Get the app today! Download iPhone App Download Android App

The Pain Ahead For Brick-and-Mortar Retail Chains

Published on Nov 16 2017 4:35 PM in Retail tagged: Trending Posts / Amazon / USA / Bricks and Mortar

The Pain Ahead For Brick-and-Mortar Retail Chains

It's been a bleak year for the brick-and-mortar retail industry. Stock prices and earnings have fallen. Store closures are being announced. The Amazon threat continues to grow, both via e-commerce efforts and now, with the acquisition of Whole Foods, as an established physical chain. But it's a mistake the blame Amazon and leave it at that.

To look dispassionately at what's plaguing the retail industry and how it can fix its problems, consider a surprising historical parallel: the airline industry.

Stagnant Period

In the 2000s, the airline industry was in terrible shape. US Airways and United Airlines filed for bankruptcy in 2002 in the aftermath of September 11th. Delta Air Lines and Northwest Airlines filed for bankruptcy in 2005, plagued by rising oil prices and competition from low-cost airlines. American Airlines filed in 2011. Anyone who suggested during that period that the industry would one day thrive would have been laughed at.

And yet, the story of airlines this decade is one of record profits. What happened? That wave of bankruptcies created space for the industry to restructure itself. Firms merged. Debts were written off. Labor contracts were renegotiated. Unnecessary hubs in places like Memphis and Northern Kentucky were abandoned. And the management teams that emerged from bankruptcy became laser-focused on shareholder returns rather than market share and capacity growth.

A New Future?

This is the future the retail industry is stumbling toward. Amazon is a big and growing presence in retail, but there's a limit to its growth. The "last mile" problem in delivering retail products, particularly outside of dense and wealthy communities, will remain challenging for the foreseeable future. Amazon's purchase of Whole Foods can be seen as an admission of this hard limit on its past business model. Wal-Mart's stock price hit an all-time high last week, showing the market realizes there's room for more than one winner in the industry.

But Amazon, perhaps analogous to the low-cost airlines that emerged in the 2000s, has changed the dynamics of the retail industry, which needs to restructure. It still has too much capacity, too many stores. In some cases -- particularly Sears, JC Penney and Macy's -- debts may be too high and need restructuring. Perhaps Sears and JC Penney are the Northwest Airlines and US Airways of retail, and won't make it to the other side of restructuring. Geographic footprints need to be rethought.

In major metro areas and wealthy suburban communities, the brick-and-mortar retail industry may not look much different in the future than it does today. Some underperforming stores may close, and existing stores in high-traffic developments may be refreshed, but wealth and density will support the industry much as it always has.

It's in second- and third-tier communities where we'll see the biggest changes, much like we did in the airline industry. Rather than these communities having a Wal-Mart and a Target and a Macy's and a Sears and a K-Mart, it may just be one or two of the five. The huge capacity reduction will allow the remaining operators to gain some percentage of the sales lost by their peers that close or shrink, and let them raise prices somewhat to increase profitability. (The Memphis airport didn't close in response to the wave of airline bankruptcies, but its passenger traffic has fallen over 60 percent over the past decade.)

Cost Management

At the corporate level, debts will be written down. Any kind of recession on the horizon would be sure to hinder an industry already struggling. Sears, JC Penney, and one or two others might cease to exist. Management teams will reset expectations with new shareholder bases and focus only on profitability and shareholder value rather than a geographic footprint that no longer makes sense.

This transition may occur rapidly, and soon. Company valuations are getting to the point, especially for firms like Dillard's and Target that own much of the real estate they operate in, that nontraditional investors may be motivated to buy in and push for radical changes to maximize shareholder value.

Whatever forces align to reshape retail, it will be a very different landscape a decade from now. [Bloomberg View, by Conor Sen]

News by Bloomberg, edited by ESM. Click subscribe to sign up to ESM: The European Supermarket Magazine.

Share on Facebook Share on Twitter Share on Google+ Share on LinkedIn Share on Tumblr Share via Email