The End of Brick and Mortar

By Nolan Abramowitz

A challenging competitive environment is causing American retailers to shut down their stores at a record pace in 2017. American retailers are projected to close 8,600 locations this year which would be the highest number of closings since the 2008 recession. Over the past week, Bebe Stores Inc. announced it would close its remaining 170 stores and only sell its products online. Other prominent retailers such as RadioShack, Payless Shoesource, and J.C. Penny will close 550, 400, and 138 stores respectively.

Overbuilding and e-commerce have dealt a huge blow to the American retail industry by creating an ultra-competitive landscape that severely diminishes operating margins. The CEO of Urban Outfitters, Richard Hayne, explained that over the past few decades “thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst.”

For the past few decades, many retailers incorrectly believed that consumers would always prefer to try on clothing in stores and thus continued to expand their physical footprints. Now, as of 2017, apparel and accessories are expected to become the largest e-commerce category. Helena Cawley, a young urban professional from Manhattan, points out that she used to frequent large department stores, but would now rather buy clothes online. “With free returns and free shipping, it’s so easy.” To maintain their market share, retailers have begun to increase investment into their own e-commerce initiatives. While e-commerce sales have increased to 15.5 percent from 10.5 percent of total sales since 2012, retail margins have fallen to 9 percent from 10.5 percent over the same period. Retail margins have been decreasing because online shopping has enabled customers to ‘comparison shop’ more effectively and reduce price leveraging by retailers. Additionally, it is much less profitable to do business online because of higher shipping, customer acquisition, and technology costs.

Further contributing to the problems of American retailers is the large amount of debt on their balance sheets. Moody’s has recently highlighted 19 retail and clothing companies with high probabilities of default. The 19 retailers on the list owe a combined $3.7 billion in debt over the next 5 years with a third of it due by the end of 2018. The probability of bankruptcy for these companies, which include Sears Holdings and J. Crew, is extremely high due to their limited financial flexibility. Private equity deals have also contributed to this problem as leveraged buyouts have forced some retailers to take on a lot of debt to fund their own takeover.

Despite strong competition from Amazon, some retailers have still managed to find success. Wal-Mart, for example, has been rapidly improving its e-commerce business fueled by its recent acquisition of Jet.com which has enabled it to offer millions of items for sale online. Likewise, Ulta Beauty is a chain of beauty stores that has been very successful in the American retail industry by offering both beauty products and salon services in its stores. Ulta’s high growth (23.7 percent sales increase in 2016) has been fueled by its unique business model that guarantees high foot traffic into its stores. Retailers must continue to innovate their business strategies in order to successfully compete against online retailers and continue to attract customers to their stores.