A Prognosis For The Health And Well Being Of Retailers

Author(s): Scott L. Grossfeld

Source: CCN Retail Perspectives

Spring 2009

The current global economic recession has certainly taken its toll on the retail business. Some blame the retraction of retail on the frozen capital markets, while others blame it on the devastating impacts of the recession on consumer confidence, the fall-out from the housing market decline, recent trends of retail over-building (and the practice of locating same category stores in very close proximity to one another, resulting in a cannibalization of the markets), the rise of unemployment and/or the collapse of the stock market. There are a myriad of other reasons that can individually, and collectively, be argued to have contributed to the current historic losses being experienced by the retail community. Whatever the reasons, few (if any) can deny that the current health of retailing in the United States is at a precedent-setting low.

California is not immune from this trend. According to statistics from the International Council of Shopping Centers, approximately 15% of the country’s shopping centers (and retail square footage) is located in California. With such a large share of the nation’s retailing business, it is not surprising that retail development in California is at its slowest in recent memory.

Unfortunately, an unhealthy retail industry negatively affects the entire retail development business. This includes retail developers, brokers, retail construction professionals and others involved in the development of shopping centers and other retail sites. Obviously, if retailers do not expand or open new stores, there will be fewer (or no) new shopping centers to build and leases to broker.

Therefore, the question on the minds of everyone involved in retail is: When will retail recover?

Based on recent statistics from such sources as the International Council of Shopping Centers and articles available on various industry websites (including Globestreet.com) 2008 encountered a major reversal in terms of retail growth. Through September of 2008, it was estimated that 10,600 new stores were opened in the United States. This is contrasted by an estimated 8,600 stores closing during the same time period.

The same (or similar) sources estimate that through the first half of 2009, there will be 73,000 stores that close. These sources estimate that only 2,000 new stores will open during the same time period. Such statistics, if accurate, will widen the abundance of dark stores in the nation’s shopping centers and are indicative of a continuing decline in retail in the near term.

Many, inside and outside of the retail development community, are undoubtedly aware of some of the contributors to these statistics. The national news outlets spent considerable resources following the closings of many major national operators, such as Mervyns, Circuit City, Linens ’N Things, Levitz, The Sharper Image and other former shopping center stalwarts. Of course, it is not just major national brands that make up the considerable number of closures. Smaller, regional operators as well as large numbers of mom and pop stores (largely due to consumer lethargy and an inability to obtain credit for operating capital) have succumbed to the global economic downtown.

With so many retailers closing, and fewer operators expanding or opening new stores (combined with recent episodes of retail overbuilding), there will be a large supply of existing space to absorb before new development is jump-started.

Although these statistics are compelling and disheartening, there are some retailers (and retail categories) that appear to be performing well. Furthermore, there appear to be some signs that retailer decline may be slowing or changing direction.

Discount-oriented retailers and providers of necessities and staples appear to be weathering the storm better than most. According to recent news reports, Wal-Mart seems to be continuing its pattern of growth, in terms of revenue, store openings and an increasing stock price. In addition, according to recent Globestreet.com articles, retailers such as Ross and American Apparel are still growing in terms of net income and store openings. Costco, Forever 21 and Kohl’s are other bright spots in terms of retailers in expansion mode. Similarly, drug stores and supermarkets seem to be less affected by the generally negative economic conditions.

In addition, some shopping center owners and commentators are reporting that a variety of retailers are resorting to the re-negotiation of leases, instead of store closings. These factors would appear to support the proposition that these retailers are attempting to wait out the economy, in lieu of throwing in the towel.

Although it is undeniable that retail has been in the worst decline in recent memory, there are some bright spots in the market. As these positive statistics grow and the root causes of the economic decline begin to be addressed, it is unquestionable that the retail industry (including retail development and associated industries) will rebound.

Yes, there are still rough days ahead for retail. And, recovery will not be immediate. However, new governmental plans to stimulate the economy by, among other things, dealing with toxic assets and increasing liquidity in the capital markets, will seemingly work to slow home foreclosures, improve the residential markets (the consumer’s most critical concern) and make credit available to retailers to purchase inventory and have sufficient capital to operate their businesses. As these programs take root, many of the problems in the economy will begin to heal, leading towards a gradual but strong improvement. It is hoped that these recent governmental developments, coupled with very recent improvements in the stock market and other economic indicators evidence the start of this process and a slow (but steady) recovery. Assuming enough seeds have been planted to stimulate a recovery of the economy, it is hoped that retail will be able to show a modest improvement in 2009 fourth quarter sales, leading to a more robust 2010. This could logically result in retailers beginning the process of contemplating new store openings in 2011 – which means new leases being signed in 2010.

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