The Retail Breakup

With the economy recovering after the crash in 2008, many in the retail industry were hoping the mass of store closings would subside and become past history.  Even though retail appears to be much more solid than it was five years ago, store closings are going up.  In 2015, 5,866 stores were closed in the US, this is a 7% increase over the store closings in 2014.  Cushman & Wakefield estimates that store closings can surpass 6,200 units this year. 

Store closings run a variety from department stores, grocers, apparel, and electronics stores.  These include some major big box retailers like Office Depot, Macy’s, Sears, and Barnes & Noble.  Examples of this are Sports Authority, who filed Chapter 11 bankruptcy in March and announced it is thinking about closing 140 of its 450 stores.  Walmart is closing 154 stores in the US, most of these are the smaller Walmart Express format.  Best Buy is closing some stores as leases expire, including 30 stores last year.  North of the Border in Canada, Target closed 130 stores. 

There are several factors that are influencing the decline in retail.  Planners for retail companies are rethinking the old time brick-and-motor strategies now that there is such strong growth in online retailers and e-commerce.  Online now comprises of just under 8% of all retail sales.   Retailers are seeking to expand their on-line presence.  Underperforming stores are looked at with more scrutiny.  Retail companies are shrinking store footprints and looking for locations that are more favorable.  Basically, retailers are being much more selective on where and how to expand. 

Some may question the health of this recovery.  With nearly 94MM Americans out of the work force, there is less potential disposable income to be spent in stores.  Personal income has had anemic growth since 2008.  Less income creates stagnant growth for demand for goods and services.

Demographics also has an impact on demand for goods and services.  As Baby Boomers retire, they have less income and typically will purchase fewer goods.  The next demographic group, Generation X, is quite a bit smaller in numbers than the Boomers.  So as the Boomers retire and Gen X gains in assets and disposable income, their impact on demand will be less due to their lack of numbers.   Millennials have more numbers than Gen X, but their impact on demand for goods and services has not been felt as they tend to not have as much disposable income and assets as previous generations.  Also, their buying habits will change the landscape of retail.

Small shop space may often have a list of possible tenants; bigger box stores create a bigger challenge.  There are fewer possible tenants because of retail bankruptcies and consolidations, which have taken possible tenants out of the market.  Other big box retailers are actively looking to shrink their square footage footprint.  Even in areas where a big box retailer is expanding and there are often options from other open buildings, the empty building may not be suitable due to location or demographic concerns. 

One option for empty larger box stores is to divide the space.  In Pueblo, Colorado, the Walmart on the north side of town built a new supercenter, leaving an older Walmart building vacant.  The building owner was able to fill the space with putting in a Big Lots Stores in the majority of the space.  They then filled in the rest of the space with a restaurant, thrift store, and offices. 

Retail construction in the US has also fallen dramatically.  In 2005-2008, new retail space averaged around 250MM square feet.  This amount dropped to less than half of that in 2009 and has not come close to recovering from the pre-crash level.  New retail space last year ended around 80MM square feet. 

Overall, these factors present strong headwinds for the retail industry, especially in the big box area.  As large companies seek to find methods to increase profitability, they will focus on more efficient methods to deliver their goods to clients at lower prices or utilize more targeted methods to generate sales.  All of these may create more empty big box retail space.