If you just read the headlines, reports of retail businesses filing for bankruptcy and closing hundreds of stores sound like a cautionary tale for the overall economy. However, the story behind the big letters reading “Everything Must Go” is much more complicated.
In truth, Americans are buying as much, if not more, goods as they ever have. A report released on November 11 by the New York Fed researchers showed that retail sales rose by 0.4% in October. That is less than the 0.8% in September but still strong. Part of the strength is the fact that individual earnings growth has averaged 6.2% per year since the pandemic began, compared to the cumulative debt balance rising 4% per year. According to the Bureau of Labor Statistics, hourly earnings rose 0.4% in October, ahead of estimates, and the inflation rate has not exceeded wage growth since January 2023. As a result, the debt-to-income ratio among U.S. consumers has steadily declined during the post-COVID recovery.
So, the question is, why are so many retailers closing their doors?
The worst year for store closures was 2020, when 9,700 stores were shuttered, compared with 3,704 opened. Net losses totaled 5,994. Since then, nearly 5,000 stores have opened each year between 2021 and 2023, and closures have dropped substantially.
In actuality, more stores opened than closed in 2022 and 2023, according to data from Coresight Research, a real-estate analytics firm. So far this year, 4,426 stores have opened, while 4,548 have closed.
Tenants are looking for good properties, Brandon Svec, national director of U.S. retail analytics for CoStar Group, has insisted. “There are still a substantial amount of tenants from a broad range of sectors looking for space,” he said in an August interview. “And the longer-term imbalance between the space needed in retail and the space that we have, I don’t think has shifted.”
That news is contrary to the headlines you have been reading.
Inflation
Perhaps the most jarring bankruptcy news came from Big Lots after the Columbus, Ohio-based company announced the closing of 56 stores in 27 states. The announcement came after it had already closed 46 stores. Compared to other retailers who buy products directly from manufacturers and distributors, Big Lots buys its products at wholesale prices from other retailers who ship expiring products and merchandise that has either gone out of style or didn’t sell as expected. In return, Big Lots customers, most of whom live below the poverty level, are able to purchase products at highly discounted prices. However, the low-income portion of the population has been hardest hit by inflation and reduced their spending more than most.
Family Dollar, which has Dollar Tree stores and acquired the bankrupt 99 Cents Only Stores, operates with the same business model as Big Lots. This year, it announced that it will be closing 1,000 stores across the country. However, the move is to eliminate underperforming locations and retail stores that suffer maintenance neglect to the point that it does not pay to make the needed repairs.
Inflation targeting the poorest segment of the population and high interest rates affecting the business borrowing needs are the primary causes for Big Lots and Family Dollar closings.
Market Over-Saturation
Another culprit for store closings is market over-saturation. There are drug stores on nearly every major intersection corner. Walgreens has announced the closing of over 1,200 stores over the next three years. Likewise, Rite-Aid is closing 165 stores, and CVS is closing 315. Part of the reason is to reduce the overhead of underperforming locations, which, unfortunately, means closings in less affluent areas. The other reason is a consumer shift to receiving their prescriptions through the mail. Amazon, the world’s biggest retailer, has entered the prescription drug business, offering lower prices and the convenience of home delivery.
Shift in Consumer Shopping
Sears, the company that invented catalog shopping, had over 3,000 stores at its peak. Today, only nine stores remain, and its famous paper catalog is no longer available for outhouse reading.
Amazon has become the main competitor for retailers around the world. The Sears catalog is now online, but the number of products offered pales in comparison to Amazon’s online offerings. Likewise, clothing stores like Macy’s are struggling to keep pace with Amazon’s pricing, delivery, and return structure. Macy’s is in the process of closing 51 locations, and RUE 21, another trendy clothing retailer, is closing 543 locations.
According to CapitalOne data, online shopping now accounts for at least 15% of all U.S. retail sales and may double by 2030. Online shopping now includes far more than Amazon.com. Walmart, Target, Costco, and others are investing in their online capacities. Shopping malls have struggled for years partly because shoppers have been moving or changing buying habits. Big chains would rather locate stores near their customers.
Intense competition
If you own a small bookstore, your problem is the Amazon effect: A shopper comes into your shop, sees a book of interest, and orders it online. That, of course, is just a piece of the competitive challenge. High-end retailers are struggling to find goods that high-end customers want. A bigger problem: Big-box retailers have been revamping stores and cutting prices (thanks to better terms from vendors). That undercuts the profit margins of smaller operators.
The world is not black and white, and the reason for retail store closures is likely a combination of factors rather than a single cause. However, it can be said that one common denominator is management.
A good management team stays abreast of market trends and anticipates financial challenges before they become irreversible.
At Business Finance Corporation (BFC), we have clients in a variety of industries and often see consumer and business trends at their infancy. One of the leading indicators is the average length of time accounts receivables are paid. Based on that trend alone, we can advise clients on anticipated cash needs. To learn how BFC can help your business, call 702-947-3800 or go to https://bfc.vegas/.
Your Partner in Success,
David Cabral