By Garrick Brown, Vice President of Retail Research, Americas
Before I get to the meat of this week’s Newsline (this year’s Holiday Sales Season forecast), there have been a few very interesting headlines over the last couple of weeks since our last issue.
A couple of weeks ago up and coming Millennial lifestyle retailer Shinola announced that they were going to open a hotel (in 2018) in Downtown Detroit. If you aren’t sure who they are, you haven’t been hitting the Cool Streets. This is one of a few dozen hot up-and-coming retailers that somehow is connecting with Millennial consumers and actually getting them to spend money on stuff instead of experiences. Of course, a big part of that is that going to Shinola is an experience… if you want a primer on how to get experiential retail right, these are the guys to study. From curated retail (i.e. cool stuff, a willingness to take chances with their inventory and unique individual experiences at each of their stores) and great locations (a mix of Cool Street and High Street), they have emerged as one of the hottest brands out there at a time or retail retrenchment and adaptation. That being said, Shinola’s entry to the world of boutique hotels means they have the foresight to make money on Millennials BOTH by selling them stuff and selling them experiences.
That news was followed last week with West Elm’s announcement that they would be opening boutique hotels in Detroit, Minneapolis, Savannah, Charlotte, Indianapolis and other locations starting in 2016. Though nothing has been announced, I would be surprised if Brooklyn (where it was founded) doesn’t turn up on a future list. In case you don’t know, West Elm is a division of Williams-Sonoma… which recently was rumored to be in merger talks with Restoration Hardware. Restoration Hardware, by the way, opened its own small boutique (14 rooms) hotel concept near their huge flagship store in Manhattan’s Meatpacking District last year.
While this may sound like a new trend, it actually isn’t. Bulgari, Versace, Ferragamo and Lalique all have individual boutique hotels in Europe that look to capitalize on those brand’s luxury lifestyle cache. But those are all single locations and more outliers than anything else. In the States we certainly have seen some retail and restaurant chains go this route in the past. Certainly, the Hard Rock Hotel chain was initially a spinoff concern from that casual dining chain… needless to say, the hotel chain has emerged as the dominant player there.
But this flurry of recent announcements is unique in that most of these experiments have been one-offs and hardly anything you could point at as a new trend in the marketplace. The reason why this is happening isn’t hard to understand… it gets back to that issue of Millennials spending money on experiences more so than stuff. There are about 88 million of them out there right now and within the next four years they will account for more than half of all consumers aged 18 to 65. And, by the way, the oldest ones are entering their peak earning years.
Of course, we aren’t talking about a big wave of these lifestyle retail/boutique hotel mashups hitting the market until 2018 and could that be just in time for next downturn? Hard to tell, but one cause for concern is that even in garden variety recessions among the first two things to take a hit are restaurants and hotels (people eat out less often and cut back on travel while business expense spending usually scales way back—impacting both). But do I think these will be successful? Probably so long as retailers that go this route open these boutique hospitality projects in the right markets and they partner with experienced hospitality players. The fact is that boutique hotels are white hot and I suspect that they and Airbnb will probably make it through the next downturn with only minimal impact simply because of their popularity with that elusive demographic… the Millennial.
Can you expect more brands to explore this trend? I would have to say the answer is absolutely. In fact, considering that Urban Outfitters/Anthropologie already has purchased a pizza chain out of Philadelphia and has proven itself not afraid to think outside of the box, I am almost surprised that we haven’t seen an announcement from them yet. No, I don’t have any insider information here… it just makes perfect sense for a strong, mostly urban-based lifestyle brand. Which, by the way, also owns a pizzeria chain now so I could easily see that retail mash-up adding another layer of complexity. Could we even see this coming from brands that aren’t as tied into lifestyle branding? Possibly, but I would guess not. But who knows, perhaps one day I will find myself visiting the Family Dollar motel where some guy in a trucker cap will serve me an ice cold Pabst Blue Ribbon as I check in. Before I go to my room, I’ll make a quick stop at the gift shop to buy some $0.99 cent toiletries and later that night I will have room service (provided by Waffle House) send me up some biscuits and gravy.
Moving on to the news of the week…we saw a couple more casual dining bankruptcies and more market speculation on the state of retail in general (none very upbeat, but don’t worry we’re going to end this week’s Newsline on a positive note based on some things that I think aren’t quite garnering the headlines they deserve).
But let’s get through some of the bad news first. Consolidation continues in the sporting goods sector; the long-rumored and awaited acquisition of Cabela’s by Bass Pro Shops finally appears to be happening at a $5.3 billion price tag. That is, assuming the deal passes FTC muster. A year ago I would have said that this won’t be a major issue, however, with the closure of Sports Authority and with the FTC having thrown the market a curveball by shooting down the planned merger of Staples and Office Depot/OfficeMax a few months back… well, who knows. I still think it will get through as plenty of competition in the marketplace remains with Dick’s Sporting Goods, Gander Mountain, Academy Sports + Outdoors, Modell’s Sporting Goods, Hibbett Sports, Big 5 Sporting Goods, Sportsman’s Warehouse and others. But it still remains troubling that the FTC apparently failed to recognize the imperative of the Staples deal. Then again, that deal did represent essentially a reduction of the top three players in office supplies to just one entity over the course of about 18 months. It apparently simply looked too much like a monopoly to them, regardless of the fact that the move had a clear survival-based imperative behind it. That’s not to say that Office Depot/OfficeMax won’t survive its current challenges, but in the meantime there are going to be a lot more closures (from them and market leader Staples) and a lot of retail jobs lost that might not have been had the merger been approved.
Meanwhile, Sears CEO Eddie Lampert roared back at rumors that Kmart was looking to cease operations. While he acknowledged there may be more closures (Sears/Kmart announced 68 Kmart and 10 Sears closures in April), he insisted that there are no current plans to hang up the Kmart banner. Sears continues to sell off real estate assets and rumors surfaced today that the Craftsman brand may be near sale to Stanley Black & Decker or Techtronics. The value of the brand is put at $2.0 billion. It was enough to briefly send Sears stock up 20% at one time this morning… before trading was halted due to volatility. This could be huge because Sears has lost an average of $1.2 billion each year over the past three and continues to hemorrhage cash. A sale in the $2.0 billion range would easily give the beleaguered retailer enough to make it through next spring. Recently Moody’s analysts downgraded Sears credit based on their take that without a significant infusion of cash that the chain might not be able to meet its obligations by next year.
Sears also reportedly continues to look for a possible sale of its Kenmore brand and DieHard businesses, which would further capitalize the iconic Hoffman Estates, Illinois-based retailer. They recently got an infusion of $300 million from a loan guaranteed by Lampert himself. Ultimately, however, unless Sears can turn around its sales slide these moves are simply buying time. That being said, the sale of all of these assets and top real estate holdings could potentially buy a few years of time and stranger things have happened. Just look at JC Penney’s turnaround over the last couple of years. We definitely see Sears as one of perhaps a dozen or more major retail brands for which this holiday shopping season may be make or break.
The good news is that nearly every economic indicator points towards stronger holiday sales this year. The National Retail Federation (NRF) just released their holiday shopping season forecast for 2016 this morning and they are calling for a 3.6% jump this year. This follows a prediction from Deloitte a couple of weeks ago between 3.6% and 4.0%. I don’t blame them for going with a range—it gives you a greater likelihood of being able to say, “I called it!” which ultimately is what every analyst is vying for.
I find it extremely interesting that nearly every major group that forecasts holiday sales has been slow to release their outlook for this year. Typically we see these forecasts appearing in mid-September, but these are the first. The reason is simple… too many of us were burned by being too optimistic last year (NRF was wrong, Deloitte was wrong, ICSC was wrong and I was wrong) and frankly, I suspect most analysts have been reticent to go out on a limb, especially when it comes to issuing another positive forecast. I include myself in this group and will now give my quick take… I agree with the NRF take but am actually even more bullish on the consumer so I am going to go Price is Right on this one and put my forecast at 3.7%, with the caveat that if I am wrong I am pretty sure it will be because I was too conservative. But that being said, I also think that a significant chunk of this is going to be driven by eCommerce. Amazon doesn’t release holiday totals, but reliable sources put their year-over-year sales up last holiday season by a whopping 20%. I would be surprised if those numbers aren’t easily surpassed this year.
As for last year’s performance, most analysts were disappointed when final revised sales only climbed by 3.0%. While that wasn’t a horrible number historically (the average over the past decade is 2.6%), much of the gains were realized by online retailers. Meanwhile, unseasonably warm weather throughout much of the country essentially meant that apparel and department store players saw weak apparel sales heading deep into December before the weather started to worsen. But by then, they were already in deep discount mode so profit margins evaporated.
And here is where there is further good news… earlier this week Wall Street firm Cowen and Company recently published an analysis that looked at expected weather trends this year that call for an earlier and colder winter. They concluded this will be a plus to many of those same chains that felt the pain last year. Assuming the weather cooperates (IE is cold and nasty, but not too cold and nasty), that’s just another factor that supports the argument for a strong holiday shopping season.
This is not to say that the election might be a spoiler (late October/early November sales usually take a slight hit mostly due to advertising being bought up by campaigns), but I see it as relatively unlikely regardless of who wins. Still, you can’t discount a potential impact… particularly if things get strange and has there ever been a stranger national election in our lifetimes? And, of course, one can’t rule out the impact of some unforeseen economic shock but outside of black swans it also appears unlikely that there is anything that would go too far off the rails with the US economy in the next few months. The global economy is another story, but worries over China earlier in the year failed to have much of an impact here, nor did Brexit over the summer (at least so far). The reality is that overseas economic turbulence rarely translates into major problems here. If anything, right now we continue to see foreign capital trying to find its way here… to the relative security of the US.
So what’s all this mean? It means that this year’s holiday shopping season will likely be one of the most important of the past couple of decades. We have little doubt that the trend of consolidation with key retail sectors is going to continue heading into 2017 and that closure levels next year will probably surpass those posted this year. To date, just racking major retailer bankruptcies and closures we are tracking close to 4,000 storefronts that have either closed, are in the process of closing or that will be shuttered by year’s end. With each week we continue to see smaller bankruptcies, like today’s announcement from Don Pablo’s restaurants or yesterday’s from Souplantation. These numbers, of course, don’t include small business failures or one off closures… but the reality is that it is not out of the question that we close the year with something approaching 4,500 closures from just the major chains alone. The last record year we had for closures was 2010 in the aftermath of the Great Recession and this number was largely inflated by the failure of Blockbuster. This trend is not over. However, a strong holiday performance will literally be a lifesaver for a number of chains and should consumers really come through, we may see a little less pressure from Wall Street on many publicly traded chains to close units come early 2017. That is, assuming consumers come through, retail buyers connect with shoppers, goods are on the shelf (see my Hanjin blog of two weeks ago) and the weather cooperates. Feel better? Yeah, I know… that’s a lot of if’s but it’s the best we got and by that I mean the US consumer is in its best spot in a decade… and that actually is worth something.
By the way, here is where I would love to give a plug to one of the best demographic studies I have ever come across that tackles this topic of urbanization as well as a number of other major shifts. John Burns and Chris Porter of Burns Real Estate Consulting are in the process of releasing “Big Shifts Ahead: Demographic Clarity for Business.” Burns is based in San Diego but does national consulting work focusing primarily on the residential real estate market. He and his Chief Demographer and research head Chris Potter were kind enough to share a copy with me a few weeks ago and I was blown away. You can check this work out here; it is well worth the investment, this is a must read for anyone in residential (single or multifamily) or retail.
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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.