Retail Closures on Record Pace

October 12, 2017 | Market Commentary

The state of U.S. retailing continues to dominate headlines in 2017 as retailers grapple with the ramifications of a rapidly changing industry. It has become commonplace to hear of retailer plans to shutter or aggressively scale-back on brick-and-mortar locations. The challenges highlight the impact of e-commerce and changing consumer demands.

Over the summer, Credit Suisse released a research report predicting that, “About a quarter of U.S. malls will most likely close within the next five years.” For instance, companies such as Limited Stores, Toys R Us, RadioShack, Vitamin World, and Gander Mountain have all filed for bankruptcy protection while Staples, J.C. Penney, Gap, Gymboree, Payless Shoes, and Rue 21 are closing hundreds of stores. Credit Suisse estimates that there could be more than 8,640 store closings this year, higher than the 2008 peak of 6,200 during the depths of the Global Financial Crisis.

With declining in-store sales, even iconic companies such as Macy’s and Neiman Marcus are feeling the impact of industry pressures. Many retailers are searching for innovative ways to increase sales as they compete with the likes of Amazon and other e-commerce sites that are driving the disruption, but according to store closure predictions, the damage rendered may be too much to overcome.

As the chart below illustrates, we are seeing the growth of e-commerce sales significantly outpace those of brick-and-mortar sales. In other words, online sales have been steadily capturing a larger percentage of total sales, and the growth gap has been relatively stable throughout the post-financial crisis years.

How did we get here?

With the rise of internet use, consumers have near instantaneous access to product price comparisons across numerous companies, leading to pricing pressures and a squeeze on margins. Brick-and-mortar retailers often struggle with inventory connectivity across their in-store and online sales channels, resulting in a clunky buying experience. Advancements on this technological front can come with a hefty price tag and often result in an overhaul to their strategic vision, which can take time to implement.

As e-commerce gains market share from brick-and-mortar retail, the U.S. marketplace is becoming increasingly oversaturated with physical locations, and it seems as if we’re starting to see a correction within the industry. The scale of this American retail oversaturation is vast as compared to other developed nations.

Where do we go from here?

Even with revenues declining within the brick-and-mortar retail industry, we believe there are still companies poised to grow despite a shift in the marketplace. Some of the characteristics we look for include a strong brand name, vast distribution capabilities, and dependable demand as these names often fit within our Strategic Profile investment strategy.

Additionally, we believe investors may need to think beyond exclusively retail names and consider companies outside the industry that are positioned to profit from the disruption. For instance, with e-commerce sales expected to grow substantially, shipping companies are poised to benefit. Furthermore, as companies look to find ways to cross-promote their internet and off-line channels, digital marketing and advertising will likely play a key role in these efforts. As such, companies within this space could benefit as retailers continue to navigate the digital era.

While it’s clear we’re seeing a significant reduction in brick-and-mortar stores, we don’t believe physical store locations are a thing of the past. Exclusively web-based brands such as Warby-Parker (an eyewear company) have been testing out the waters by introducing pop-up physical locations. Even Amazon has moved into the physical store arena, which gives reason to believe there are still benefits to having both sales channels. However, in order for retailers to succeed within this evolving industry, they will likely need to reinvent themselves and think outside the box.

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