By Garrick Brown, Vice President of Retail Research, Americas
The news over the last couple of weeks has been challenging to say the least. Gander Mountain, HH Gregg, Gordman’s, Vanity and RadioShack have all declared bankruptcy. And these were just in the last couple of weeks following the earlier bankruptcies this year of The Limited, Wet Seal, American Apparel, Marbles: The Brain Store, Family Christian Stores, Bob’s Sporting Goods/Eastern Mountain Sports, MC Sports, BCBG Max Azria… am I depressing you yet?
Oh yeah, and then we heard in just the last couple of weeks about more closures. Staples, J.C. Penney, Crocs, Stage Stores, Save A Lot Food Stores, Cub Foods, King’s Variety Store, Lucy’s, Abercrombie and Fitch and a handful of others have all announced significant closures.
Even the once rock solid restaurant sector suddenly has its own rash of closures on the way. Toppers Pizza, Outback Steakhouse, Bonefish Grill, Carrabba’s Italian Grill, Fleming’s, Paul Lee’s Kitchen, Ruby Tuesday, IHOP, Applebee’s and others have all announced plans to close storefronts. Even the once bullet proof fast casual category now has seen closures announced by Noodles & Company while Chipotle is shutting down its entire ShopHouse experiment.
The news has been bleak. But don’t let the deep issues that exist within a number of specific retail categories taint your vision of what is happening in others. First off, restaurant weakness is to be expected right now following seven straight years of aggressive restaurant growth. But let’s start with the fast casual fallout. There is a solid article in our top ten this week from Jonathan Maze over at Nation’s Restaurant News. Maze is an excellent analyst and blogger who covers the restaurant scene and who is someone you should follow. In his piece, “Why Fast casual Chains are Struggling,” he tackles the challenges of a number of chains, including Jack in the Box and their fast casual banner Qdoba Mexican Eats as well as the challenges faced by Pie Five, Pollo Tropical, Cosi, Chipotle and Noodles & Company.
First, while Chipotle has faced its share of challenges lately, I put their decision to give up on their Asian fusion concept, ShopHouse in a slightly different light. When the first ShopHouse opened a few years back in Washington DC we all held our breath for a huge rollout from what was this segment’s giant at the time. It never came. A handful of locations slowly opened in a few select markets over the next few years, but the big push we all expected never happened.
The concept generally got excellent reviews and I don’t see quality of menu as having been the big problem. I don’t have any inside information, but over the past few years I have heard market speculation on this topic covering virtually every operational issue that an operator could run into when looking to launch a large concept from the issue of supplying to scale to food costs to distribution chain challenges. Outside of Chipotle, who knows the true answer? I certainly have also heard that management had concerns over the viability of this concept in secondary or tertiary markets. Maybe that is the case, maybe not. My take is that they either had confidence in the concept or they didn’t; Asian fusion fast casual is not so exotic that you need to worry about whether it would do well in Mobile, Alabama or Bismarck, North Dakota. I have a newsflash for you… those markets have seen the same emergence of foodie culture as the rest of the nation—obviously not to the same degree as some markets… but come on… chowing down on some stir fry from ShopHouse was not exactly like chowing on monkey brains with Andrew Zimmern.
No, I see this as Chipotle had operational issues they struggled with from the start when it came to this fledgling concept and that they looked at a marketplace where saturation is a real issue and they decided that trying to salvage ShopHouse was simply not worth the risk and effort at this time. I know it sounds like I am splitting hairs, but it strikes me more like a withdrawal than a defeat. And, rumor on the street is that those ShopHouse leases have already been sold to another player. I have not been able to verify this yet, but it wouldn’t surprise me as Chipotle’s site selection has always been pretty sterling. One thing I can tell you is that nothing has been said about giving up on the better burger concept that Chipotle has been developing or the fast fire pizza concept, Pizzeria Locale that they have been quietly expanding at a decent pace the last couple of years.
As for the rest of the fast casual world and emerging weakness? It is all about saturation and all categories of restaurants are now facing shakeouts. I still don’t see a restaurant recession ahead; there is still too much consumer demand and strong economics. There are also too many restaurant chains that are well-funded and looking to aggressively grow. While most are fast casual, there are some fast food chains on the make and upscale restaurants remain active (though urban cost of living and rent issues are sending the restaurant failure rate skyward currently). All of this means landlords will be facing a game of tenant musical chairs in an environment where pushing strong rent increases may drive some tenants over the edge. It also means fast changes in the types of restaurant mixes that may prove to be most successful.
Against this tableau, it is the weakest that will lose. That can be weakest in terms of product, weakest in terms of management or debt, and it certainly could be weakest in terms of real estate and site selection. This is something that is already happening and that will only likely escalate. But don’t paint the whole sector with the same broad brush. Even casual dining, which is where we see the greatest weakness, still has brewpub concepts that are nailing it.
The same holds true of retail, but the problems are certainly greater. Though many may have missed it, perhaps the most challenging headline of the last two weeks came from Moody’s Investor Services. Moody’s reported last week that the number of distressed retail and apparel concepts that they track is now moving in on recession era levels; 14% of the publicly traded retailers that they track are now showing signs of financial distress (compared to 19% in 2009). This number is climbing and will likely get worse before it gets better.
Worse yet, word on the street as of today is that a group of investors in Sears’ loans has hired law firm Kramer, Levin, Naftalis & Frankel, LLP as advisors. According to the analysts over at Creditntell/F&D Reports, “The investors believe that the Company will either have difficulty meeting its obligations or look to renegotiate terms of the loan due to its steep operating losses and cash burn. Sears has a $973.0 million term loan and a 6.625% $302.0 million Senior Secured Note maturing in 2018. With the Company adding new debt and selling assets to offset it’s nearly $1.70 billion in TTM cash burn repaying $1.28 billion in maturing debt in 2018 would be a monumental task.” Sobering news… The reality is that this current wave of closures (while primarily impacting just four or five categories) is going to be with us for a while.
As for the “bloodbath” happening in apparel and department store sectors? We are likely just in the third inning… but just remember that the “disastrous” sector of apparel also includes off-price apparel, where Burlington, T.J. Maxx, Ross, Marshall’s, Nordstrom Rack, Macy’s Backstage, Saks OFF Fifth, et al are all putting up record sales figures and are in aggressive growth mode. This sector also includes fast fashion giants H&M, Zara and Forever 21—all in growth mode along with other fast fashion categories. It also includes the luxury apparel sector where we are seeing growth, albeit at levels that are below historic norms. But it is growth and not contraction. Will the expansion of these concepts match the contraction of others? No. But what this batch of growth retailers will do is completely change the lay of the land for malls in terms of tenant mixes and the types of retail we can expect at our shopping centers. These changes are happening now and they are happening fast. Discounters at the mall? Check. Grocery stores at the mall? Check. Old definitions of what types of tenants will be at different shopping center types are now obsolete. But remember that the ground moving fast beneath you is not the same thing as the sky falling… that is, unless that ground is heading straight at you because you are plunging towards your death. In which case you probably already are in the process of “looking into strategic alternatives” or hiring your own “financial advisors.”
By the way, here are some links you might find useful…
Our Bricks vs. Clicks Webcast Series Part I and II explores the impact of the 2016 holiday shopping season and eCommerce on supply chain and bricks-and-mortar retail. Bricks vs. Clicks reviews and further analyzes relevant data points, shopping trends and effects on the industry and its consumers in 2017.
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.
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 firstname.lastname@example.org.
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.