Archive for the 'The Economy' Category

What to do about all that excess space?

U.S. retail has historically been “over-stored” but never more so than right now, with an escalating wave of brick-and-mortar closures. The question for mall developers (addressed in the following RetailWire comment) is: What to do about it?

The U.S. has for many years had far more retail square footage than any other country: 25 to 50 sq. ft per capita (depending on how you measure it) compared to 2.5 sq. ft. per capita in Europe. It’s apples and oranges but it still illustrates that the “overspace” problem in the U.S. existed long before e-commerce put additional pressure on all that space.

The residential real estate market deleveraged after the Great Recession but retail real estate is unwinding at a slower pace. And all that footage in shopping centers is not going to be gobbled up by traditional department stores or mall-based retailers, who already have too much space. The challenge is how quickly the space can be redeployed for food, drug and discount retailers who might actually need the added locations.

And a few more comments from a more recent post:

There is still room for traditional department stores as mall anchors, but they need to be relevant to the consumer as well as consistent with the profile of the overall tenant mix. But the old paradigm of two traditional stores, Sears and Penney just doesn’t cut it anymore, and is undergoing well-deserved “creative destruction.”

Part of the challenge for the anchors that remain is to spend some money on new paint, floor treatments and lighting! Even at a showplace mall like University Town Center in La Jolla, where Nordstrom is relocating to a brand-new building this fall, Macy’s in particular stands out as a bad example of lack of capital spending. You can only go so far blaming the “death of bricks and mortar” on e-commerce if you’re not willing to keep your house in order.

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Another over-forecast by the NRF

Retailers are optimists by nature, but the NRF seems to deserve a prize for blue-sky forecasting on a consistent basis. This time, the NRF has projected an 11% increase in Back to School sales, and they issued their forecast before most retailers reported lackluster 2nd quarter sales. Here’s my comment, from a recent RetailWire panel discussion:

What jumps out is the 11% increase forecast by the NRF. The NRF’s forecasting is consistently too high (retailers are chronic optimists) but this number is really over the top. Yes, retail spending seems to be normalizing but there is little evidence — at least from general merchandisers’ 2nd quarter sales results — that consumers are going to be delivering these kinds of increases. And within those sales gains — whether they are really 11% or more realistically in the mid-single digits — you can expect to see Amazon and other online retailers continuing to gain share at the expense of brick-and-mortar stores.

Second half outlook getting shaky?

I wrote the following post on RetailWire in late July, as the NRF revised its sales forecast downward for the second half of 2015. This preceded the various market disruptions in August and early September that have probably put a dent into plenty of consumers’ 401k accounts (and their sense of well-being). Here’s my commentary:

I didn’t buy the overly optimistic NRF number in the first place, and even 3.5% for the full year may be on the high side. If you assume a 40/60 split between first half and second half sales (and 40% may be too low for some retailers), you would still need to hit almost 4% growth in the second half to achieve the forecast for all of 2015. It’s hard to see where 4% growth is coming from, based on the first-half trend.

For all of the positive macroeconomic metrics (especially the unemployment rate), we are living in an “age of anxiety” as far as overall sentiment and consumer spending are concerned. (Just look at the “right track/wrong track” survey results.) Not sure how to explain it, but retailers are showing some signs of strain as a result.

Higher wages at Walmart: What’s the driving force?

Walmart (and some other retailers) recently announced starting wages in the $9-$10/hour range, depending on experience. The sheer size of Walmart helps redefine the “minimum wage” for the marketplace in an era of rising competition for opening-wage workers. But it’s not just about the falling unemployment rate, but also about the very real need for Walmart to improve its service levels.

Here’s my comment from a recent RetailWire discussion:

I agree with the comments about service as an underreported part of Walmart’s problems. Think about the issues discussed recently on RetailWire, regarding the challenges keeping fresh meat and produce on display, in a “lowest common denominator” service environment like Walmart.

The announcement yesterday about higher wages is a tacit acknowledgment of this problem, especially heading into an era of higher employment and labor shortages. It’s not accident that some of the highest-paying retailers (Costco, for example) have higher satisfaction ratings among both shoppers and associates. Maybe Walmart is finally figuring this out.

Too early to be bullish about 2015 sales

The National Retail Federation issued its full-year forecast at its annual gathering in January. The NRF is projecting sales over 4% for the full year — which, in my view (per the following RetailWire comment), is on the high side:

As usual, the NRF is very optimistic (too much so) about a year that has just kicked off, and not with the greatest sales momentum so far. While improving employment numbers and low gas prices continue to provide tailwinds, there is still not enough evidence that consumers are spending at the rates the NRF suggests. (Usually they hold their optimism for their holiday forecast.)

Shoppers continue to be very selective about where they spend their money: No problem buying the latest iPhone in huge quantities, but this kind of purchase takes customers out of the market for a lot of other goods. So the joy among other electronics, home goods or softlines retailers may be a little more muted than the NRF suggests.

Cuba: How soon an opportunity for U.S. retailers?

Without veering into political comment, surely one of the biggest news stories in recent months is the more open relationship between the U.S. and Cuba. It’s interesting to reflect (as in the following RetailWire comment) on what this means for American┬ámarketers:

The chance for American retailers and brands to capture market share in Cuba depends on its residents improving their standard of living in a dramatic fashion. Low take-home pay and other standards of living make it hard to imagine a thriving trade in discretionary goods anytime soon. Last week’s policy moves open the door just a bit, but real progress is going to take years.

Frankly, it’s going to take a regime change committed to economic development even under the umbrella of a so-called “Communist” regime — similar to what has happened in China over the past 40 years — before you start finding a branch of the Gap on the Malecon.

The NRF’s rose-colored glasses

RetailWire panelists are usually careful to leave their political views out of the daily discussions, but the current government shutdown (in day eight at this writing) is a hot topic. The context for the discussion is the National Retail Federation’s forecast for a 3.9% increase in holiday sales compared to 2012. Even in an era of “business as usual,” that seems like a blue-sky number to me:

I’m cautiously optimistic that the government shutdown and debt limit fights will be resolved in the next couple of weeks, perhaps in the context of agreements about spending levels, the “medical device” tax, and so forth. So I don’t see this dragging down retail spending — however, if I’m wrong, there will be far bigger problems driven by furloughed employees, falling equity prices, and so forth.

The real question is why the NRF is projecting a 3.9% increase in the first place. This organization tends to over-forecast holiday sales every year, and all signs point to the sort of modest (2-3%) gains that we have been seeing all year.


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