing the consequences of its own real estate bubble.
“Our industry, not unlike the housing industry, saw too much square footage capacity added in the nineties and early 2000’s,” said Mr. Hayne last week on his company’s fourth-quarter conference call. “Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst. We are seeing the results; doors shuttering and rents retreating.”
He added, “This trend will continue for the foreseeable future and may even accelerate.”
The bubble’s collapse, Mr. Hayne inferred, is being quickened by the massive shift to online sales that is only “partially replacing store shopping” and depressing store traffic. Flat to negative store same-store sales are causing occupancy deleveraging and eroding four-wall margins. With much of the real estate overcapacity occurring in apparel, the rampant discounting by retailers in the sector is eroding margins in Urban Outfitter’s core category.
As a result, Urban Outfitters is shifting focus to its “most promising opportunities” including its Free People wholesale brand and its digital properties. This year, Urban will complete the development of a single digital platform rollout to all brands to further its scale. The company is also planning to invest in better site functionality as well as data analytics to feed customer personalization.
The company will reduce its brick and mortar investments in North America, believing that its two largest concepts, Urban Outfitters and Anthropologie, having reached “full penetration.” Mr. Hayne also noted that it “makes little sense to enter into many new, long-term leases at this time when all signs indicate that a similar lease will be less expensive in the near future.”
- Urban Outfitters Reports Record Sales – Urban Outfitters
- Urban Outfitters’ Fourth-Quarter 2016 Conference Call – Seeking Alpha
- Store closures prove retail’s bubble has ‘burst,’ says Urban Outfitters CEO – CNBC
- Urban Outfitters CEO Says the Retail Bubble Has Burst – Bloomberg
DISCUSSION QUESTIONS: Is retail dealing with a bubble similar to the recent housing crisis? Is apparel facing greater over capacity challenges than other retail sectors? How do you advise retail chains to adjust their real estate strategies in light of the situation?