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.

Bangladesh and Corporate Social Responsibility

In the three weeks since an eight-story garment factory building in Bangladesh collapsed and entombed more than 1,100 workers, there have been lots of media reports about the responsibility of American and European retailers and brand name companies to be more proactive in monitoring and demanding greater safety in the factories that inexpensively produce goods to be sold throughout the world at prices that would be far beyond the reach of the women and men who make them for an average monthly wage of just $37.  

The scramble is on. The scramble to avoid the appearance of insensitivity. Retailers and their brand name suppliers are scrambling to distance themselves from multiple tragedies in Bangladesh and Pakistan, even as worker-advocates press them to force their foreign manufacturers to be more conscious of safety and living wage measures (http://www.nytimes.com/2013/05/11/business/global/clothing-retailers-pressed-on-bangladesh-factory-safety.html?ref=business&_r=0). 

They don’t want their good names sullied by horrific misfortunes half a world away. Yet, like our politicians who often kick the can down the road rather than tackle controversial issues such as social security or tax reform, the retail community rarely takes decisive action. My 30-plus years covering the industry, reinforced by my reporter’s sensibilities, make me a cynic. Sadly, my feelings can be summed up by the last paragraph in The NY Times story linked above: 

“Kellie A. McElhaney, an expert on corporate social responsibility at the Haas School of Business at the University of California, Berkeley, predicted that these pressures would hardly sway the companies. ‘They are feeling a lot of pressure, but it’s not coming from consumers. It’s coming from N.G.O.’s,’ she said, referring to nongovernment organizations. ‘They’re not feeling it in the marketplace. I believe they’re going to do the bare minimum. The N.G.O.’s need to make more consumers aware of this.’”  

Here’s why I’m a cynic: Perhaps 10 to 15 years ago my magazine co-produced a conference called Making It Right. We worked with several corporate social responsibility NGOs to raise awareness about the sordid conditions many foreign workers were forced to toil under as they prepared apparel, sporting goods and other products Americans eagerly consumed because they were less expensive than they would be if U.S. workers produced them, or if higher wages were provided to the populations in Sri Lanka, Pakistan, Bangladesh, Vietnam, China or any of the other Third World countries exploited for their cheap labor. Meeting at the Tenement Museum on Manhattan’s Lower East Side to plan the event, our conference advisory board had representatives from Gap, J.C. Penney and other retailers. Held at the Grand Hyatt Hotel in New York City, the conference attracted several hundred industry attendees. It was a thematic success, but little of any progress was made.

My takeaway from that conference was that price was the overwhelming driving force behind corporate decisions where sourcing would originate. For a few scant pennies per item, manufacturing contracts would shift from one country to another. Bangladesh became the second largest apparel producer in the world, behind China. If tragedies persist, and they surely will, the result most likely will not be safer standards or higher wages in that impoverished country. Rather, the people of Bangladesh, who rely on the garment industry for much of their economy, will be hurt by the desertion of apparel contracts as retailers and brand name companies migrate production to countries with low wages and labor conditions not (yet) under the media spotlight.

Though there have been some reports consumers are becoming more conscious of where and how their purchases are produced, I’m not optimistic there will be a tidal wave of change. I don’t profess to be any better than the next person. I’d rather spend less on everything I buy, assuming the quality is comparable. But I do believe retailers, especially large companies like H&M, Wal-Mart, Target, Nike, Gap, and their important suppliers, such as Ralph Lauren and Calvin Klein, can demand more accountability from their overseas factories, even to the point where they underwrite safety improvements. The few pennies more each of us in America and Europe would pay to prevent catastrophes would hardly impact our way of life. But it would go a long way into assuring a better life, maybe even continued life, for those faceless workers who make our lives easier and more fashionable.