Retail Bankruptcy: Shopping Mall Blues.

The following chart was posted to ZeroHedge, showing a comparison of announced retail store closures for 2017. The numbers are stunning:

store closings announced_1_0

This was accompanied by the Fitch list of expected retail bankruptcies within the next year:

  • Sears Holdings Corp (roughly $2.5 billion);
  • 99 Cents Only Stores LLC;
  • Charming Charlie LLC;
  • Gymboree Corp.;
  • Nine West Holdings Inc.;
  • NYDJ Apparel LLC;
  • rue21, Inc.; and
  • True Religion Apparel Inc.

What do many of the stores shown above have in common? They are usually seen in shopping malls, some exclusively. This suggests that small stores in shopping malls are having trouble.

We can trace the roots of this issue: dying shopping mall anchor stores.

J.C Penney reported a near 1% decline over the holiday period on a same-store basis. Kohl’s and Macy’s reported a 2% decline. Sales at Sears — which some folks think will declare bankruptcy this year but not before the second half — plunged 13%.

Hudson’s Bay Company, which owns Saks Fifth Avenue and Lord & Taylor, reported that same-store sales fell nearly 1%. Private-Equity owned Neiman Marcus apparently saw such lousy results over the holidays that it scrapped its already delayed IPO, filed 15 months ago. It didn’t announce holiday sales, but sales in its most recent quarter through October 31 fell 8% from a year ago, the fifth quarter in a row of sales declines.

Some of the online divisions of department stores are doing well, such as Macy’s, even as it is shuttering brick-and-mortar stores and laying off workers. But brick-and-mortar department store locations are getting squeezed from all sides: online retailers, their own online retail divisions, discounters, now rising gasoline prices, and consumers with limited means to spend — no matter how they feel about the economy.

These stores are being obliterated by online sales. The chart below shows this:

16130a

What’s amazing is that the initial online sales takeover began in 2004. This has been going on for over 10 years. It is not going to reverse. There ain’t no going back.

Large anchor stores at shopping malls – JCPenney, Sears, Macy’s, ect – are what draw in the crowds. The small stores rely on anchor store traffic to get any significant number of customers. But the anchor stores are fading away. This is bad news for the small stores.

Notice which store is not on the list: Wal-Mart. Wal-Mart is still the go-to destination for middle class and below consumers when they want relatively high-quality goods at bargain prices. But they don’t rent space at shopping malls, and they generally don’t bring in the kind of people with spare money to burn – that is, the kind of people who will come for the anchor store and then shop around the rest of the mall. They might shop at the food court, but that’s it.

Commercial real estate owners of large multi-unit property, like shopping malls, are facing some serious trouble. Retail units in malls are emptying and not being sufficiently replaced. This is not due to a poor economy, but to the changing face of consumer retail. I don’t know about you, but I buy everything except food and clothes online, especially from Amazon. Even then, I’ve experimented with Amazon Fresh; grocery delivery. And I’ve bought clothes from Amazon before, I just like to try things on first.

I don’t think commercial real estate is going to collapse. It will shift gears. Shopping malls will likely see more service-oriented stores move in as renters – barbers, massage parlors, clinics, photography, etc. The food courts will always get traffic so long as they have a good selection. These attract more traffic than simple retail outlets. But rents for space will probably have to get lower. At some price, empty units in malls can be filled. Shopping mall owners will find that they cannot attract as many renters at the same prices that they charged before.

For business owners who are looking for commercial space in a mall, the next recession will probably afford opportunities to lock in long-term leases at rates that are comparatively far lower than today’s rates. This will be especially true for the large indoor shopping malls, which stand to suffer the most. Smaller strip malls will not do as poorly; they don’t require an anchor store for traffic, they just need to be located well.

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