Retail Trend to Watch: Consolidation as Department Stores & Malls Shrink
The retail sector is shrinking, literally. eMarketer estimates that retail sales in the United States will drop by 10.5% in 2020 and will not rebound to pre-COVID19 levels until 2022. This will cause retail sales to consolidate in the hands of fewer retailers and will negatively impact the number of malls. The types of retailers expected to take the biggest hit are department stores and clothing retailers. Clothing and accessories sales were down by 78.8% in the United States in April of this year, more than any other category.
Simon Wolfson The CEO of clothing retailer Next explained the situation clearly when he said: “no one wants to buy clothes to sit at home in.” Next has been hit hard by pandemic with its sales expected to drop by 25% this year.
Department stores are in a precarious position
Department stores have been in decline for many years and the pandemic has only accelerated their fall. Since the pandemic started Neiman Marcus and JCPenney filed for bankruptcy and many expect that Lord & Taylor will be next. Department stores have been searching for relevancy for many years with a constant stream of turnaround plans that have failed to change the fate of once storied department stores like Sears.
Part of the challenge facing department stores is that they are overexposed in the clothing sector. That might be okay if it wasn’t for the fact that Americans, even before the pandemic, were buying less clothing. In 1920 Americans spent 38% of their income on food and 17% on clothing. Today Americans only spend 10% of their income on food and even less on clothing, just a paltry 2.4%. Morgan Stanley has said that the apparel market has “hit a ceiling” and is “going into structural decline.”
Adding to that, department stores are mid-priced retailers and the middle of the market is disappearing. Consumers would rather congregate in either ends of the spectrum, luxury or low priced. If you look at the bottom end of the price spectrum you will see it littered with retailers like Walmart, Amazon, Costco and Target that are performing well.
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Malls are in the biggest fight of their lives
Malls are the unfortunate beneficiaries of all of this destruction. The United States has the highest retail selling space per capita by a wide margin and the lowest sales per square footage of any country in the world meaning that the United States has too many stores. At some point consolidation was bound to happen but no one expected it to happen at such a fast pace this year.
14 out of 20 of the largest mall tenants are either department stores or apparel retailers. Macy’s and JCPenney alone represent a little over 10% of all mall space in the United States. Once a department store falls the entire mall is at risk. One of these risks comes from co-tenancy clauses. These clauses state that if an anchor tenant is no longer there then other retailers can pay less rent or break the lease. “If the anchor tenants close stores in the mall, other tenants are likely to follow suit,” said Coresight CEO Deborah Weinswig.
Another risk is that department stores take up a lot of space. When a department store vacates a mall finding four to five other tenants to fill the space is not feasible in this environment and certainly there aren’t any new department stores looking to move in. The malls that will feel the impact the most are lower tier malls. Malls that are higher end, the ones with an Apple or a Nike store, are less likely to feel the impact of anchor tenants leaving but they are still suffering.
Mall based retailers have already started to flee. Five mall-based retailers: The Children's Place, Inditex (which owns Zara), Guess, G-III Apparel Group (which owns Calvin Klein), and Signet Jewelers announced more than 2,100 store closings within a single week earlier this month. It is estimated that when it’s all said and done between 20,000 and 25,000 stores will close in the United States in 2020. That is significantly higher than the 9,302 stores that closed in the United States last year, a year in which there was a record number of store closures. Between 55% to 60% of the store closures could occur in malls.
Many retailers have already stopped paying rent. Within enclosed regional malls in Canada, only 20% to 25% of tenants paid their rent in April of this year. “I’ve been in this business over 30 years and I have never seen anything as catastrophic or as impactful in a negative way in our business,” said Tim Sanderson, head of retail at JLL Canada, a brokerage. “It’s the mid-tier smaller-scale landlord that cannot make their mortgage payments to their lender that are going to be in trouble.”
The first regional mall in the United States to fail as a result of the pandemic is Northgate Mall in Durham, North Carolina. The owner of the mall, Northwood Retail, said: “the severe impacts of the COVID-19 pandemic, which has changed the way we live and socialize, has resulted in extreme financial difficulties experienced by a majority of our tenants and the property.”
Social distancing requirements which reduce the capacity in stores and malls even once the pandemic is under control means that retail sales are likely to languish until a vaccine is found. "We expect..the number of malls may eventually decrease to 800 or less from 1,200," said Cowen Analyst Oliver Chen.