CRE Message: More store closures on the way? - by Donald Bouchard

Donald Bouchard, CRE

Recently, Macy’s became the most recent department store retailer to announce new closings. One hundred locations are slated to be shuttered and the chain indicated that the specific locations would be announced after Christmas. Macy’s fiscal year ends on January 31. Macy’s announcement also indicated that it will continue to focus on its e-commerce strategy. Interestingly, and perhaps telling, is that Macy’s online sales grew approximately 15% last year. Consider, however, that total company sales fell 3.6%.

In a recent article in the Philadelphia Inquirer, an analyst at IBISWorld, Inc. noted that “slim profit margins and falling mall foot traffic” were driving the closures. The story also went on to quote Jeff Green, a Phoenix based retail consultant who indicated that “in the late 1990’s, Macy’s began buying up many strong regional department store chains. This resulted in a huge market share for Macy’s. However, the retail environment has changed and the department store industry is significantly overstored. Macy’s is trying to right size.”

This commentary is consistent with a CNBC report on August 11, when Macy’s CEO Terry Lundgren admitted that the U.S. simply had too much retail space. “By Lundgren’s own admission, industrywide there is 7.3 s/f of retail space per capita in the United States. That compares with roughly 1.3 s/f in the U.K. and 1.7 s/f in France.”

Again with reference to the Inquirer article on Philly.com, Bridget Weisharr, a senior equity analyst at Morningstar offered short term optimism but also noted “…we still believe that Macy’s lacks a moat and is in a sector experiencing a secular decline. In our opinion, department stores will continue to be forced to compete on price with newer e-commerce entrants and an oversaturated competitive environment.”

Recently, I reviewed data about the department store industry produced by the Federal Reserve. The statistics are eye opening. Since 2000, total department store sales revenues have declined $60 billion or 30%. This is at a time of population growth and substantial increases in total retail spending. Likewise, these figures do not take into account the impact of inflation over the same period where the decline in sales is even more alarming. Postulating some simple arithmetic, let’s just assume that the average department store sales over that period of time were $175 per s/f. How much excess store space does this imply? The answer is not pretty but affirms the reality of an over-stored retail environment.

Macy’s should not be singled out here as an anomaly. The entire retail sector is experiencing the shifting fortunes of a marketplace that continues to evolve at a faster pace than many expected. Department stores have long been part of the traditional retailing paradigm at malls and many malls in America have Sears, Macy’s and J.C. Penney as anchors. There is sustained pressure on achievable sales volume, increasing store closures and consolidation and an industry trend to occupy smaller footprints. What does this mean for entities like traditional malls which continue to exist with a traditional platform in an evolving and over saturated market? The trend being witnessed is for a transition of malls to what has been called a more “experiential” environment intended to lure back shoppers.

In some instances fundamental retailing concepts are being rethought with the addition of grocery stores, bowling alleys and billiard parlors, office components and even medical uses. Naturally the transition from classic “big box” anchor stores will require substantial capital investment and can include complete retrofits or demolition to make way for newer uses. Traditional anchor department stores are large and were specifically designed for a single use and this can make adaptive reuse problematic. Unfortunately the decline of department stores is an ongoing phenomenon and the pressures from all sides show no signs of abating.

Regardless, the changes will inevitably produce new opportunities for investment and redevelopment as traditional models of store design, size and use allow for profitable alternatives. I suppose all of these changes are inevitable, I just didn’t anticipate the ever increasing pace of the transition. Now please excuse me while I buy something using my iPhone.

Hope you had a great summer!

Donald Bouchard, CRE is a senior vice president at Lincoln Property Company, Boston and is the 2016 chair of the New England Chapter of the Counselors of Real Estate.