The Changing Nature of Physical Retail Space

The first half of 2015 has seen numerous retail store closing announcements and several new retail bankruptcy filings, including those of Wet Seal and RadioShack. As each month brings new store closing announcements or news of another retail bankruptcy filing, one question continues to naturally emerge: How many more retailers will file amidst the industry turbulence?

While there is no quick or easy conclusion, any discussion of the changing retail landscape must examine two of the key issues driving the industry turmoil: 1.) financial strain caused by unprofitable physical locations, and 2.) the emergence of a new American consumer increasingly motivated by changing tastes and new technologies. These factors will continue to drive further restructuring in the industry in the near-term as established retailers confront new realities as a result of rapidly changing consumer behavior.

The chart below shows a sample of the announced store closings towards the end of 2014 and through the first half of 2015. The table identifies 4,299 location closings,[1] with 3,338 resulting from bankruptcy filings.
Highlighted rows indicate company has filed for bankruptcy.
A. 11-month period cited in Bankruptcy Declaration of CRO Stephen Marotta.
B. Store closings result partially from consolidation post-merger.
C. Merger pending between Dollar Tree and Family Dollar.  Revenue figure taken by combining last reported 12 month figures for both companies.
D. Pending bankruptcy proceedings calls for initital store closings of 25 with the potential for further closings.
Data used to develop the chart is from S&P Capital IQ and bankruptcy filings where the company is/was private.

With the near ubiquity of smartphones in today’s society shopping is increasingly taking place in a mobile manner. Traffic to physical stores was down on average year-over-year in Q1 2015.  Declining foot-traffic in malls is harming many traditional retailers. Without the consistent flow of potential customers, struggling retailers are seeing declines in revenue per store and the impulse buys associated with foot-traffic.

The National Retail Federation (“NRF”) recently cut its retail sales forecast to 3.5 percent growth for 2015 versus the 4.1 percent forecast in February. The NRF attributes the soft growth to inclement winter weather in the beginning of the year, the West Coast port shutdown and low expectations for back-to-school sales.

With retail sales remaining relatively stagnant, retailers must be prepared to adapt to a more selective American consumer who is less likely to visit a physical store. As revenue growth is increasingly being sourced from online sales, lease and other operating expenses associated with unprofitable stores are becoming more pronounced and an unsustainable drag on the cost structures of brick and mortar retailers. This increases the need for certain retailers to trim their store-networks as they simply do not have enough revenue to support them.

As the economy turns more towards e-commerce, it is likely that additional stores will close, and more retailers could file for bankruptcy, until a new balance is achieved. Although malls and stores will continue to exist, the prevalence of smart phones, tablets, and apps continues to make e-commerce increasingly natural and popular for shopping. Traditional brick and mortar stores, with their high rent and employee costs, face a significant challenge – how to convince busy consumers to come to their stores, shop and thereby mitigate or reverse declining foot traffic. The number of retail bankruptcies during 2015 demonstrates how difficult these challenges can be in certain cases, and more retail store closings and bankruptcies can be expected in the remainder of 2015 and beyond.
[1] Includes 2,122 closings associated with the RadioShack and Wet Seal bankruptcy proceedings.