Why Are So Many Stores Closing?

Perhaps you’re wondering why soooo many chain store retailers are closing sooooo many stores, especially after what has been hailed as a gonzo holiday season. To be sure, after every New Year retailers have always pruned deadbeat locations. But the numbers going into the trash bin of history are dizzying. More than 9,000 store units closed last year. A higher number is predicted for 2020 (https://moneywise.com/a/chains-closing-the-most-stores-in-2020).

The names coming off marquees across the country include some venerable labels: Sears, Kmart, Macy’s, Forever 21, Pier 1 Imports, Gap, Chico’s, Bed Bath & Beyond. Why is the contraction reaching unparalleled heights? Though each chain has its own problems, there are common threads that have unraveled throughout the retail industry.

Start with the fact that in the United States we are overstored (forgive me for not providing actual statistics, but after 32 years covering the retail industry as an editor and publisher of Chain Store Age I am taking retirement privilege and just providing trend analysis. You’ll have to trust I know what I am talking about).

How did we get overstored? No retailer thinks their store is not desired by voracious consumers. So when real estate developers pitched less than A+ locations they signed on the bottom line, sometimes induced to do so as the price of landing a truly A+ spot in a different coveted shopping venue owned or operated by the same developer. The developers, of course, needed those tenants to get their construction loans. Thus, it is no wonder that stores in secondary market are closing and with them secondary market shopping centers.

Everyone wants to blame Amazon and other Internet retailers and before them Walmart, Target, Home Depot and an assortment of big box retailers. Yes, they all contributed to the blacking out of storefronts on Main Streets and in strip centers. They killed off lots of independent merchants and weaker chain stores. As for Internet retailing, it still accounts for just about 15% of all sales.

So what’s behind the tsunami of store closings? Lousy merchandising choices, for one. For apparel and fashion home goods stores, if the wrong stuff is put up for sale customers will stay away in droves. As rents and labor costs are high, the combination with the cost of goods put retailers in a swimming pool of red ink.

Many chain stores have high levels of debt because private equity firms bought them by leveraging retail assets, mostly their leases or the land they owned for their stores, warehouses and distribution centers. When sales fail to meet budget expectations debt payments cannot be met. Suppliers refrain from selling them merchandise because if a company files for Chapter XI bankruptcy protection the law allows creditors to claw back all payments made in the prior 90 days. Suppliers fear being paid pennies on the dollar for their products. That’s why the first clue of a pending bankruptcy filing is insufficient product on shelves or clothing racks.

Failure to keep abreast of state of the art technology and distribution efficiencies are more harbingers of doom. Often it’s because companies did not have the cash flow to make the necessary investments. It’s a melting snowball effect in a red hot competitive industry driven by shoppers who demand instant gratification.

Let’s not overlook the polarization of our population. Not our political divide. The economic bifurcation. The fastest growing retail formats are dollar stores and food discounters like Aldi and Lidl, both European imports, that cater to families on tight budgets. Companies that serve middle income consumers are being squeezed.

Being a high end retailer doesn’t guarantee success. Barneys New York failed because of the aforementioned heavy debt load strapped on it by private equity owners. Toys “R” Us, which knocked off almost all toy competitors, succumbed as well from its private equity debt load. Toys “R” Us was never the price leader. It based its success on being in stock on the most wanted toys. When Walmart and Target matched Toys “R” Us on inventory management the game was lost. Walmart and Target had many more stores than Toys “R” Us in most markets, making it more convenient for shoppers to find what they wanted in their stores. Location, location, location. Three keys to success. Or failure.

Can you still make it in retailing? A resounding, emphatic, YES! Required are merchandise tailored to a specific audience; systems that provide seamless customer fulfillment and support; dedicated, driven staff from the top down; sufficient capital, and even more capital; savvy marketing including an Internet presence; and those historical three keys—location, location, location.

Successful retailers make customers their unpaid promoters. Think Trader Joe’s or The Container Store. A successful retailer would be missed if it closed its doors, missed not because it was nearby or a long time presence in a community, but rather because it brought excitement and fulfillment to the often mundane task of buying and selling everyday goods and services plus the occasional frills that make shopping essential and enjoyable.

Retailing in the Age of Amazon Will Not be Devoid of Human Contact

By now you probably heard or read about Amazon’s pending purchase of Whole Foods Markets, what business analysts are projecting as the tipping point in a retail revolution that may well transform consumer transactions into experiences almost devoid of human interaction. With your smart phone you will be able to circumvent dealing with store personnel, they say, resulting in massive layoffs of workers at the lowest rung of the labor force, many who are unskilled, or elderly, or handicapped, or immigrants with tenuous English language skills, or combinations of the above (https://nyti.ms/2sAPV2D).

Analysts point to the the example of Amazon Go, an experimental store for its Seattle employees. Customers scan their phones upon entering, sensors remotely monitor what they put into their shopping baskets, and exit without the need to stop at a checkout stand and interact with a cashier for their purchases to be charged to their accounts.  

It reminds me of a technology I witnessed back in 1990 at my first EuroShop exhibition of store equipment and technology in Dusseldorf, Germany. A shopping cart haphazardly loaded with products was wheeled through a box the size of a compact refrigerator. Presto, all the items were scanned and ready to be taken home by the customer. So here we are more than a quarter of a century later, nowhere near the promise of yesterday, much like the flying cars we expected to be riding had we believed the future as portrayed in color newspaper inserts of the 1950s and 1960s. Heck, we haven’t even been able to create the flying hover board Marty McFly rode in 1989’s Back to the Future Part II set in 2015. Our earthbound hover boards are fire hazards.

But I digress. The point is, despite Moore’s Law and its corollaries to the rapid adoption of technologies, we are decades away from widespread implementation of Amazon’s futurescan. For several reasons.

Not everyone who enters a store buys something. Not everyone wants their whereabouts and their identities known and cached in some unknown database à la Minority Report. Civil libertarians would have a field day if such technology becomes ubiquitous, implemented without the authorized consent of the public.

Perhaps most socially and culturally relevant, eliminating the human factor in retailing would exacerbate the bifurcation of society already underway. While smart phones are ubiquitous in most neighborhoods, checking accounts and credit/debit cards are not. 

Three times a week I drive into Manhattan along Fifth Avenue, from 142nd Street in Harlem to 98th Street, one of the tonier sections of New York. From 110 Street, where Central Park begins, to 98th Street, Fresh Direct trucks double park as drivers deliver groceries to the wealthy. Above Central Park, over nearly three years I have yet to see a Fresh Direct truck servicing the population.

When visiting a supermarket, I opt for self-scanning in Stop & Shop. Except, not all Stop & Shops in my sphere of buying offer self-scanning. Stores in less desirable neighborhoods do not. Hmmm. I don’t really need to wonder why.

At upscale stores, such as Trader Joe’s, where friendly, knowledgeable service, along with exclusive products, are differentiators, I cannot foresee management abandoning their unique service proposition. 

Stacy Torres, an assistant professor of sociology at the University at Albany, provides real-life examples of why robots replacing humans has its drawbacks as long as we remain social animals: https://nyti.ms/2tVmHbT

The most dynamic growth retailers are deep discounters in food and general merchandise. While Trader Joe’s concentrates on the upscale market, its sister company, Aldi, aims low. It is a German-based no-frills, generic low-priced grocer sweeping across our country. So is Lidl, another German discount grocer with aggressive U.S. expansion plans.

Dollar stores, among them Dollar General and Dollar Tree, though the former is not a true dollar store purveyor as its price points are not restricted to 100 pennies, are the growth vehicles of challenged America. They serve a class of customer that will always be handled by store personnel.

Just imagine going into a Home Depot or Lowe’s. Not that it’s easy to find someone to help you right now, but it is doubtful they will do away with sales floor assistance. Cashiers? Sure, they’ve already eliminated many. But don’t expect to be walking into cavernous buildings barren of staff. The same can be said for electronics stores.

For sure, apparel and department stores are prime candidates for downsized labor costs as long as technology inhibits five-finger discounting from destroying a retailer’s bottom line. Consumer affinity for off-price apparel stores amply demonstrates that help is not necessary on the selling floor. Even Macy’s is now finally embarking on a Backstage off-price concept in an attempt to prolong its corporate lifespan, having let Nordstrom Rack and Saks’ Off Fifth enter the battle with Marshalls, T.J. Maxx and Ross Stores decades ago. 

It has been noted that even as store-based personnel are vanishing the number of warehouse staff is multiplying. Amazon, if not already there, is the number one apparel retailer, with all sales coming from its warehouses or those of its vendors. The reduction of apparel outlets will continue. 

Some retail innovations take years, even decades, to catch on. Thirty-six years ago a retail industry guru named Alton F. Doody decided he had preached enough. During his illustrious career he had counseled such groundbreaking retailers as Walmart and Target, but now he wanted to test an idea for a store of the future: Investment Clothiers. It was a concept where men and women could try on samples of suits, jackets and pants, then leave empty-handed with the knowledge that their selection would be pulled from a warehouse and ready for pickup or delivery the next day. 

Doody chose Cleveland, where I interviewed him, as one of his test markets. Cleveland, after all, was a very corporate city back then. Lots of men and women needed affordable business wear. Alas, the experiment failed.

Doody was decades ahead of his time judging by the positive results enjoyed by Bonobos, a menswear retailer just purchased by Walmart. Begun as an Internet retailer, Bonobos has opened dozens of stores where goods are showcased, customers are measured and fitted, but product is shipped at a later date.

If you’re old enough you might remember a hot concept of the late 1970s and early 1980s—the catalog showroom. Sales from companies like Service Merchandise, Best Products and Luria’s ranked among the top 100 retailers. They displayed hard goods in showrooms, fulfilling customer desires on the spot from extensive behind-the-wall warehouses. 

Okay, sometimes, often actually during high traffic periods, the wait for your purchase to be pulled off the back room shelves was exasperatingly long. And small showrooms meant fewer model options could be offered compared to those available at a traditional discount store. So it was not surprising the catalog showroom concept disappeared when Walmarts and Targets, not to mention Kmarts, appeared at virtually every crossroad. 

What all this means is retailing is among the most evolutionary of enterprises. As The New York Times related in two articles on April 15 (https://nyti.ms/2oJWGwQ and https://nyti.ms/2odz8xo), retailing is evolving faster than perhaps in any previous time. It is too early to seriously consider mass retailing on a robotic scale, but there surely will come a time when a segment, too soon to say how small or large, will accept automated, non human service. I just don’t see its widespread implementation during my transactional lifetime.