By Garrick Brown, Vice President of Retail Research, Americas
First off, I want to wish you all a happy and prosperous New Year. That being said, I’m going to cut to the chase in this edition of the Newsline because I have a lot of ground to cover. So here is the first installment of my Ten Things to Watch in Retail in 2018.
1. SAME OR FEWER BANKRUPTCIES, BUT BIGGER IMPACT
Retail bankruptcies are likely to remain near current levels, but could actually fall somewhat in number. Moody’s recently issued a report that ICSC ran with; Retailer bankruptcies to decline in 2018.
The widely distributed press release basically made the argument for this based on improving consumer metrics. I think one could argue this point either way. The problem I see, however, won’t be in the number of the bankruptcies that we may see in 2018… but the size of them.
The good people at PNC Bank put the total of “Major Retail Bankruptcies” for 2017 at 36. That is up from 26 in 2016 and 22 in 2015. Only 2009 with 37 total bankruptcies tops what we just faced in 2017.
That said, a number of major chains remain on analyst bankruptcy lists. Last week USA Today wrote, “Here are the 26 retailers and apparel companies most at risk in 2018.” Their list from Moody’s includes; Sears, Claire’s, Payless (again), J. Crew, Neiman Marcus, Nine West, Calceus Holdings (Cole Haan parent), and others.
Moody’s also reports that the number of distressed retail and apparel companies they are currently tracking is 26, or nearly 19% of the companies they track verses 19 in 2008 during the Great Recession (or 16% of those tracked).
And keep in mind that while bankruptcies in 2017 had a major impact on the market, that impact would be dwarfed by that of a Sears. Sears, Kmart and Sears Hometown with over 1,200 stores, almost half as mall anchors.
2. STRATEGIC CLOSURES TO INCREASE
Strategic closures will increase significantly in 2018—particularly if we see the bankruptcies of Sears and Bon-Ton. On the department store front those two chains alone could result in the return of over 800 large format department.
Keep in mind that until recently a common practice in the mall world was for co-tenancy clauses in leases. These are clauses that would allow a tenant to terminate a lease early under certain conditions, typically the loss of a major anchor tenant.
There is great debate to how much of an impact this may have. Landlords say maybe 20% of their deals—at most—have these provisions, and retailer real estate managers say 50% to 80% of their deals have such clauses.
Regardless, Class A and trophy malls have little to worry about. If they lose a struggling department store it’s more a blessing than a curse. Class A malls will have no problem backfilling this space with current, relevant tenants paying today’s market rents.
The problem is with Class B Malls and below backfilling this space. This is where you will see experiments and innovation. We will see non-retail tenants from community colleges to medical in Class B properties. Class C malls will be where we see those dead and dying mall stories, and ultimately mixed-use redevelopment opportunities.
This is why this year’s wave of department store bankruptcies and closures will be followed by a wave of strategic closures mostly impacting the weakest properties.
3. MORE LEGAL CHALLENGES TO RETAILER STRATEGIC CLOSINGS
In 2016, we recorded roughly 4,000 major chain store closures. For 2017, we tracked just under 9,000. I forecast back in the fall that in 2018 we would see the peak of the closure trend with 13,000 major chain closures.
I am revising that number downward to 11,000 for a number of reasons.
First, holiday sales figures will likely surpass predictions. Most of us forecast growth in the 4.0% range… and it looks like sale growth this holiday shopping season may be closer to 5.0%. That said, a strong holiday season isn’t enough to save retailers on the edge. We will need to see strong Q1 and Q2 numbers as well for those struggling concepts.
The biggest factor, however, that I see potentially making an impact is the fact that we will increasingly see landlords attempting to sue tenants in order to prevent strategic closures.
Simon’s successful injunction against Starbucks planned closure of its Teavana chain in December is likely to have a chilling effect on profitable chains looking to close underperformers. Here is my take; it may not matter all that much one way or the other if the ruling is appealed or overturned. Simon has successfully sent a message to retailers that strategic closures won’t be as simple a proposition as many may have thought. This alone is likely to slow and complicate matters for chains looking to close underperformers.
4. LUXURY RETAIL LIKELY TO SEE BOOST BY YEAR END
Not all of the retail news is bleak. Consumer spending is climbing. Consumer confidence is at a 17-year high. Unemployment is at the lowest level this century and wages have been growing for nearly three consecutive years and continue to trend up.
Not everyone is shrinking! Off-price apparel, discounters, warehouse club stores and dollar stores will continue to post record growth. Grocery stores and most restaurants will continue to account for growth, even as the weakest concepts will increasingly struggle with a saturated marketplace. Food halls will remain white hot.
But where we may see some of the strongest growth in the coming year is in the luxury sector. Here is where we will likely see the greatest consumer impact of the Trump tax cuts.
The most significant beneficiaries of this will be higher income individuals, so the biggest boost will be for the luxury retail sector. Underlying economic fundamentals were already pointing to modest gains in consumer spending way before the tax bill was ever approved. However, the direct impact of the Trump tax cuts will play out most visibly for upscale consumers and retailers.
Increased consumer spending, however, is not likely to fuel the same kind of expansion as in years past—with this sector remaining behind the curve in its embrace of omnichannel. Regardless this is yet another piece of good news heading into 2018.
5. THE CLICKBAIT CONUNDRUM
I wrote about this in our last issue. I provided three possible headlines… any of which could have been accurate titles for one article. Dozens of you wrote me to say that, the gloomiest title (“America’s Malls are Rotting Away”) is what you clicked on. In 2018, real challenges in the marketplace will continue to be exacerbated by unrelentingly negative focus on the retail sector. Right now, there is a bit of a post-Holidays honeymoon happening.The reality is that we are now entering the traditional retail store closure season and the news always turns ugly in Q1. The challenge this year is that once the Apocalypse stories begin again, they are going to keep on going.This is because there are real challenges out there. Simple as that. The headlines may be hyperbole, but there is validity to the real challenges of some retail categories right now… killing the messengers isn’t going to change the reality of what is coming.
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.