By Garrick Brown, Vice President of Retail Research, Americas
So where do I even begin… First, I want to thank all of you that stuck with the Newsline while I was out. I got plenty of emails asking where I was and probably a hundred newbies asking for subscriptions, but not a single cancellation. Of course, that could be a sign that the real value of this compendium is the news coverage itself and not my analysis or observations. My wife’s theory runs along those lines, “People were probably just happy to have you shut up for once.”
That said, there is no downtime in the retail news cycle and in the age of newCommerce, the changes, disruptions and innovations are coming at us faster than ever. So I would like to thank my staff, in particular, Michael Patrick and Pam Flora for keeping the Newsline coming while I was out. I don’t want to get into too many details, but the long and short of it is that I got sick and ended up being in the hospital for a while. That said, I am doing fine now. I feel great, lost a bunch of weight and probably the happiest I have ever been. Thanks for all the warm wishes while I was out. It’s really good to be back.
While I was out we saw a couple of huge stories break. The long awaited Walgreen’s/Rite Aid merger didn’t quite happen as planned. If you remember, two years ago Walgreens was looking to buy Rite Aid outright for $17 billion. Instead, the deal that was approved by the FTC last month was a $4.4 billion deal for Walgreens to buy 1,932 stores as opposed to the entire chain. Instead of being gobbled up, Rite Aid will remain standing (at least, for now) with roughly 2,600 locations.
So what does the deal mean for commercial real estate? Well, for starters it means near parity in terms of size for CVS and Walgreens. Both will now be operating roughly 10,000 stores each. But more importantly for landlords and net lease investors, it means that the likely consolidation of redundant locations that would have happened with an outright merger will be seriously mitigated. Two years ago when plans for a merger were announced, we looked at the Walgreens and Rite Aid portfolios and saw that there were about 3,000 competing locations that were within one mile of each other. A significant number of those likely would have eventually been shuttered with a flat-out merger, with older, larger format Rite-Aid’s bearing the brunt of it. I have not yet seen a list of the actual locations that Walgreen’s is buying but it is a safe bet that the number of redundant locations is likely not high. From a real estate perspective, the best outcome for landlords all along was not for a merger and all the synergies that come with it, but for there to be multiple, competitive parties involved.
But we might not be done with this saga. Even reduced to 2,600 stores, Rite Aid’s place as the third largest drug store chain in the United States remains the same. One would think that the cash infusion of $4.4 billion, which will go a long way towards solving the chain’s lingering debt issues from the early 2000s would have gone a long way with Wall Street. Yet, it hasn’t. After an initial surge when the deal was announced, Rite Aid stock has fallen steadily since and some analysts have gone with the “left at the altar” narrative. Meanwhile I have also continued to hear rumors from some of my friends in the investment community that some sort of deal for the rest of the company may be in play with everyone from private equity players to “you know who”. I suspect this is all just speculation, but if the stock continues to drop, Rite Aid may prove to be an incredibly undervalued asset and a bargain for someone in the marketplace.
Another big story that broke while I was out was the bankruptcy of Toys R Us. Whether or not the toy giant will be able to restructure roughly $5 billion in debt is unknown, but its collapse could have an impact that would ripple throughout the toy world. The chain owes Mattel alone $136 million. Hasbro is owed nearly $60 million. Lego is owed almost $32 million. Most of the retailers who have sought bankruptcy protection to restructure their debts in this latest cycle have ended up in liquidation. There have been a few exceptions (like Gymboree who emerged about two weeks ago with 350 fewer stores and $900 million less debt), but for the most part retail bankruptcy in 2017 has been like the old ads for Roach Motels; “They check in, but they don’t check out.” Toys R Us might be an exception simply because of the sheer amount of debt they have. Simply put, the toy manufacturing industry needs them to survive and toy manufacturers make up eight of their top ten creditors. There is no doubt that competition from Amazon and Walmart have played a role in the struggles Toys R Us has faced, but the company’s real problems stem from the massive amount of debt its private equity owners piled on. The chain has just over 1,900 stores, the average size of which is 35,000 square feet in the United States (combination Toys and Babies R Us stores run 50,000 square feet). Ramped up closures are a given, but it is too soon to tell how many. If creditors can work with them, it may be just a few hundred. If not, look for a very ugly liquidation and for a ripple effect of toy manufacturer bankruptcies.
Speaking of bankruptcies, Sears Canada went down over the last few weeks. Like so many other retailers looking to restructure, Sears Canada was unable to do this or to find a buyer. The result is total liquidation and the closure of over 130 stores north of the border. Some of their real estate was solid and won’t have much of an issue eventually finding a tenant. Likewise, Canadian landlords should find success backfilling this space utilizing the same strategies that we have seen American landlords use to backfill vacant U.S. Sears locations; demise, demolish, redevelop. Plug in entertainment, experiential or discount apparel retailers. You name it. But the same problem remains in that this becomes a much more difficult task to accomplish once you get away from the Class A malls. The further down the food chain you go, the harder it is. If there is one silver lining for Canadian landlords on the demise of Sears north of the border, it’s that at least Canada is nowhere near as over-developed (oops… I mean under-demolished) as the United States is. But no doubt this is the worst retail news since Target withdrew from Canada a few years ago. In the meantime, those of us in the States can only watch and wait… wondering if the demise of Sears Canada is simply foreshadowing for what awaits their American parent here in the coming year.
I was going to talk about the new Nordstrom store on Melrose in Los Angeles this issue, but I am running out of space. A crew of my people checked it out during ICSC Western Region last week and came back with their report card. But I am actually going to be down in Hollywood this weekend so hopefully can give you a full report with pics. That said, I can tell you already that this is the store of the future… kinda. Let’s just say that variations of what Nordstrom is doing in their little 2,000 square foot boutique will be one of many new formats that I think you can expect to see over the next couple of years. More to come…
By the way, here are some links you might find useful…
Check out our new U.S. Macro Forecast Report.
Click here for our Q2 2017 Global Research Marketbeat Reports. Just scroll over the world map and pick a continent. Click on North America, find your market on the map and click on it to find the most recent reports covering various property types.
Additionally, you can find our recent report on the Craft Brewing trend and its impact on retail and industrial real estate. Click here to check out The Craft Brewing Revolution and our latest Cool Streets video. In this episode I tour Cincinnati… a town where craft brew rules and has also been a driving force in urban renewal—especially in the super cool Over-the-Rhine neighborhood.
Our Main Streets across the World Report tracks high street retail around the world and breaks out the globe’s premier shopping districts by continent and average asking rent.
Cool Streets of North America Report and accompanying video series.
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.