Early this year Macy’s announced that it was closing 40 of its department stores. In April, Sears Holdings said that it would close 10 Sears and 68 Kmart stores. Then last week, Macy’s announced that it would close about 100 additional stores. Do these retrenchments represent just the normal ebb and flow of company fortunes in a competitive marketplace, or is there something more profound going on in retailing?
Well, there seem to be three strong crosswinds impacting the retail sector today, and the large department stores are taking the brunt of them. The three are middle-class income stagnation, globalization and the internet.
Through 2014 (the last year for which data is available), the average real incomes of none of the five household income quintiles had recovered to their pre-recession peaks. However, the recovery of income has been more complete for the higher income groups. While the average income of the lowest quintile of households had recovered to only 88 percent of its pre-recession peak, the average income of the highest income quartile had recovered to 98 percent. The share of total income garnered by the three middle quintiles declined from 46.9 percent to 45.7 percent, while the share of the highest income quintile went from 49.7 to 51.2. Retail chains that cater to higher-income shoppers are reportedly doing well, but for many large chains the three middle groups, with annual household incomes from about $21,000 to $112,000, is where the volume is, and income growth for those households has been slow.
Competition between name-brand retailers and discounters is not new, but in recent decades the out-sourcing of dry-goods production to China, Bangladesh and elsewhere has tilted the playing field in favor of the discounters. Epitomized by the Walmart formula, which combines a cheap foreign supply chain with monopsony buying power and a no-frills “supercenter” shopping experience, the discounters have increasingly pressured the department store chains (as well as smaller chains and independent retailers) that traditionally marketed fashion and quality. Warehouse clubs like Costco have also made inroads among middle-income families whose incomes have stagnated. From 2000 through 2014 the number of department stores nationally declined from about 10,500 to 8,000 while the number of supercenter and warehouse club outlets has grown from about 1,800 to 5,300. Walmart alone operates over 3,400 supercenters. Total retail sales in warehouse clubs and supercenters are now about triple the sales volume of traditional department stores.
Traditional retailers also face intensifying competition from internet sales. In 2015, internet sales topped $432 billion. While that represents only abut 9 percent of all retail sales, e-retailing has captured about 30 percent of the retail sales growth since 2007. As a consequence, in-store retailing has grown at only a 1.2 percent real annual rate over the past eight years, compared to the 8.2 percent growth rate of e-retailing.
As a consequence of the slow growth in real in-store retail sales, retail employment nationally grew at only a 1.6 percent annual rate between 2000 and 2015 and at a 1 percent rate from 2007 to 2015 (computed from annual averages). Since the turn of the century, employment has grown most rapidly in health and personal care stores (including pharmacies) and in general merchandise stores, a category which includes department stores and warehouse clubs and supercenters. But between 2000 and 2015, employment in department stores declined by 425,000 while the number of jobs in warehouse clubs and supercenters increased by 664,000. Not surprisingly, those trends continued through the first half of 2016, with employment in department stores down by about 10,000 while employment in warehouse clubs and supercenters grew by 63,000.
The number of retail stores in the U.S. hit a peak in 2007, when there were 1,123,629 (according to the Census Bureau’s County Business Patterns). Due to the recession and the growing dominance of the clubs and supercenters, the number of retail outlets nationwide declined by more than 58,000 through 2014. The decline has been disproportionately in small stores employing less than 10 people. The number of retail outlets with less than 10 employees fell by 51,535 between 2007 and 2014, while the number of retail stores employing 100 or more workers increased by 839, or 2.9 percent.
The troubles of the traditional department stores could have spillover effects on other retailers and on urban and suburban real estate. Most shopping malls are “anchored” by one or more full-line department stores, which attract traffic for specialty and independent retailers who co-locate with them. If an anchor store closes and is not quickly replaced, the mall can experience a downward spiral of reduced traffic and increasing vacancies, possibly causing it to become a dead mall. Dead malls can become a blight on a community, sapping it of jobs and vitality. However, not all obsolete must necessarily become dead malls; in strong local real estate environments they can be creatively repurposed.
There are about 1,100 enclosed shopping malls in the United States. A widely-noted report from Green Street Advisors in 2014 estimated that about 15 percent of them will have to be closed or repurposed in the next 10 years. According to the CoStar Group, at the end of 2014 about 15 percent of the country’s enclosed malls were 10 to 40 percent vacant.
For shopping centers generally, CoStar and Cushman & Wakefield report that the vacancy rate declined to 8.0 percent at the end of 2015, compared to a peak of 10.3 percent in 1Q2010. The figures cover about 3.95 billion square feet of retail space, but do not include malls, outlet centers, theme retail centers airport or freestanding retail. The firms also estimate that new construction of shopping center space has averaged about 20 million square feet annually since 2010, about one-seventh of what it averaged during the previous 10 years.
Census Bureau figures show new private spending on commercial construction totaling $64.8 billion in 2015, about two-thirds, in real terms, of what it was in the years prior to the recession. As a percentage of domestic nonresidential fixed investment it has also slipped, contributing to the weakness in private investment that has, in turn, contributed to the weakness in overall economic growth.