So, chain retailers are closing up shop as an alarming rate. Just last week, Sears announced it was closing more stores, and Claire’s once the per sq ft profit leader in mall-based retailing filed for bankruptcy. This week, post-bankruptcy, Gymboree announced it is shutting 350 stores.

store closing retailpocaplyse

What in tarnation is going on here? Is this seriously all Amazon’s fault?

  1. The fall of mall based retail is based on a couple of things. First, media consumption has changed dramatically. In the mall heyday (80s-90s), retail media was largely driven by local media advertising (TV, radio, print). In that paradigm, anchor stores (Macy’s, Lord & Taylor, Sears, etc.) were able to capture a huge share of consumer attention and shape their product desires. The anchor would advertise, drive foot-traffic, and all of the stores in the mall benefitted. Media today has changed – it is no longer possible for an anchor to own a market. Consequently, anchors can have less influence in the media market and can compel less traffic. That hurts the overall mall experience because the smaller stores suffer disproportionately.
  2. Big box retail (stand-alone stores like Best Buy) are predicated on a prolonged suburban flight. Their sense of “destination shopping” was built up around bigger and better homeownership (more rooms = more stuff to buy). The flight away from cities has slowed dramatically. More families are staying in or very near cities where the concept of a “big box” store is not feasible due to both space and cost constraints.
  3. E-Commerce has been a huge factor, but it isn’t determinative. Let’s assume that 10% of all retail is e-commerce. Further, let’s assume that half of that (5%) belongs to Amazon. 1% goes to online only retailers (Wayfair, etc.). The remainder is traditional retail moved online. So, 6% has moved completely away from traditional retail – the market may have shrunk, relatively speaking, for traditional retail. But that is a 6% decline in 15 years (since e-commerce became “a thing”), but again, that is relative because overall, retail grows 1-3% annually. So, at worst, the relative retail market is 94% as big as it was pre-ecommerce, and at best, it is a wash and the relative market is flat for the last 15 years.
  4. The reason why e-commerce isn’t determinative lies in the nature of what has been keeping chain retail afloat for a long time – private equity. From Staples recently selling to Sycamore Partners to a thousand other retail stories, retail has been propped up by private equity. Those kinds of purchases are usually highly-leveraged (meaning that there is a lot of debt to be paid). The debt service required in these kinds of transactions puts huge strain on a companies cashflow. In times of strong growth, it is not an issue. But economic growth has been at a crawl since 2008, therefore debt-fueled expansion has been treacherous. And for most retailers, margins are very skinny. So with little pricing power, most retailers have seen declining margins, slower growth and fixed debt service. This is NOT a recipe for success.
  5. The retail experience is lousy. As companies fight through those rising fixed costs (real estate, etc.) and declining margins, they have deprecated the on-floor retail experience. In an effort to streamline costs and operations, retail has kept pay to a minimum and at the same time diminished the autonomy of the job. Therefore, retail is filled with poorly paid workers who are forced to stay inside a very small box. Here is a news flash – nobody wants that job, so the only people who take that job are those who have the fewest options. Therefore the quality of the retail experience declines rapidly. And to be clear, it is not the fault of the employees, but rather the system in which they work.  But ultimately, shoppers do not respond well to terrible experiences and they vote with their dollars.
  6. UPS & FedEx (as well as the huge leaps forward in flat-pack technologies meaning more things can be shipped) have become dramatically better at logistics, and relative costs (dollars per pound shipped) have dwindled. Superior delivery logistics have enhanced the e-commerce experience to the point where practically anything can be at your doorstep in 2 days or less from dozens of sellers. Consequently, we see fewer consumers willing to put up with terrible retail experiences when they can get their desired products with a modicum of inconvenience.
  7. Younger consumers are different. Since younger consumers (those >45) have a lifetime of digital media consumption, they respond to different stimuli. The Macy’s 1-Day sale strategy where Macy’s could own the discussion, as we talked about in #1, is over. But today’s consumer is more influenced by non-advertising influences than ever before. When I was young, MTV was a huge product demand driver. But even that was fairly centralized. With media consumption widely dispersed, even an ardent watcher of broadcast television with its 16-20 minutes of every hour chock full of ads likely sees more non-advertising driven influences every day. From YouTube celebrities to Instagram feeds to the obscure interest-driven discussion forum, consumers are bombarded with more and varied influences to shape their purchase desires. Therefore, their retail dollars are more dispersed. They spend in more places and across more brands than ever before. The traditional mall-based or specialty retailer cannot stock a wide enough selection to accommodate the widely influenced product desires of a non-mainstream media audience. This diminishes the power that larger retail brands have in the marketplace.
  8. 2008 happened. The housing market crashed. Real wages declined. Credit became tighter. And almost a decade later, we are still talking about economic recovery. 2008, for a small percentage of the population, drove real and meaningful change in the buying habits of Americans. Add that to poor job growth in the low end of the white collar world and the increased debt faced by those with student loans, and we have a portion of the population with less disposable income than before. While the impact of those consumers may not dramatically reshape the market, it will have pockets of dramatic impact. If we also consider that birth rates in the US have dropped in the last decade, there is a portion of the younger workforce who are, in real terms, poorer than ever, and they are having fewer children. Spending on children is a huge economic driver. Fewer babies to people with fewer means results in fewer purchases.
  9. We are busier now than ever before. In the US, we work longer hours, take fewer vacations and feel more stressed than ever. Regardless if true, we feel more time pressure than ever before, therefore we are less likely to view shopping as a regular leisure activity. If it doesn’t feel fun to go shopping at a mall or a store, we are just less likely to do it.
  10. The world of digital has reshaped entertainment. While anecdotal, see if this story doesn’t ring true. Kids used to play with toys. After a while, toys would get dull and they would get replaced. However, phones and tablets, in many ways, have replaced a portion of the toy spectrum. Rather than purchasing a $15 game, or a $30 toy, my kids spend $0.99 on a new app. That take dollars away from retail and slides them into the pockets of Apple, Google & Amazon (and developers) rather than to the cash registers at Target, ToysRUs or others. We have replaced physical stuff, to some extent, with digital stuff. And while the impact might be small, it adds to the issues of slow growth and rising costs for retailers (from #4).

Whew.

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