Will the next recession devastate mall-based retailers?
Seventy-four percent of U.S. business economists expect a recession to hit the U.S. by the end of 2021, according to a survey by the National Association for Business Economics. With many retailers having struggled in recent years during relatively good times, there is real concern over what will happen to those very same businesses if consumers pull back spending in an economic downturn.
“If there’s another recession — and I think there will be soon — everyone gets knocked down,” Mark Cohen, director of retail studies at Columbia Business School and the former CEO of Sears Canada, recently told The Washington Post. “The strong get back on their feet. The weak don’t recover.”
The Dallas Morning News reports that many of the weakest retailers have built their businesses in malls. Earnings at chains with stores located in U.S. malls fell 29 percent during the first half of the year, according to data compiled by Retail Metrics. Retailers operating stores outside of malls produced earnings that were up three percent.
Retailers issuing second quarter earnings reports support the view that mall-based chains face an uphill climb in times both good and bad. This is true even of chains that have sought to minimize their downside risk by experimenting with new concepts, opened off-price and showroom outlets in non-mall locations and thrown financial and human resources at building revenues through digital channels.
A case in point is Nordstrom. The company reported that net sales for its namesake chain fell 6.5 percent during the second quarter while revenues at its off-price Nordstrom Rack business were down 1.9 percent. Nordstrom, which used cost cuts and inventory reductions to post better than expected earnings for the quarter, did see its digital sales improve four percent year-over-year. Digital revenues now account for 30 percent of its total business.
“It’s an enigma why their business isn’t better,” Chuck Grom, a senior analyst with Gordon Haskett Research Advisors, told The Wall Street Journal prior to Nordstrom’s earnings announcement. “They have one of the best websites. They don’t have too many stores.”
Other mall-based retailers such as J.C. Penney are in more precarious positions. The chain, which is seeking to rebuild its debt-laden business under current CEO Jill Soltau, reported a six percent decline in same-store sales during the second quarter (excluding discontinued appliance and furniture product categories).
- Retailers struggled during boom times. What happens if there’s a recession? – The Washington Post
- Retail earnings show big box, off-price brands are winning while mall stores struggle – The Dallas Morning News
- Nordstrom Reports Second Quarter 2019 Earnings – Nordstrom, Inc.
- Nordstrom Did So Much Right, but It’s Still in Trouble – The Wall Street Journal
- Can Jill Soltau rebuild J.C. Penney? – RetailWire
DISCUSSION QUESTIONS: How does the current health of retail in the U.S. compare to where the industry was before the start of the Great Recession? Do you think the fallout from the next recession to hit the U.S. will be more devastating to retail businesses than those that came before it?