By Garrick Brown, Vice President of Retail Research, Americas
The repercussions of the Green Street “Mall Sector Special Report” continue to undulate through the industry. I spoke about this in the last issue of the Retail Newsline and it appears that the impact of that report is snowballing across the sector. I will get into that momentarily, but first I have to say that I was ecstatic to find this article on CNBC.
It’s no secret that the best writing, best acting and best directing (arguably, if your idea of directing moves beyond big explosions and special effects extravaganzas) is all on television nowadays. And one of the best (smartest AND funniest) shows that is on the air currently is HBO’s Silicon Valley. Mike Judge’s skewed satire of the tech industry is consistently hilarious and rarely is far off the mark. A couple of episodes back one of the characters on this show uttered a line that immediately struck me as instantly iconic…
The line came as one of the main characters (now Chief Technology Officer for the firm he created) argues with the CEO his investors have newly installed over him as to what the primary product of the company should be. The CTO believes it should be the innovative and potentially groundbreaking technology that he and his team have created.
The CEO sets him straight; “(Our) product is our stock.”
This is the reality and the challenge for any publicly traded company.
Is the Gap’s product clothing? Or is it the price of its stock?
Think about the challenges of being the CEO of a publicly traded retail company today. Not only do you have to perform the incredible tightrope act of connecting with fickle consumers whose tastes continually evolve, but you have to do so while being micro-scrutinized by your investors… who tend to have extremely short memories and usually lack the patience for any sort of significant long-term planning or investment that doesn’t immediately put some returns back in their pockets. And that is the difficult job of being a publicly traded retail CEO in good times.
Now add into the mix two massive shifts in the retail landscape… the rise of e-commerce and the continued frugality of the American consumer and you see that it isn’t necessarily all that enviable a position to be the CEO of a publicly traded retailer right now. This is because even if you have an excellent plan for dealing with all of these challenges and navigating all of these minefields, there is no guarantee that the investors on Wall Street will either agree with your vision or (more likely) have the patience for it. And Wall Street tends to want what it wants… when it wants it.
And so let’s get back to that Green Street Advisors report that I believe marks a turning point of sorts…
The report essentially found that in order for department stores to return to 2006 levels of sales productivity that the sector as a whole would basically have to close 20% of all existing U.S. locations. It basically reported that department store sales have been on the decline for years with this sector increasingly losing market share to online players and other retailers but that department store operators have been too slow in reducing their footprints. The report also acknowledged that while department store anchors are still an important component of mall health, their role as anchors has diminished as other traffic drivers have emerged and so the impact of more closures on Class A malls (which they refer to as “the survivors”) would actually be a long-term positive.
Let’s start with the obvious question… Do I agree with the Green Street assessment that 20% of all mall department stores need to close in order to return to 2006 levels of sales productivity?
The numbers don’t lie. It is what it is…
In fact, I don’t disagree with anything in the actual report, though there are a few things where I see some problems.
One problem I see is the idea of picking 2006 as the year to return to in terms of sales goals. Sure, it fits nicely because it was exactly ten years ago and it also happened to be at the peak of the last cycle… and those of us who are analysts tend to love using our peaks as benchmarks. But remember, from about 2002 to 2006 we had a couple of things going on that were helping to drive some really strong consumer spending numbers that probably won’t be replicated any time soon (at least I hope not). Consumer spending numbers got a huge boost during those years from shoppers on a credit binge… not just in terms of credit card use, but from the strong (and ultimately destructive) trend of homeowners using their homes as ATMs via refinancing. Those were factors that helped to build up to the crash of 2008, both in terms of worsening and deepening it. While I am sure just about everyone with Macy’s stock would love to see their sales productivity back to 2006 levels again, I just don’t believe that 2006 levels were even close to being sustainable in the first place.
Would it be better if Green Street had chosen for their benchmark 1996 levels or some other random year within a recent growth cycle? Say 1999 or 2000? Perhaps but I would suspect it would not impact the findings much simply because department stores had much more market share back then anyway. But it doesn’t really matter if we are talking about 18% of stores needing to be shut down vs. the 20% of anchors called for in the report.
The reality is that nearly every major department store chain out there was already working on plans for right-sizing their footprints and most have been dealing with numbers that align with what Green Street recommended. The challenge is one of timing. Most retailers have been proceeding with strategies that have tried to focus on closing underperformers as leases expire so as to minimize costs. Pulling out of a lease early is not all that easy and it can be extremely expensive. And Green Street was right in that this process is probably moving a little too slowly.
Truth is, there isn’t anything I really disagree with in the Green Street report… my big concern all along has how Wall Street would respond. My assumption has been that it would be with a strongly notched up sense of impatience with retailers going through this process and that pressure on publicly traded chains (not just the department store guys) to speed the process of their e-commerce right-sizing would ramp up considerably.
Heading into this year I had cautioned that retail closures would be at their highest levels since 2010 (back when we were just emerging from the Great Recession). But I had initially assumed we would be looking at heavy closure levels throughout the first quarter with those announcements starting to taper off by about halfway through the second quarter. Not now.
Only a few days after the release of the Green Street report, Deutsche Bank analyst Paul Trussel strongly urged The Gap to close another 175 stores for pretty much the same laundry list of issues cited in the Green Street report. The Gap released weak sales numbers yesterday… and promised to “streamline” operations.
Does this mean that they will be closing 175 more underperformers? They haven’t said… yet. But it is clear that the pressure is there. The pressure is there and it is building for most of the apparel and department store players. Wall Street wants more closures and it wants them now.
Does it matter that rushing these closures might turn out to be an extremely expensive proposition to retailers as they attempt to pull out of long-term leases? Not to Wall Street, but it should.
Do I believe that we will see another round of retail closure announcements coming this summer? I think you can count on it.
Do I think this will impact even Class A malls? There won’t be many closures hitting the trophy properties… the few that happen will still be backfilled. But there will be a strong indirect impact in terms of weakening the tenant pool. But the picture is only going to get worse for Class B and C malls and lifestyle centers.
Do I think this trend will spread beyond the just the publicly traded apparel and department store players? I think you are going to see growing apprehension for any publicly traded retail but it depends on the sector.
Do I think that this trend marks the beginning of the end for this retail cycle? That’s a complex one…
I will give you the answer to that one next week with our pre-ICSC edition of the Retail Newsline. But one of the factors that will play into my answer is that I just finished gathering, reviewing and collating data for the inaugural Cushman & Wakefield North American Retail and Restaurant Expansion Guide. We will be releasing it at ICSC ReCon in Las Vegas on May 23rd but there are definitely some patterns that I am seeing that will be playing out with full force come 2017. More to come on that next week.
In the meantime, we recently released our Cushman & Wakefield Q1 2016 U.S. National Shopping Center Report. You can check it out by clicking here.
Or you can check out any of our latest research reports by clicking here.
This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing email@example.com.
Garrick serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.