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Steve's Market Commentary

Will Our Shopping Malls Disappear Forever?

Jun 7, 2017

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Retail Sales Up In 2016, But Brick And Mortars Still Floundering

According to a U.S. Census Bureau’s Trade Report, 2016 was a good year for the retail and food services sector. Spending was up 3.3% annually to $5.5 trillion and in the all-important holiday season—from October to December 2016—sales were up 4% relative to the prior year. Moreover, GDP has been inching up over each of the past eight years as the environment of low gas prices, low unemployment, and some wage growth has been putting more money in our pockets. This should be good news for retail, right?

Well, yes and no. When we dug a little deeper, we found that Christmas spending at brick-and-mortar stores was down 2.1% while online spending was up a sizable 12.8% at “non-store retailers”. So, clearly, traditional store-based retailers did not have a great 2016, while online retailers, such as Amazon, did.

The Body Count Grows: Macy’s, JC Penney, Sears, Kmart, And More

This is not news to anyone as we all notice closure signs in our neighborhood malls and read about stores such as Macy’s, one of America’s most iconic retailers, announcing plans to close 168 stores due to declining traffic.

Sears announced plans to close 108 Kmart and 42 Sears stores to stem losses, and a spate of retail closure announcements and bankruptcies from JC Penney, RadioShack, Sports Authority, Payless, American Eagle, and more have hit the headlines.

Online Shopping Attains Critical Mass, Crushes Offline Stores

So, what’s really behind this retail meltdown, especially given the fact that retail in the economy is growing?

There are multiple factors, but they’re not all as obvious as you would expect. First, it seems the internet has reached a point of technological and cultural maturity. Online technology, mobile apps, payment systems, product choice, e-commerce security, and the convenience of next-day home delivery have clearly evolved to the point where consumers no longer feel they need to walk into a store to get what they want.

In parallel, consumers are now comfortable with online shopping and mobile apps and trust the safety and security of online payments. We are delighted by delivery and return options as well as the convenience and substantial time and gas savings that come from buying online. Not to mention the fact that it’s just a lot of fun to get stuff in the mail.

As a result, online retailers are cashing in. For example, Amazon has seen sales quintuple from $16 billion in 2010 to $80 billion in 2016. But the story is clearly bigger than Amazon, as many smaller, specialty online retailers are also cashing in.

Retailers And Developers Went Overboard For Decades

In addition—and these are the stories you’re not hearing about and what made me think about this topic today—retailers have simply over-built. For the past 45 years, America added malls at two times the rate of its population growth. As a result, per capita, America has 40% more retail shopping space than Canada, 500% more than Britain, and 1000% more than Germany. This has been a big contributor to the retail crash we are now witnessing. All of this was dramatically accelerated by the recession in 2007 when millions lost their jobs, tightened their spending, and became alert bargains hunters. Meanwhile, technology hit its sweet spot at exactly the right time.

Millennials And The Future Of Retailing: Experiences, Not “Prizes”

To top it all, there was that demographic shift that I have long talked about: the rise of tech-savvy millennials who embraced e-commerce with open arms and upended traditional retail, corporate, and social structures. The deeply impactful attitudes of this generation lay greater emphasis on spending time with friends and family and valuing experiences and social causes more than spending money on branded goods or wasteful purchases. So, branded clothing stores saw a sharp decline in sales while travel and local dining services gained. We can see this when we look at the data from American air carriers which are setting passenger records and note that restaurant and bar spending grew at twice the pace of all other retail spending.

Are Malls Doomed To Close?

So, the big question: is this the end of America’s mall culture? Not quite.

While a lot of excess retail space could turn into ghost buildings or be torn down, malls in demographically vibrant areas will see a shift in usage. They’ll go from dedicated shopping centers (as they are now) to vibrant community centers that embrace society and its new set of values. These will be mixed-use developments where people live, shop, see their doctor, work, socialize, and skip long commutes; little urban villages will replace the old mall-suburbia model and bring new life to dying areas. A new spring, if you will. For example, Lifetime Fitness, the developers of high-end fitness centers, is planning to expand into the large box stores left empty by the exit of large retailers. They are also planning to help take advantage of the new configuration of the mall experience to be more of a village center surrounded by restaurants and medical centers, small retail, and more.

Retailer Stocks: Caveat Emptor

Finally…is this a good time to buy battered retail stocks, much like in November 2008 when banking stocks took such a lashing? Well, again…yes and no. Undoubtedly, some brick-and-mortar retailers are going to come out of this leaner and stronger with new online strategies, but I fear many others will resort to desperate strategies such as acquiring competitors for too much money which, in the end, will only delay their demise,

It looks like things could get a lot worse before they get better, and we’ll continue to see significant store closings in the next few years. So, investment wise, unless you know the retail sector really well and are willing and able to pore over a lot of accounting statements, I’d say don’t sift for bargains in brick-and-mortar retail’s sinking sands. Sit this one out and park your money elsewhere for now. And while you’re looking, see if you can spot a few undervalued niche online plays that are well positioned to deliver solid future returns. After all, that is what’s really driving retail growth.

Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances. There are no investment strategies, including diversification, that guarantee a profit or protect against loss. Past performance doesn’t guarantee future results. Equity investing involves market risk, including possible loss of principal. All data quoted in this piece is for informational purposes only, and author does not warrant the accuracy, completeness, timeliness, or any other characteristic of the data. All data are driven from publicly available information and has not been independently verified by the author.

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