The Encouraging Truth About Retail

If you read the mainstream media, retail is dying. Recently IHL released an updated research report titled Retail's Renaissance – A Growth Story demonstrating the exact opposite (webinar and report can be found here).

Simply stated, the mainstream media claims that retailers are closing all their stores, that online retailing is taking over the world, and it's the end-of-retail-as-we-know-it. While such a narrative can be great for clicks and pageviews, it simply does not stand up to the scrutiny that hard data can bring. Long story short, retail overall is healthy, but some specific retailers have some serious problems and there are issues in C&D malls, and innovation related to customer behavior is making the store more important than ever.

The irony about the whole retail apocalypse narrative is that while most of the mainstream press has focused on the negative and sensational, they have completely missed a huge story. The truth is that since January 2017, the US retail industry has increased sales by $565.7 billion. That's about the total retail sales in the US from 1975, the year I graduated high school. At the same time, retail has also added a net 8,575 stores, and both the retail sales and increases in store counts add up to a very healthy industry.

For our research, we used our Sophia Data Service to identify 1,660 retail chains (parents and banners) from nine separate retail segments in the US market. These chains all have 50 or more stores, with the following exceptions:

1. Banners (with less than 50 stores) of parent companies that have more than 50 stores.
2. Pure-play e-commerce retailers who are growing their brick-and-mortar presence quickly.
3. Legal Marijuana / CBD retailers who are growing their store counts as well.

Of the nine retail segments we reviewed, seven showed an increase of stores in 2019 over 2018 levels, with the final tally showing 1,065 chains reporting increases in store counts for 2019. The two segments reporting declines in store counts, namely Department Stores and Specialty Softgoods (apparel and shoes), have done so for the past handful of years.

The fact that retail overall is doing well does not mean that all retailers are doing well. Unfortunately, this is where most retail stories have focused. Just 20 companies represent 75% of all net closings for 2019, a figure that is up dramatically from the 53% we saw in 2018. In fact, it is clear that 2018 was a peak for companies who decided to close stores and 2019 is a year of growth for most retailers.

Some Key Results from the Research

• In 2018, 675 retailers showed an increase in stores. For 2019, this increased 56% to 1,065 chains.
• Chains closing stores peaked in 2018 at 612 chains. This dropped 66% to 206 chains for 2019.
• For 2019, retailers have announced 2,965 more openings than closings.
• Since January 2017, Department and Specialty Stores have closed a net 9,651 stores. All other segments combined for a net increase of 18,226 stores.
• For every chain with a net closing of stores, +5.2 chains are opening stores overall.
• Food/Drug/Convenience/Mass Merchants +9.5 stores opening for every chain closing
• Apparel/Hardgoods/Department Stores +3.7
• Restaurants (Fast Food and Table Services) +6.3

Retail is healthy overall, but there are those individual retailers that are in trouble, and they are limited to a relatively small percentage of the overall population. In fact, there are tell-tale signs of retailers who are struggling or gone bankrupt. Most specifically, the companies are leveraged by too much debt for overexpansion (often by shortsighted private equity). For instance, the tale of a company like Toys R' Us was that it was leveraged with $7 billion worth of debt. This tale has been repeated over and over with Wet Seal, Limited Stores, and others

The mainstream media has focused almost exclusively on those retailers in trouble and has used their situations as a proxy for all of retail. To that we say "Nonsense!". The data does not support the headlines.

Also an important thing to keep in mind is even good retailers close stores each year. Reviewing each store in one's chain on a regular basis enables underperforming stores to be identified and dealt with (invest vs. close).

To avoid being a part of the small percentage of retailers that are in dire trouble, IHL recommends the following:

1. Review your business model regularly to account for changes in demographics, consumer behavior and technology.
2. Keep your debt under control in order to maintain flexibility to respond to changes in the market.
3. Keep your store counts within sustainable levels. Don't build it simply because the mall is there.
4. Mind your stores and fix your out-of-stock problems. Consumers shop stores because they need products now or need more information / experience. You must be in-stock or you will lose those customers for good.

Retail does not have a systemic overall problem, it has a specific retailer problem. The positives are everywhere, the challenges specific and focused. Without question there are many challenges for retailers today, but overall the state of the retail industry is strong.