Three Reasons for Retail Apocalypse in the United States
There has been an active discussion of the retail trade collapse in the United States since 2017 when bankruptcies of retailers took mass proportions and the number of store shut-downs reached 7,000. In 2018, the collapse of Toys “R” Us has been the biggest (value of assets totalling $ 6.6 billion) among retailers since the crisis year of 2008. From the beginning of 2019, the trend is gaining momentum: in March, Diesel company has become bankrupt, following Charlotte Russe (February 2019) and Things Remembered (January 2019), which were unable to sustain competition from online platforms and the burden of accumulated debt liabilities; Innovative Mattress Solutions, which has been driven out of business by online start-ups like Casper; Shopko chain of retail stores, which has obtained a legal action from McKesson Corporation with regard to a debt of $ 67 million. As can be seen from the above, the main factors in the retail crisis are a decline in offline retail trade, the inability of retailers to adapt to changing consumer preferences and accumulated debts.
Since many retailers leverage bankruptcy to restructure their debts or to change their business model for adapting it to the changed competitive context, business failure other than mergers, takeovers and acquisitions of companies is the most credible indicator. According to the British Centre for Retail Research, the year of 2012 was the worst year for retail as 54 companies have ceased to exist; last time such figure was achieved in the crisis of 2008. Since that time, 40 to 50 American retailers ceased to exist every year, except 2014 and 2015, when only 25 and 30 companies went out of business, respectively. In the first two months of 2019, fifteen retail companies have failed, therefore, there is every indication that this trend will continue in the foreseeable future.
On the Verge of Collapse
The growth of eCommerce, including platform-based companies such as Amazon, is one of the main reasons for a decline in the retail industry: fewer consumers go shopping to stores and prefer doing online shopping. Within a period of 2010 to 2016, Amazon revenues have grown by $ 64 billion, i.e. three times as much as the annual Sears’s income ($ 22 billion in 2016) over six years. However, the more complex process takes place in reality. Electronic commerce is the most successful in certain categories of goods only (books, multimedia); online platforms are capable to successfully compete with large retailers thanks to the customization of goods (selecting things according to the buyer’s needs), and prompt and low-cost return and exchange of goods. All of these services are readily available for use to traditional retailers, many of which have made great efforts to beef up their online presence. An additional point is that we should not forget that Amazon’s retail business is unprofitable as the company earns most of the money from its cloud services.
Another explanation is that there are too many shopping malls in America. Gross lease area (GLA) per capita is one of the key indicators reflecting the development of the retail sector. According to The Atlantic, in the United States, this figure is 23.5 square feet, which is 40% higher than that in Canada (16.4), five times more than that in the United Kingdom (4.6) and ten times more than that in Germany (2.4). Over the period from 1970 to 2015, the number of shopping malls in the United States has been increasing twice as fast as the population, despite declining attendance which went down by 50% in 2010–2013 and continued to decline year over year. According to Richard Hayne, CEO Urban Outfitters, in the 1990s and early 2000s, the retail industry was going through a boom; the construction of new shopping malls and supermarkets spurred rental growth causing the formation of a bubble which has burst nowadays: stores cease to exist, and rental is falling down.
Among other things, American retailers have accumulated substantial debts. A case in point is Toys “R” Us, a chain of toy and children’s goods stores, which liquidated its business in 2018. The bankruptcy of this retailer in September 2017 was one of the biggest failures in the US history after the company failed to refinance $400 million of debt liabilities, being insignificant part of the total debt of $5 billion. The debt crisis of retail is part of the cumulative effect of the Federal Reserve System’s (FRS) anti-crisis policies, which pumped the US economy with easy money, making the risky money more attractive. As interest rates are raised, the situation on the lending market is becoming less favourable for borrowers, including retailers. Bloomberg predicts the rise of the borrowing cost for retailers from the standard level of 6.5% up to 13%, as happened with Nordstrom Inc. in 2017.
Push the Falling One
Closer attention by private equity could be an additional catalyst for the retail crisis. Those firms are known for their aggressive investment style: they are seeking quick restructuring with intent on reselling the company or what is left of it. It is estimated by Retail Dive that since 2002 private equity has invested in retail business as much as $116.5 billion, including well-known companies, such as PetSmart, Dollar General, Staples, Toys R Us, Neiman Marcus Group, Michaels, Petco, Mattress Firm and Claire's Stores. Half of the retail companies, which are included in the TOP-10 largest takeovers by private investment firms, have initiated the bankruptcy procedure or are facing financial constraints (Moody’s Caa rating and lower). Retail Dive analysts noted that interest of private equity to troubled companies is associated with a large portion of liquid assets in retailer’s capital, which could be reinvested in business or paid in dividends. Retail business with large cash reserves became an easy prey for vulture investors.
Not Only Economy
Retail apocalypse can be explained not only by economic but also by social processes. As a result of the lagged effect of the 2008 crisis and fall in real household income, consumer preferences have shifted: people spend less for “things”, but looking for some new influences, from going to restaurants to tourism. The upturn of the “experience economy” is supplemented by the individualization of consumption, with which online stores better cope by selecting recommendations based on consumers’ individual preferences. Finally, the development of the Internet and new media promote the creation of new platforms for social interaction, from social networking services to Amazon users’ feedback. A traditional shopping mall was a public space, where people could not just do shopping, but spend time, communicate and show their social status to strangers. A trip to a large supermarket, constituting a trade ‘core’ of any shopping mall, turned out to visitation to some other stores; family leisure at a food court or at the cinema was a source of profit for tenants. As the dilution of the middle class takes place, part of the lifestyle of which was trips to shopping malls, and on the other hand, as optional public spaces (including online space) experience an upswing, large retailers, followed by smaller tenants of shopping space, are falling into decline. It is no wonder that the number of “dead malls” in the United States keeps growing.