Retailers in Distress

by | 12 May 2017

This post was co-authored with Andrew Nelson, Chief Economist for Colliers International in the United States.

In the past few months, the retail industry has been in a constant state of turmoil. Macy’s. Dillard’s. Bon-Ton. Nordstrom. Iconic visionaries that have defined retail history and are known for anchoring shopping malls nationwide have become unlikely participants in the retail revolution.

From Fifth Avenue to the Mall of America, we have seen well-known brands like BCBG, Payless, Sears and HH Gregg fall victim to bankruptcy. Meanwhile, other mainstays are downsizing their retail footprints to avert a similar crisis — including Macy’s, Polo Ralph Lauren, Bebe and Eastern Outfitters. While long-standing retailers and their partners are particularly susceptible to negative impacts, such as defaulting on commercial mortgage-backed securities loans or weakening commercial real estate valuations, the industry shakeup is agnostic, affecting retailers across all verticals and price points.

While watching some retailers close their doors and others hang on by a thread thanks to private equity financing, retail analysts have speculated about the demise of the department store and other traditional retailers for the past two decades. Yet the industry has always had a knack for innovating just enough to prove the analysts to be overly pessimistic. However, the onset of closures in the past 18 months seems to be a pivotal moment in history — one that may prove fateful.

What is going on and why now

Retail is an ever-dynamic sector, and a new generation of retailers is always displacing the stars and powerhouses of a prior era. But the current shake-out among retailers seems particularly harsh and deep.

To understand what’s happening, it’s important to look back into retail history, particularly the rise of the shopping mall. Driven by decentralized downtown areas — think Atlanta, Seattle and Los Angeles — shopping malls became popular as they provided an opportunity for national retailers to reach suburban consumers closer to where they lived. These sprawling real estate ventures flourished with well-established retailers like Macy’s, JCPenney and Nordstrom as well as regional chains like Kohl’s and Mervyn’s serving as a draw, “anchoring” the malls and driving foot traffic and business to fellow retail tenants.

This retail development formula held steady for more than half a century. But as malls multiplied and expanded, their tenant leasing strategies became murky — leading to one of the causes underlying the challenges facing so many American malls today: oversupply of retail space.

Because rather than optimizing a space to accommodate the needs of its consumer base, landlords seemed to focus more on attracting the highest-paying tenants, often without regard for product mix. With little room for differentiation, the market became saturated with tenants selling the same thing: apparel and accessories. Pair that with the migration of consumers to mobile and online shopping channels, the emergence of fast-fashion retailers like Zara and the rise of discount stores such as Marshalls and Ross, and the problems at malls have multiplied.

Colliers retail

Retailers also got ahead of themselves in the last economic expansion, opening too many stores before there were customers to support them — which was followed by a deep shake-out during the recession. But now we’re experiencing a second wave of closings even as the economy has broadly recovered and consumers are stronger than ever. The impact on weaker malls has been devastating: When an anchor store closes, there can be a domino effect with in-line stores closing and shoppers leaving, followed by another round of store closings as the center hemorrhages.

Traditional retailers are faced with the challenge of rationalizing nearly a billion square feet of U.S. retail space with store closings, retail space conversions and the implementation of radical ideas to reverse the trend of declining sales and risk to their bottom lines. As Bloomberg recently reported, the U.S. has far more retail square footage per capita than any other nation. It’s time for department stores to trim the fat, right-size and invest heavily in alternate measures like e-commerce and delivery.

Who’s doing it right

In an economic downturn, staying relevant oftentimes requires capitalizing on the misfortune of others. Take Dick’s Sporting Goods, which has been able to maintain a steady national footprint and online presence despite heavy competition from Amazon. To scale their customer reach, Dick’s acquired a percentage of Sports Authority store leases after the company folded and absorbed niche brands, like Golfsmith, in smaller markets. Meanwhile, other sporting goods retailers have continued to falter or fold — most notably Sports Chalet, Eastern Mountain Sports and Gander Mountain — among others.

Paying close attention to their consumer bases also helps retailers stay relevant. The Home Depot monitored their e-commerce inventory and identified products that were difficult to move online. In the past year, they began to integrate digital components with in-store shopping programs to increase sales, and their efforts earned recognition from FastCompany as one of the World’s Most Innovative Companies of 2017. Of course, being on the right side of economic trends helps too: The Home Depot and other home improvement stores struggled mightily during the housing implosion but have benefited with the broad recovery in the housing markets.

There’s a new ROI in town

“There is no question. This is not business as usual. We are in a rapidly changing landscape,” — Aiden Tracey, CEO of SGSCO.

Retailers need to meet consumers where they are, and their greatest challenge — by virtue of online and mobile shopping — is that consumers are now everywhere. Even Target, a brand that is investing billions in its e-commerce strategy, has concluded it isn’t moving fast enough. Brand retailers need to step up, and there’s no time like the present to “accelerate the transformation of our business cycle,” according to Target CFO Cathy Smith.

There is an immediate need for retailers to consider their businesses in broader terms, beyond products and inventory. It’s time to rethink ROI as the “rate of innovation” instead of the standard return on investment. The shift is underway as retailers from Lowe’s to Hermes invest in innovation labs to source progressive ideas. Those retailers who adapt to the times will undoubtedly benefit in the long term.

Some players are already on board with this new way of thinking. Samsonite is expanding its footprint with the addition of eBags to its portfolio and Coach just announced a deal to acquire Kate Spade. TJX Companies (parent company to TJMaxx, Marshalls and other brands) is investing in the future of home goods and is rumored to be testing out a new home-goods concept. Walmart is elevating its brand in some markets by adding “a store within store” feature with a separate entrance, while McDonald’s is introducing a new grill concept. And amidst many product consolidations, some brands are testing out new concepts while others like Forever 21 are bucking trends and entertaining creative partnerships.

Colliers retail

This innovative approach applies to real estate as much as merchandising. Birchbox, the e-commerce retailer known for its monthly beauty subscriptions, recently opened a bricks-and-mortar store in Paris, second to its New York flagship. “Birchbox has evolved and adapted many times, and in 2016, we had to completely change our operating behavior to fast-track profitability and ensure our long-term sustainability as a business,” says Katia Beauchamp, CEO of Birchbox in RetailDive.

Commercial real estate developers should be proactive in taking a more creative approach. They need to rethink the whole concept of “anchor” spaces and prepare for a huge shift in the retail sector. Refilling vacant space will obviously be a challenge and requires reconfiguring layouts to create more open-air, service-oriented spaces.

As long as developers are mindful of upcoming market trends and influences, they can capitalize on this surplus space as an opportunity for growth. Millennials thrive in experiential environments, so it shouldn’t be a surprise that entertainment and restaurant concepts are on the rise. Strategic plans could also include non-traditional options like call centers, art galleries and medical tenants.

All great changes are preceded by chaos

The future of retail is multidimensional and dependent on too many variables to count. One thing that is certain is that the decisions retailers make in 2017 will redefine their businesses as they stake a claim in the new world.

These are exciting times as the industry evolves and grows, and there is much to anticipate — from artificial intelligence and robotics to machine learning and the next phase in big data. We can’t wait to see what’s in store.

Anjee continues to be an insatiable collector of all things retail. She’s a student of culture living next door to future shoppers, whose fleeting trends constantly change the retail landscape … driving retailers, landlords and developers crazy!

 

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