Retail in 2015: A Reality Check

Author

Robin Lewis, Contributor

March 17, 2015

As the first quarter of 2015 draws to a close, it’s time for a reality check on what the retail landscape is going to look like for the remainder of this year and beyond. What are some of the major issues and market characteristics that continue to evolve, and those that we are stuck with that are largely out of anyone’s control to change?

For starters, once again the retail industry managed to stumble through another mediocre Holiday season. Once all of the insane promoting and discounting is factored in, as well as tallying up the excess inventory that will have to find a hole somewhere to bury itself, mediocre may turn into bleak and unprofitable.

On a more positive note, perhaps this will be the year in which we finally witness the serious elimination of excessive retail space, including malls and shopping centers, and the downsizing of what remains. Part of this weeding out should consist of retailers who have reached the end of the line financially, due to their inability to steal business from competitors in a slow- to no-growth marketplace (examples: Deb Shops and dELiA*s). The other part of the shakeout should include retailers who are stuck in the last century (examples: Sears, Kmart and Radio Shack), unable to transform their strategies and business models in ways necessary to engage the 21st century consumer, now the “controller in chief.”

Overcapacity Feeds on More Overcapacity

Note that I said perhaps the industry will shed excess capacity, followed by the likes of those who should be eliminated. And the reason for not holding my breath while I wait for this to happen is that I’ve been holding my breath for at least a quarter of a century. Year over year, the perhaps and should never turned into will and did. Worse, more net space has just kept piling onto the excess.

Since 1995, the number of shopping centers in the U.S. has grown by more than 23% and GLA (total gross leasable area) by almost 30%, while the population has grown by less than 14%. Currently there is close to 25 square feet of retail space per capita (roughly 50 square feet, if small shopping centers and independent retailers are added). In contrast, Europe has about 2.5 square feet per capita.

Although each year there are mall and store closings, the elimination of retail space, and now perhaps websites, is not occurring as rapidly as the emergence of new or replacement space entering the marketplace. The primary and underlying reason for this condition, and why it will continue ad infinitum, is that growth expectations/demands of shareholders, independent owners and Wall Street are higher than the growth of the real economy. And this has been the case for at least the last 25 years.

Some Common Pitfalls That Lower Everyone’s Sightlines

As businesses continue to adhere to this delusional reality, I offer a list of some of the more self-deluding tactical decisions that businesses make to create quick (or any) growth. They’re self-deluding because in the aggregate, these decisions simply lower all ships by exacerbating the ongoing and long-term increase of overcapacity.

  • Every time a retailer opens a new door it’s an immediate new revenue stream for growth. So why not? Too many stores are somebody else’s problem.
  • There are financial barriers to closing underperforming stores, not the least of which are penalties for breaking lease covenants.
  • Realtors’ willingness to incentivize (cut deals) for retailers enables them to stay in business.
  • As long as an underperforming door in a chain is “breathing,” it may be financially less costly to keep it open than to close it.
  • Productivity of underperforming doors and/or space is not always easily or measurably identified.
  • Many underperforming malls are repurposing or relocating as neighborhood, lifestyle shopping villages. This is not a bad idea. However, it simply moves the space to another area without reducing it.
  • Outlet store shopping centers are growing at a rapid pace. And traditional full line retailers are opening more outlets than full line stores because they provide greater growth and profitability.
  • Off-price retailers are rapidly expanding.
  • Just as there is too much stuff sloshing around the globe, so too, there’s too much capital in pursuit of investing in even more capacity and/or propping up “losers” (iconic brands that investors believe can be fixed)—sort of like the Fed and “Government Motors,” (the bailout of General Motors), and of course, Sears et al.
  • The liberal and strategic use (or misuse) of bankruptcy, during which businesses shed debt, renegotiate contracts, and emerge as new low cost-competitors, helps perpetuate overcapacity.
  • The continuous stream of foreign brands and retailers entering the U.S. marketplace, believing that “if you build it, they will come,” totally misunderstand the most congested and complex marketplace in the world.
  • Finally, of course, the unrelenting acceleration of e-commerce, with virtually no barriers to entry, including financial, is building incomprehensible overcapacity. This is an unprecedented phenomenon and there are no measures that indicate these enormous additions to the supply side are being offset by corresponding declines in the brick-and-mortar and any other retail sector.

Are you with me so far? And I haven’t even started on the conundrum retailers face in trying to carve out market share where it’s already been halved. Stay tuned.

This article was written by Robin Lewis from Forbes and was legally licensed through the NewsCred publisher network.

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