By Ryan Gregory, guest contributor
It doesn’t seem like a week has gone by in 2017 without an announcement of mass store closures or another bankruptcy filing in the retail industry. Notable and distinguished brands such as Gordman’s, Payless, Abercrombie & Fitch, GameStop, Gander Mountain, Kmart, Limited Stores, rue21, Sears, Kmart and others have announced major downsizing initiatives or petitioned the courts for bankruptcy protections. For some perspective, nine national retailers have filed for bankruptcy thus far in 2017. That equals the number of filings in 2016 and is the most we have seen since 19 retailers filed in the depths of the 2008 recession. Newspapers, websites and trade journals have issued a flood of articles on retail’s struggles with many coming to the conclusion that retail stores are dying. However, a trip to any city’s popular shopping destination will tell you that those stories are a bit of an exaggeration and that the truth is more nuanced.
Unfortunately, the growing pains the retail industry has experienced thus far in 2017 may not slow down in the short term. Retailers have been and are still trying to find the right balance of their physical store presence as sales shift online and as their internet strategy becomes more important and capital intensive.
Some of the issues retailers are facing are playing out in my household every day. My wife’s hobbies include fashion, shopping, hair, makeup…you get the drift. Earlier in our relationship, she frequented malls and clothing stores on a regular basis. As our lives got busier and the world of free shipping and returns evolved, she started to do more and more shopping online. Today she does the majority of her shopping online but still uses physical retail stores for returns, exchanges and the occasional shopping trip. Those dynamics result in fewer trips to the mall, but her favorite retailers are still booking those sales and are getting traffic to their storefronts.
Other problems facing retailers are not as obvious. Some of the retailers in significant distress today were purchased in leveraged-buyout situations. Everyone reading this article is aware that excessive debt can limit flexibility. While online sales likely played a part, retailers such as Claire’s, Sports Authority, rue21 and other private-equity-backed companies may have not been able to react effectively to the changing retail environment due to balance sheet limitations.
While e-commerce has hurt some more traditional retailers, opportunities exist for companies that can compete both online and on the ground to offer consumers the ultimate in convenience. Retailers with an existing store network have the advantage of giving consumers the best of both worlds with robust online offerings, free ship-to-store options, and a traditional shopping experience. Walmart is succeeding in this new paradigm on both fronts with its recent announcement of 10 consecutive quarters of same-store sales growth and a 63% year-over-year increase in e-commerce sales. While it is true that few retailers are in the same ballpark as Walmart, the company’s strategic acquisitions and focus on growing its e-commerce platform have been impressive. Additionally, the company’s in-store sales growth should be a good sign for Walmart’s neighbors in shopping centers across the nation.
What we are also starting to see is native e-retailers growing their businesses by venturing off the web and onto Main Street. As an example, the men’s fashion company Bonobos launched as an e-retailer selling direct to consumers with smashing success. In recent years, to complement their online sales, Bonobos has opened more than 30 storefronts (with plans to open more) in major U.S. cities such as Chicago, Seattle, Minneapolis, Austin and others. The stores are staffed with stylists who provide one-on-one attention and fashion advice while allowing customers to try on their wares. However, the stores operate as showrooms, and, true to Bonobos’ internet roots, all items that customers want to buy are shipped directly to their homes. This model allows Bonobos to save on inventory costs and still provide customers a way to touch and feel their clothing and interact with the brand. Bonobos is not alone in this respect with Amazon, Warby Parker and Fabletics all having opened or in the process of opening physical stores.
NorthMarq’s own loan servicing portfolio does not suggest a trend of retail properties faltering. NorthMarq currently services approximately 1,300 loans whose collateral is retail properties. Of these loans, only three (0.2%) are non-performing. These numbers provide a contrast to the headlines we have been seeing and reading. Furthermore, my own anecdotal observations have been that good properties have been able to retain leases through bankruptcies or have been able to re-lease space when the original tenant vacated.
While headlines may suggest that the traditional American retail store is headed the way of the dinosaurs, the on-the-ground/on-the-internet ingenuity of the retail industry argues otherwise. I believe we are passing through a phase of retail adapting to our fast-changing world as it experiments with new ways of catering to the needs of its customers while also altering, but not eliminating, its traditional brick-and-mortar business practices to remain nimble enough for further experiments.
Now is the time for retail entrepreneurs to do three things to avoid joining the ranks of the shuttered storefronts: 1) assess the unique applicability of online resources to their particular type of retail use; 2) re-think the ways in which brick-and-mortar resources add value to the enterprise (minimizing “physical” costs such as inventory); and 3) exploit the synergies inherent in the right mix of online and physical storefronts. If retailers can make honest assessments and adapt accordingly, I predict we will see the industry successfully evolve and avoid the “extinction” today’s headlines imply is inevitable.