Whither Retail Apocalypse //or can we blame Amazon?

Bad news all over again

The worldwide retail apocalypse continues to swallow new victims, as nine US retailers faced bankruptcies in 2017, with even more expected to come in 2018.   J.C. Penney, RadioShack, Macy’s, and Sears have each announced 100+ store closures. The Sports Authority liquidated, and Payless filed for bankruptcy.  Popular and iconic apparel brands including Lululemon, Urban Outfitters, American Eagle, and Ralph Lauren all announced downsizing efforts to minimize costs.  We also don't need to go far back down the memory lane to remember retail icons such as RadioShack, Circuit City, and Blockbusters, many of which fell prey to private equity debt burden.

Similar story is unfolding in Indonesia: a number of prominent Matahari Department stores have closed down due to productivity issues.  In 2017 food-centric retailer 7-Eleven closed all of its 161 convenient stores after eight years of operations, citing poor store productivity, competition from ubiquitous Alfamart and Indomaret stores, and the 2015 nationwide ban on alcohol sales in minimarkets.  Problems also plague down-market department store chain Ramayana, which closed 8 stores in various metropolitan areas in 2017.

Let's talk about the various change factors.

1. Dramatic change in consumer behavior

The most important factor is the shifting consumer consumption patterns.  The millennial generation generally has more limited resources, but when they do spend, they'd rather spend on experiences (vacation, travel, health spending, meals out) – basically stuff you can show off on Instagram without looking pretentious.  They don’t want to spend on material objects like housing – because they'd prefer to be mobile and don’t want to be tied down.  They don’t want to buy cars – because there’s Uber/Gojek/Grab-Cars.

The impact hits the broader consumer segments significantly.   The Toys R'Us bankruptcy, in which it plans to close 800+ stores in the US and 100+ in the UK, is a good lesson on changing consumer behavior: today’s children and teenagers were shaped by smartphones, social-media apps, and living-room bingeing.  Yes, this correlates with upticks in teen depression and anxiety, but it also depletes the market for hardware toys.  In the last year, Lego, Mattel, and Hasbro have all reported declining sales for key toy brands.

What’s up? Travel is booming. Hotel occupancy remains robust, despite intense competition from home-sharing platforms (Airbnb).  The rise of restaurants is even more dramatic. Since 2005, sales at “food services and drinking places” have grown twice as fast as all other retail spending. In 2016, for the first time ever, Americans spent more money in restaurants and bars than at grocery stores.

2. Online does have impact

Amazon in the US and Europe is dominant, true.  But the claim that consumers don’t spend on retail because of online stores is dubious – take Indonesia, where the value of online shopping is still way too small (~1%).   The real issue is that the internet has made for savvier consumers: (especially with bigger-ticket items) they study product reviews, watch unboxing videos, discuss products in forums or with their friends; consumers are often more knowledgeable about products on sale than storekeepers!  Knowledgeable consumers not only compare prices to find the best deals, but they also spend less time in physical stores and do less window shopping, avoiding impulse purchases along the way.

3. There’s just too many dang malls

The oversupply in Indonesia is longstanding, where Jakarta, with its 173 malls, has banned new construction since 2011, citing overcrowding, concerns on traffic jams and lack of public space. Outside of the Jakarta province, including in Greater Jakarta area, however, the pace of construction has not been affected.

In the US the situation is odd, to say the least.  As everything from once-mighty department stores to niche clothing chains announce plans to shutter hundreds of locations, and retailers file for bankruptcies at a record pace, builders continue to pour growing sums into retail projects.  Across the country, construction spending on shopping centers topped $1.6 billion in June, the largest amount since 2008 and the Great Recession. In nominal terms, mall construction numbers record the second highest monthly total ever according to Census data, coming in behind July 2008.

Is traditional retail going the way of the dodo? Where is it going to end?

I reckon brick-and-mortar retail is going through an uncomfortable dislocation, which may take a little while longer, but retailers will eventually find its comfort zone.  For instance, fashion retailing is still going to live, as fashion e-commerce still has its set of challenges, such as branding and fit.  Similarly with fresh groceries, for which online stores face difficult (though definitely solvable) logistical hurdles, although physical stores have their own set of problems (e.g. debt, competition, and diminished buying power).  High-end goods, including electronics, will likely transform their retail presence into experience-stores akin to Apple Store.

Other retail segments, such as department stores, is probably going to end up much, much smaller than it has been in the past.  Bloomberg cites railroads as a historical example -- it didn't go extinct when people started using cars, but it saw its usage become specialized.   There's already evidence that specialized stores that cater to a specific niche, either premium (e.g. Whole Foods) or value-focused (e.g. Dollar General), tend to outperform those using balanced approach -- something Deloitte coins as "retail bifurcation" as opposed to broader "retail apocalyse".