Strategic business consulting news and analysis from BRG
Bargain basements are opening up all across the retail sector—only the shoppers aren’t price-conscious consumers. The buyers are savvy investors, real-estate developers, private equity firms and hedge funds looking to profit from store closures and the mall’s decline.
For years, retailers conditioned shoppers to wait for discounts, often until liquidation sales when ‘’everything must go.’’ Now it’s the other way around. The biggest deals are in real estate, distressed brand intellectual property and credit card portfolios.
Retailing is undergoing a phase of creative destruction: Adverse demographics and delivery of online options are squeezing traditional business models and extinguishing jobs, even as the US and world economies grow at a moderate pace.
Euromonitor International, a market research firm, forecast in February that global consumer spending would rise 2.3% in 2017, off slightly from 2016. Advanced economies will fare worse. Euromonitor sees consumer spending growth in developed markets easing to 1.5% in 2017 from 2.0% in 2016.
Recent US store closings by such marquee names as Walmart, Macy’s and The Limited have put about $2.5 billion in potential sales revenues up for grabs. Consumers will spend that money somewhere—a key question is who will win their business. Whether it is local stores, online merchants, or elsewhere matters keenly to the economy; especially if consumer spending migrates into housing, healthcare, or food categories.
Merchant survivors will have to crack the inescapable problem of demographics. The population of traditional mall shoppers is getting grayer, while millennials quickly adapted to online and mobile, forcing retailers to think differently about how products are purchased. Immigration—an antidote to low birthrates—faces political headwinds, and the inexorable pickup of interest rates from historic lows will crimp home buying.
Department stores, consumer electronics and apparel have been particularly vulnerable to the combination of the secular slowdown in growth, millennials’ finicky spending habits and online shopping. While US department store sales fell 5.6% in 2016, sales at non-store retailers boomed 11.8%.
Discount stores and “dollar stores” promising extreme deals are still finding growth, capitalizing on consumers’ search for value. At the other end of the spectrum, higher-end fashion has no shortage of people with more disposable income and a willingness to spend it.
In the US, online sales made up 9.1% of the sector total at the end of 2016. Yet the Amazon phenomenon is a double-edged sword for employment and, ultimately, for the buoyancy of consumer spending. US retailers have shed about 100,000 jobs in the year to March 2017, while online operators are putting up “Help Wanted” signs.
Taken together, these are lingering headaches for the retail CFO. Once-predictable capital structures have become more volatile. E-commerce platforms can take time to catch on and it remains difficult to measure traffic impact, but no one wants to be left behind.
Another concern is inventory—normally used to secure revolving seasonal borrowing, and common in retail sectors that balance cash flow with advance purchasing for holidays. Merchants have used factors to relieve payables, but stillare challenged with having the precise inventory needed to convert traffic to customers while reducing unnecessary discounts.
All this turmoil has impacts ranging across cities and towns that depend on sales tax to logistics companies and suppliers. Major landlords are reporting vacancy rates of 10% to 11%, well above the 7% before the 2008 recession.
So, new partnerships are emerging. US mall owners Simon Property Group and General Growth Properties teamed with other investors in 2016 to buy teen clothing maker Aeropostale out of bankruptcy. This new model for the US could bring a new dimension to the equation.
Retail brands have been disappearing for years. The current opportunities are for buying well-loved brand names and intellectual property as these industries shift. A rare bonus with purchase is the likelihood that brand names—unlike store leases or inventory—are being sold at going-concern prices, even when core operations of a business are in the wind-down process. Many of these now-dormant brands have high potential for the right buyers looking to leverage their G&A structure and grow.
Keith Jelinek is a Los Angeles-based managing director of Berkeley Research Group, with decades of retail management experience.