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US retail store meltdown

  • Is it the end of the retail industry in the nation?
  • Is e-commerce the sole reason for impact on the industry?

 

The US retail hold a significant share of the world retail market, especially in the apparel segment where it is 50% larger than China. The twelve of the largest world retailers are from the US. The companies like Walmart, Costco, Kroger, Walgreens are among the largest retailers. Further, the retail industry in the US is approx. 1/3rd of the nation’s GDP. In 2017, retail sales recorded a total value of $4.99 trillion. 

While the overall retail sales have continued to grow at a healthy pace, the industry as a whole underwent numerous changes and innovations in the past few years. The recent developments suggest a lot on store closures and bankruptcy filing by a number of retailers.

The year 2017 saw a record store closures and retail bankruptcies. There were dozens of retailers which announced the closing of around 9,000 stores and 50 chains filed for bankruptcy in certain categories of retail as shown below. According to reports, it is expected that the number of store closures in the US would increase by 33% and 25 more firms may file for bankruptcy in 2018.

The highest number of closures were observed in the consumer electronics and apparel-related businesses. On the other hand, the opening of stores witnessed a prominent growth in few of the retail categories. The apparel industry roughly holds a 25% share of the US retail sector and consumer electronics has a share of close to 15%, hence, these segments constitute nearly 40% of the US retail market. The remaining comprises books, home furnishing, toys, drugs, liquor, pet, convenience and gas along with sporting goods with limited usage. The largest store openings were seen by the Dollar General which is a variety store and sells daily use items at cheaper rates. In 2017, Dollar opened 1,317 stores and is planning to expand further backed by its increasing popularity. Supermarkets and supercenters are also looking forward to enlarging their scope with increasing footfalls. A rise in travelling has also given a boost to convenience stores and gas retailers. Moreover, with a shrinking of income levels, consumers are moving towards discounted and inexpensive items. The other sectors which opened a large number of stores are the drug (which is a necessity) followed by liquor, discount department, convenience and gas and auto stores. Toys and bookstores are rarely seen in the US as people prefer reading online and children enjoy playing on game consoles, smartphones and laptops.

Hence a pertinent question that arises, while retail sales are increasing, what is leading to the closure of retail stores?

As stated above and depicted through the chart, there are few sectors which did well during the last decade, namely low-cost convenience stores (e.g. Dollar), gas stations and drug among others. Few of them were impacted negatively by a major hit suffered by apparel and consumer electronics with a closure of nearly 10,000 stores (2007-17).

The factors which are predominantly affected the apparel and consumer electronics retail are:

1. E-commerce is expanding its horizon and impacting direct retail sales

One of the factors responsible for the fall of brick and mortar shops was and is e-commerce giants like Amazon which is hampering retail. Amazon’s revenue increased from $16 billion (2010) to $80 billion (2017) in North America and surprisingly more than half of the US population subscribes to Amazon Prime. The company recently slashed the price of its subscription by half to lure lower income group. The demand for products in retail stores is decreasing as these are easily available online. While most brick and mortar stores are moving towards online sales, though the average online contribution to brick and mortar store is only 9-10%. The companies such as Amazon and Dollar Tree are providing necessary items at a cheaper rate with easy return policies, this is giving conventional retailers a hard time. Further, the sales through stores are decreasing and companies which have an ample number of stores in various location are facing the brunt. The companies resorted to the closure of stores where a low footfall was recorded, wherein stores in malls become the initial target. Additionally, having excessive number of stores also increases the operating cost which affects profits. The firms which cannot afford excessive costs are either closing the stores or are filing for bankruptcy.

However, e-commerce is not the sole culprit behind retail losses as this channel holds a mere 9% of the total retail sales in the US, within this mobile shopping’s share is 20% and there are few sectors that are observing a significant meltdown.

2. Oversupply is always bad for a business. In this case, the problem is with malls and supermarkets

The USA has 1,200 malls as of 2017 and the data suggests that these have grown more than twice as fast as the population following a phase of recession. However, the consumer spending is not increasing in the same proportion. The market for apparel, consumer electronics, books, beauty products and toys is more competitive online which leads to cheaper rates as compared to physical stores. The oversupply of malls has forced brands to close their stores where considerable sales are not recorded. The retail space available per person is 23.6 sq ft in the US which is more than any other major developed nation in the world. The gross leasable area in the US per person is 40% more than Canada, 5 times of the UK, 6 times of France and 9 times more than that of Germany. 

Further, following the financial and economic crisis (2008-12) mall visits declined by more than 50% (Source: PEW Research). This decline proved that malls are a burden to retail. Notably, this kind of space competition plays a very crucial role. For instance, when an anchor tenant like Macy’s, Nordstrom, Sears faces loss and decides to close their stores, this leads to a probable closure of other small stores in same premises. Hence, one can say, a failure of one major department store can affect the performance of other retail outlets in the entire mall. In addition, as per the latest statistics people in the US are gradually refraining from malls as most products are easily available online. The sales in retail are mainly from convenience stores, liquor shops, pet shops and home furnishing which do not have an oversupply and the online presence is comparatively lesser.

3. Changing customer preference

The other significant reason for the retail store’s demise is the low growth in the middle-class income, which is the target segment for most department stores. In the past few years, while the US government has taken steps to increase its minimum wages, this led to an improvement of income for lower middle class, they are not inclined towards buying expensive items. This is indirectly pushing the gap between middle and lower income groups. Nearly half of the US population falls into the middle-income category and a low rise in their earnings is affecting the spending.

Addedly, consumer preferences are also gradually changing. The people in the US mostly spend on housing, followed by transportation and food among others. Housing remains the highest expenditure area for the US people since the recession as shown in the below chart. 

Consumers have changed their spending habits from clothing to travel and dine out. Out of the total spending on clothing, a significant number of purchases are done online. The travel sector is also prospering, in 2016 airline industry had a record 823 million passengers. In the US, there were heightened sales in restaurants and bars instead of retail stores in 2016. The individual spending on food and beverage increased by 8% in 2016 and grew by 5% in 2017. The change has been influenced by the young generation as they are more active on social media and clothes do not make them social media savvy as compared to the exploration of new places and variety of foods. It may sound a bit weird but being a misfit on social media is also a reason for store closures. Televisory is of the opinion that this is not directly related to retail sales, although it is indirectly affecting spending habits and is turning out to be a big deal for malls. The young generation is uninterested in malls for entertainment and instead prefers road trips, visiting new places, etc.

In totality, the oversupply of malls, shrinking of the middle-class income and change of preference is a pain for the US retailers. E-commerce provides an easy shopping option for the people and retailers are also moving towards online selling but are unable to penetrate at similar levels amid high competition in pricing. Hence, retailers need to be more innovative in order to retain their customers. The oversupply of malls has created an excessive number of stores, especially in the middle-income areas which are increasing the operating expenses of retailers. These need to segregate their store locations to cover each and every income group. While the present focus is on middle class, these firms can also target lower middle and lower income groups with competitive prices. The average income of the US households is increasing, but they are managing their expenses and are striving for savings. Further, average saving per household has shown a YoY growth of 14% in 2017. The recession is still fresh in the memory of people and they are better prepared for a future eventuality. Televisory believe that retailers need to take stock of the current situation before it worsens. The retailers need to cut excessive cost, increase their online presence, customer engagement and offer competitive prices in order to survive in the forthcoming years. 

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