Retail in a New Age

Written by Aditya Garg

However, while e-commerce has certainly helped accelerate the trend, the narrative behind the decline in retail is a bit more complex. The underlying driver behind the decline are these companies’ large debt loads and the saturation of the U.S. market.

“That is the tipping point, right there,” said Barbara Denham, Senior Economist at Reis in an interview with the New York Times.

What was she referring to?

Denham was commenting on the steady decline in retail stores and the increasing plight of retail companies across the country. In just the last three years, the U.S. has seen some of its most iconic big-box retailers go bankrupt. These names include such icons as Toys ‘R’ Us, Payless Shoesource, The Sports Authority, and Radioshack.

Once mainstays of American consumerism, these stores have now been forced to fold due to increasing pressures on their business models.

The culprit?

E-Commerce?

Certainly e-commerce, led by industry leader Amazon, has been a driving factor in the steady decline of retail sales. Over the past three years, average annual e-commerce growth has increased to over $40bn. E-commerce has made it easier and faster for consumers to shop and, given their low cost structure, allowed e-commercial retailers to generate much larger margins on each sale.

However, while e-commerce has certainly helped accelerate the trend, the narrative behind the decline in retail is a bit more complex. The underlying driver behind the decline are these companies’ large debt loads and the saturation of the U.S. market.

Driven by an earlier wave of buyouts, there are billions of dollars of debt on the balance sheets of many of these retailers. While in earlier years, these companies were able to refinance their maturing debt, the negative outlook on the industry has led to a drying up of traditional lending sources. For instance, Toys ‘R’ Us was recently forced to file for bankruptcy after it was unable to refinance just $400m of its $5bn in debt—a mere eight percent. This was during a time that the company had continued to report stable sales and increasing profitability.

Another key trend has been the saturation of the US market. Even before the rise of e-commerce, the US was thought to be ‘overstored’.

“Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce,” Urban Outfitters CEO Richard Hayne said in an interview with the Washington Post. “Our industry, not unlike the housing industry, saw too much square footage capacity added in the 1990s and early 2000s…this created a bubble, and like housing, the bubble has now burst.”

The large debt load that is soon to mature, coupled with the oversaturation of the U.S. market and a rise in e-commerce has, over the last few years, created the perfect storm for the retail industry.

Given that the onslaught of store closures comes at a time of rising consumer confidence and low unemployment points to a permanent restructuring in the industry rather than a normal dip in condition—perhaps suggesting that retail may take much longer to recover than many hope.

However, while many continue to speak of an impending “retail apocalypse,” in a note to clients, Goldman Sachs Analyst Matthew Fassler noted that while “the U.S. retail sector is overstored and out of step in an era of e-commerce…retail is not dead; it is changing. How brick-and-mortar stores employ new technologies and new models may determine how they survive the relentless shift online.”

While certainly there will be growing pains over the next few years, retail will continue to play a part in the economy of the future. What part it plays is to be determined.