Retailers were pleased with 2016’s holiday shoppers and their willingness to open their wallets. However, interspersed with the congratulatory messages about sales numbers there were some words of warning:
These are also the worst of times for retail. National chains including Macy’s, Sears, J.C. Penney’s, Kohl’s and Barnes & Noble all suffered absolutely brutal holiday seasons, calling into question what — if anything — they can do to right the ship and compete more effectively in an increasingly digital world. [RD Jan 2017]
By April 10, 2017 the sounds were still ominous:
There have been nine retail bankruptcies in 2017—as many as all of 2016. J.C. Penney, RadioShack, Macy’s, and Sears have each announced more than 100 store closures. Sports Authority has liquidated, and Payless has filed for bankruptcy. Last week, several apparel companies’ stocks hit new multi-year lows, including Lululemon, Urban Outfitters, and American Eagle, and Ralph Lauren announced that it is closing its flagship Polo store on Fifth Avenue, one of several brands to abandon that iconic thoroughfare. [Atlantic]
Part of the explanation is obvious — for example mobile shopping increased from 2% of spending to 20% from 2010 to 2016. The increases in e-commerce is also readily apparent. The enthusiasm of developers for shopping malls caused massive “over-building” and this fad has collapsed in a heap. It isn’t more explicitly stated than this:
The number of malls in the U.S. grew more than twice as fast as the population between 1970 and 2015, according to Cowen and Company’s research analysts. By one measure of consumerist plentitude—shopping center “gross leasable area”—the U.S. has 40 percent more shopping space per capita than Canada, five times more the the U.K., and 10 times more than Germany. So it’s no surprise that the Great Recession provided such a devastating blow: Mall visits declined 50 percent between 2010 and 2013, according to the real-estate research firm Cushman and Wakefield, and they’ve kept falling every year since. [Atlantic]
It’s no mystery why mall visits would decline in the wake of the Housing Bubble/Wall Street Casino collapse, what we should be asking is why the mall visits have kept falling every year since. And we’re back to the convenience of e-commerce, mobile shopping, and overbuilding argument. There’s another element involved, and it may be hidden in plain sight, i.e. in the comments from Cowen’s retail recommendations. (pdf)
At the end of the first quarter of 2017 Cowen’s was embellishing its five year store analysis report segment with a rain shower graphic, warning that retailers like JC Penney, and Macy’s might need to close some 20-30% of their stores, and Kohl’s might look to decrease its operations by about 10%. There was another rain cloud for malls, associated with the prediction saying 20% of malls would need to be transformed from current operations or closed outright. So, what received the sunshine graphics? “Speed, service, and branding,” along with “deep value.” What’s “deep value?” Read Cheap.
Outside one questionable thesis stating that the middle class is shrinking because its membership is moving up into upper income brackets, most analysis describes the declines in sectors of the retail market as it relates to the middle income squeeze.
“It’s hard not to see the invisible hand of income inequality reflected in the fortunes of the retail sector. As the gulf between the rich and poor grows, and the middle class shrinks, retailers serving the former are seeing big growth, while those aiming with a middle-class clientele are struggling to bounce back.
The numbers don’t lie: wealth distribution is more uneven than ever. And the middle class is getting smaller with each passing year: According to a study by Pew Research, “From 2000 to 2014 the share of adults living in middle-income households fell in 203 of the 229 U.S. metropolitan areas” examined in the study. And that bodes poorly for the economy as a whole, as the report suggests that “a struggling middle class could be holding back the potential for future economic growth.” [Balance]
About whom are we speaking?
While discounters and high-end luxury have thrived, department stores serving a more middle-class customer base have struggled. Macy’s (M), Kohl’s (KSS) and Nordstrom (JWN) and single-brand retailers like The Gap (GPS) had terrible quarters and struggled with declining foot traffic and inventory issues. [Balance] (Aug 2016)
Nordstrum’s as of last February? “Nordstrom continued to see greater difficulties in its premium namesake brand. The Nordstrom brand saw comparable sales fall 2.7%, leading to a 1.1% drop in segment revenue. Strength in women’s apparel and beauty weren’t enough to pull the overall company’s number higher, and the East was the best region geographically. However, the discount Nordstrom Rack concept kept doing well. Revenue was up double-digit percentages for the quarter, and comparable-store sales were up 4.3%.” [Fool]
The latest news from Macy’s: “Macy’s is looking to use the crucial holiday shopping season as a springboard to reverse 11 straight quarters of same-store sales contraction. A decline in foot traffic at malls and the rise of e-commerce has shaken investor confidence in department stores and led Gennette to slash costs, close stores and reduce inventory. Macy’s is also seeking monetize some of its real estate holdings.”
What do these retail giants have in common? They both catered to middle and upper middle income shoppers. Thus no one should be surprised to find job numbers moving up in general while retailers weren’t sharing the optimism. [Dive] Even Macy’s recent announcement of seasonal hiring was tempered by saying the jobs were temporary.
The Republican offerings on this subject? Enact a tax scheme which overwhelmingly benefits corporations and upper income individuals. This is a perfect way to exacerbate the current retail situation wherein the elite stores are doing well, and Dollar General is expanding for everyone else.
Enact a tax scheme which is “territorial” the antithesis of keeping jobs in the United States: “ It could give a permanent preference to foreign income and lead companies to shift more profits to tax havens knowing that they could permanently avoid virtually all taxation on such profits.” Again, a permanent tax cut for corporations while raising taxation revenue from everyone else who isn’t a millionaire or billionaire.
So, retail employees, who earn an average of $22,900 per year or about $11.00 per hour, and a third of whom work part time, will see the Great Squeeze continue. It remains to be seen if those retailers who target middle income earners (Sears, Nordstrum, JCP) will be able to stave off the onslaught of online, e-commerce, deep discount shopping. And, the GOP will continue to believe in the Growth Fairy coming to the rescue of their highly specious arguments for Trickle Down Hoax economics. A prediction for the 4th quarter of 2017: Elves who spent the holiday season cutting prices may see short term gains with yet more indications we’re looking at some more long term losses for middle income America. In the competition between the Growth Fairy and the Discount Elf — bet on the Elf.