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Thursday, June 19, 2014

Is Retail Dying in the U.S?

In recent weeks, I seem to be reading a surprising number of Cassandra style forecasts of the impending death of retail in the United States. Also, a few Media Realism readers have written to me echoing the same sentiment. All seemed to be using the same basic factoids to come to their gloomy conclusion. The list usually includes some combination of the following:

1) There are 100,000 shopping centers and strip malls in America.
2) They contain approximately 1 million stores.
3) The one million stores comprise 15 billion square feet of retail space.
4) The retail space works out to 47 square feet for every person living in the U.S.
5) Our per capita square footage devoted to retail is up to eight times that of other industrialized countries.
6) Over the last 20+ years the median household income has dropped from $56k to 51k but retail space per capita has jumped from 19 to 47 square feet.

I have checked and doubled checked the above numbers and most seem quite close to sources that I respect.

Most analysts that I read plus all of my readers who contacted me are forecasting a big shakeout in retail and a rough patch for the next few years for commercial real estate as more shopping centers have empty space and tenants negotiate harder on their leases.

Interestingly, no one seems to be mentioning on line shopping which would strike me as the biggest threat to brick and mortar retail. When I talk with local broadcasters (not local cable players who often deal in portions of markets), they are having a hard time getting long time retail spenders to maintain budgets consistently.  Some blame it on the struggles of suburban, middle class families while others say that online shopping is largely to blame.

There is no question that retail has always been a tough game and it will get even more difficult. The square footage figures cited above indicate that in certain parts of the country there is definitely some over-saturation of retail outlets.

When people dismiss problems and talk of Whole Foods, Michael Kors, Tiffany and Nordstrom they forget that upscale retailers take up only about 1% of total retail square footage in the country. And, their yield per square foot has to be much higher than the vast majority of players.

So, we have a glut of retail space. And, players in retail need to do even more careful risk assessment than ever. Will these issues disappear if the economy starts to consistently deliver 4%+ growth quarter after quarter?

Probably not as the shopping experience is shifting. Some people think that retail will dry up and blow away as on line shopping gets stronger (on line consistently has grown at double digits in recent years regardless of the strength of the economy). Many, however, still love to “touch and feel” items before they buy them. While on line players facilitate returns, it still remains a time consuming nuisance.

And, customization is morphing in to new shopping experiences. Do not be surprised if within a decade, you can visit a retail outlet and pick out or design attributes of a running shoe, for example. Exact measurements will be taken and, in a few days, you will have shoes exactly as you wanted them and they will fit PERFECTLY. Due to tech gains, the price differential may not be significantly higher than off the shelf entries.

As I am fond of saying, markets always go to extremes. So, it appears that retail was overbuilt. Retail like media will evolve a lot in the next 20 years. And, it is a sure bet that retail will use less conventional media than ever to support their locations.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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