N. David Milder
Since 2009, the Downtown Curmudgeon has been writing about the “new normal” that has emerged for our nation’s downtowns. One of the most important features of this new normal is the great changes occurring nationally in retailing that are having significant impacts on downtown retail growth potentials. While such growth is still possible, for many downtowns, the changing nature of our retail industry has made it much tougher to achieve.
A follow-up article will investigate how these retail changes are impacting different types of downtowns in different ways. The attention here will be on those retail industry changes.
The Reduced Demand for Retail Space
For downtowns, one of the most important changes is that retail chains, especially those in the GAFO category, are looking for far fewer new store locations than a decade ago and the new stores are significantly smaller than those constructed in the years before the Great Recession. In other words, the demand for new retail space by national and regional chains has diminished substantially. Mall construction has fallen to a trickle, while 15% to 20% of the existing malls are in danger of closing. Within the commercial real estate industry there is finally a recognition by many that, nationally, we just have too much retail space – the US has about five times more shopping space per person than any other nation. Significantly, the retail chains now are only looking at proven strong locations that offer minimal risk. In effect, this means that most downtowns – not the wealthiest and most successful — have been demoted by the chains as potential locations for their stores.
The Deliberate Consumer
One prime driver behind this reduction in retail space demand is the emergence of the “deliberate consumer.” Their more prudent spending has impacted retail sales and consequently the demand fro retail space. For over a decade prior, the earnings of middle-income households had been stagnant and the Great Recession brought about a very significant change in their consumer behaviors. These middle-income consumers bought less and became more cautious about what they purchased, giving much higher priority to needs than wants. They also paid down their credit cards and became more circumspect about using them. The strong recession even encouraged members of more affluent households to spend more prudently. In more recent years, employment prospects, incomes and the overall economy have improved and some increased consumer spending has followed. However, cautious purchasing behaviors are still seen, mostly in middle-income households, though also to a lesser extent in households in the $100,000- $250,000 income bracket.
In a large number of metro areas, the middle class is shrinking significantly in numbers, while the numbers of those with higher and lower incomes are growing. This has obvious impacts on retailers – middle market retailers are languishing and disappearing as consumer incomes polarize.
Those in the top quintile of household incomes account for a disproportionate share of our nation’s consumer expenditures. Although they account for 20% of the households, in 2015 they made 40% of the consumer expenditures for food away from home, 41% of the furniture and home furnishings expenditures, 44% of the apparel expenditures and 42% of the entertainment expenditures (see the above table). The lowest three income quintiles, composing 60% of all households, only accounted for 35% – 37% of the expenditures in those retail product categories.
Another factor threatening to suppress retail demand is the emergence of Millennials as our largest age cohort. Millennials are more interested in experiences than things and they spend much less on retail than the Baby Boomers did at a similar age.
The other major influence on the reduced demand for retail space has been the growth of e-commerce. According to the Census Bureau, in the second quarter of 2016, e-commerce only accounted for a small portion of the nation’s total retail sales, 7.5%. (It was 3.9% in the 2nd quarter of 2010.) However, as shown in the table below, when we look at sales by retail product category, e-commerce’s market share is often significantly higher. By 2013, 79.5% of the sales for music and videos, 44% of the sales of books and magazines, 32.9% of computer hardware and software sales and 28.8% of toys, hobbies and games were transacted on the Internet. The product categories least impacted by e-commerce are drug, health and beauty products, 4.7% of sales, and food and beverages, 9% of sales.
E-commerce is capturing surprising amounts of sales even in categories that have large, hard to ship products such as electronics and appliances and furniture. The research by Hortac?su and Syverson indicate that, if trends continue, these product categories will have 50% of their sales transacted online in 2017 and 2022 respectively. E-commerce also has made surprising inroads in the clothing, accessories and footwear category, where seeing, touching and trying on the products are supposedly so important, 14.9% of sales. Moreover, it is projected to capture 50% of this category’s sales by 2024, if current trends hold!
Significantly, while e-commerce has only captured about 17% of the sales for office equipment and supplies, Staples has been closing many stores and downsizing many others. Similarly, while e-commerce has only captured about 15% of the sales of clothing, accessories and footwear, many apparel firms have been hard hit. Chico’s, for example, closed 120 stores in 2015 and has been busy trying to strengthen its online presence. American Eagle is in a similar position.
That’s a lot of sales potential being taken away from downtown retailers – unless they, too, also can compete on the Internet.
Additionally, research has shown that the Internet is involved in at least 45% of all retail purchases. Many people, for example, now research the products they want and the shops that sell them before they go out shopping.
Some Green Shoots
However, the green shoots of a counter trend have surfaced – e-commerce retailers such as Amazon, Harry’s, Warby Parker, Bonobos, Blue Nile, and Birchbox have opened brick and mortar stores. Warby Parker has 32 locations and Bonobos has 20. Amazon just opened its first, whether there will be more remains to be seen. (It has taken a large space on 34th Street in Manhattan, but it’s not yet clear what it will put in there.) Also, it is de rigueur among today’s retail experts that a multi-channel approach, including both online and brick and mortar stores, is the key to success, so more brick and mortar stores opened by online retailers can be expected. The key question is how strongly will these green shoots grow?
Two positive characteristics of the new normal for our downtowns are that a lot of their revitalization efforts are successful and there is now the expectation that most of them can be vibrant and economically healthy places. However, this success has usually led to significantly higher commercial rents. Small retailers, who already have long been plagued by difficulties in raising capital and operating funds as well as burdensome municipal regulations, now often are facing unaffordable rents. In other instances, rents have been declining or holding steady. The critical factors seem to be whether retail chains are entering or leaving the downtown and whether new retail spaces are being constructed.
How Are the Retail Chains Doing?
Among the retail chains, department stores (e.g., Macy’s, Sears-Kmart, Kohl’s, JCPenny, Nordstrom, Bob-Ton) are flailing and have closed many stores. They are not only fighting the ever growing e-retailers, but also the off-price retail such as TJ Maxx. Macy’s is even trying to create in-store off-price operations. All are trying to buttress their own e-commerce operations.
Specialty stores (e.g., American eagle, Chico’s, The Gap, Talbots, Coach, Abercrombie & Fitch, Eileen Fisher, Williams Sonoma, Crate and Barrel) have also been closing locations and/or struggling to develop strategies suited to their new retail environment. They, too, are challenged by the e-retailers. The more traditional specialty chains in the women’s apparel sector have really been struggling as they compete with:
- Foreign low-price, fast fashion operations such as Zara and H&M.
- Off price, value –oriented and low prices chains such as TJX, Burlington Coat, Filene’s Basement, Ross, Stein Mart, DSW and the low priced dollar stores/ These have been strong post-recession performers.
Value oriented outlet malls are likewise strong performers. Indeed, some department store chains have developed their own off price/outlet chains, e.g., Nordstrom Rack and Saks Off 5th.
Supermarket anchored shopping centers are showing significant strength.
New 25,000 SF Target in an Affluent Residential Neighborhood About a Half Mile From Chicago’s Michigan Avenue’s Magnificent Mile
Large big box chains are plodding along, trying hard to adapt to the Internet competition and doing better where their locations’ grocery offering are robust or if they are in the home improvement sector. Walmart and Target are focusing now on using smaller formats to enter dense urban markets (see above photo), but they have rejected their use in sparsely populated locations. For example, in 2016, Walmart announced closing 154 stores, 125 of which were in the smaller Walmart Express and Neighborhood Market formats; they were disproportionately located in low-income, low-density areas.
With consumers making far fewer “trading up” purchases, mass luxury retailing has weakened, though true luxury brands are still doing better than most other retailers.
How Are the Small Independents Doing?
Systematic research on how these retailers are doing under the new normal for our downtowns is hard to find, so I must rely on my field observations and interviews:
- Here in Kew Gardens, NY (a village in the big city) lots of the small retailers closed during and soon after the Great Recession. However, the vacancies have slowly been leased and more often than not by far stronger operators. Lots more food and beverage establishments and dollar store type operations.
- In many parts of Manhattan, rising rents and the great recession have forced small GAFO merchants to completely disappear. Similar patterns were observed in many other large cities we visited.
- On the other hand, in many smaller downtowns, often those with few or no GAFO retail chains, a surprising number of independent apparel shops are to be found (e.g., Morristown, NJ, Woodstock, VT, Great Barrington, MA). Some of them survived the Great Recession (a few quite surprisingly), while others opened more recently. Before and during the Great Recession, downtown independent apparel merchants appeared to be a dying breed. Why the apparent turn around? One hypothesis: not only the absence of apparel chains in their downtowns, but also their absence and/or weakness in their larger trade areas? To some degree, the growing weakness of national chains’ brick and mortar stores appears to be giving small independent retailers the opportunity to capture more customer expenditures.
- I am seeing more and more millennial small merchants who from the get-go are adept at using websites and the social media. The problem of Internet inept independent merchants seems to be naturally “aging out.”