Retail's Changing Face

It’s no secret that this Christmas shopping season was a disaster for retailing. Sales were off somewhere in the neighborhood of 4%. Since a typical retailer will make upwards of 40% of their annual sales during the holiday season, the fall in sales is nothing short of disastrous.

All of this is likely to lead to a major restructuring of the industry. The victims are not going to be just the retail stores but will include the whole infrastructure surrounding the industry. An article in the WSJ estimates that up to 25% of retailers have a high possibility of going into bankruptcy. In order to cope with the shakeout, the Journal suggested that the following may occur:

• Bankruptcies - Retailers are being squeezed not only by a lack of profitability but also by a lack of financing. Many traditional lenders are dialing back on their exposure to the industry leaving some retailers with no choice but to seek protection in Chapter 11. The lack of debtor-in-possession financing is likewise forcing many into liquidation as opposed to reorganization.
• Store Closings - Instead of growing sales via new stores, many retailers are cutting back on expansion and in some cases closing stores.
• Smaller Inventories - In an effort to control costs, retailers are cutting their inventories and offering shoppers less selection. This probably means that a lot of specialty designers are looking squarely at failure.
• Fewer Concept Stores - Attempts to create new brands via specialty stores are being abandoned right and left.

Not mentioned in the article but of importance is the effect that the store closings will have on commercial real estate. Already reeling from an oversupply of retail space, growing vacancies and falling rents, a failure rate of 25% for existing retailers would be a heavy blow to the retail commercial real estate business. You might well see one or more national mall operators forced into bankruptcy, and plans for new malls, power centers and even strip centers are likely to go in the deep freeze.

None of this should come as a great surprise. Expansion in the retail industry was fueled by the same easy money that fueled the housing boom. In many respects they are part of the same puzzle. Just one more price to pay for being overly exuberant.

Comments

[MrsLinarcos:]

I expect Sears/Kmart to be the first really big retailer to go into bankruptcy.

2008 Dec 30 09:50 AM

[Mr Anderson:]

I expect, as I have said before that we will see a reduction in the retail foot print and investment being directed into online retails systems with a strong Mobile component. I also believe that we will see a strong push towards supporting our local communities as well shop at home and buy products made in your country. This is a new addition to the retail landscape, I call the the Nationalistic component.
Sites like www.iBuyLocal.com that are being rebuilt to adapt will have a shot down the road

2008 Dec 31 11:51 AM