The Retail Circle of Life

Risk analysis: what if every financially weak big box tenant in the US went out of business? Big box retailers are 80% of the US retail platform. The way they go portends the state of the whole system. Most markets in the US are severed by about 100 big box brands – everything from Walmart to Walgreens.

Today, in each major US market, about 20 of the 100 big box companies are suffering financial stress. Many had problems well before COVID. Back in April of 2020, I realized that these weak tenants accounted for only about 6% of US retail space and, more surprisingly, they accounted for only 3% of the sales. If all the weak box retailers shut down, the remaining 80 retailers could easily absorb their sales.

About two thirds of these weak firms have already filed bankruptcy and most of them have reemerged with a fresh start and only a handful have been liquidated. A few others, like AMC Theaters have raised capital without bankruptcy. The system is very resilient. There is no retail apocalypse. It’s the circle of life – Simba defeats Scar.

Retail Bankruptcies

The 2020 retailer bankruptcies are not a bad sign. They allow the system to purge imbalances. The talk of “thousands of retailer bankruptcies portend an retail apocalypse” is nonsense in a system that just closed 50,000 stores with only 1-2% drop in occupancy. In 2020, the average open-air center lost just one small business. Of course, every closing is tragic at some level, but the system is strong and will soon recover.

Only a small handful of national retailers are using bankruptcy. There are only about 100 companies occupying 15 or more boxes in Florida, they range from Walmart to Walgreens. All told, they have 80% of the GLA and 11,000 locations. About 10 of them need the help of bankruptcy to get a fresh start. About 5 are non-viable and need to liquidate, like Earth Fare, SteinMart, Pier 1 and Lucky’s Markets. In 2020, 24 Hour Fitness, Tuesday Morning, Guitar Center, JC Penny, Old Time Pottery, Men's Warehouse used chapter 11 to shed unprofitable stores, eliminate excess leverage and build liquidity. They are off again with a fresh start. It's the American way and it works. There is no retail apocalypse.

How can we restart the US growth machine?

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Unfortunately, economic growth is not about to set any long-term records. For 50 years, from 1966 through 2007, the US economy grew at an average annualized rate of about 3.1%—a great and dynamic expansion which saw the economy almost quintuple in size. Then came the Great Recession of 2008-09. Not only did the economy fail to recover to that long-term 3.1% trend in subsequent years—for the first time ever, following a recession—it went on to post only slightly more than 2.1% annual growth in the decade from 2009 through early 2019. It was the weakest economic expansion on record, and it looks set to continue for the foreseeable future.

Scott Grannis challenges us to think about the big problems - how can we restart the US growth machine?

Florida Box Openings & Closings: Nov-Dec 2020

Openings: 49 stores

Ace Hardware: 5
Aldi: 5
Crown Wine & Spirits: 1
Crunch Fitness: 1
CVS: 1
Dollar General: 8
Dollar Tree: 4
Family Dollar Stores: 1
Floor and Decor: 1
Esporta Fitness: 3
Harbor Freight Tools USA: 1
Harris Teeter: 1
Office Depot: 2
Old Navy: 1
Pet Supplies Plus: 1
Planet Fitness: 4
Publix: 6
Sprouts Farmers Market: 2
True Value: 1

Updated: 2/9/2021

Closings: 32 stores

ABC Fine Wine & Spirits: 1
Bed Bath & Beyond: 4
Family Dolla Stores: 1
Habitat for Humanity: 1
JC Penny: 8
La Fitness: 4
Office Depot: 1
Office Max: 3
Old Time Pottery: 1
Publix: 4
Save-A-Lot: 4

Oh my god, all my weight gain is in my right arm – The E-commerce Story

For the next 10 years the US does not need any new retail space. Retail sales in the US have grown steadily by 3.75% annually. Over 10 years, at that rate, retail sales grow by 40%. Half of that gain is due to inflation or just raising prices. The other half is volume growth and that’s what really matters. 

Over the last 5 years, a strange thing happened. All the retail volume gains occurred in the e-commerce space. It’s like a person who is gaining weight each year by 2%, but all their weight gain is in their right arm. It’s just weird to watch all the volume gains occurring in e-commerce, but that’s the reality.

For example, 2019 e-commerce was 15% of retail sales and it grew by about 15%. In other words, it added 2.25% which was all the volume growth. E-commerce’s growth rate is slowing, but it’s still accounting for all the volume growth. In a few years, e-commerce will be 20% of retail sales and its growth will have slowed to about 12%. Do the math it’s still 2.4% or all the volume growth.

During the last few years, almost all retailers’ volume gains occurred in deliveries, curbside pick up and in shipping. In other words, all the volume growth came from the “back door” and the volume out the “front door” was unchanged. For the foreseeable future, there will be no additional dinners sold inside your favorite restaurant and no more shoppers at your local grocery store even if your town’s population is growing. Those stores sales will grow, but it will all happen out the “back door”.

It’s no surprise that Walmart stopped adding stores in many key markets recently and instead made massive investments in their “back door” e-commerce platform. Other retailers followed: Target spend $550M to buy Shipt, McDonalds spent $300M to buy a geo-fencing platform. Still, because of high delivery costs, all the profits are coming from the front door where the profit margins average 8%. Warehouse, labor and delivery cost and rising rapidly and it is very difficult to make any profit from e-commerce sales.  And so, it’s no surprise that the King of the Back Door, Amazon, is embarking on a massive store expansion with its Amazon Fresh stores. The profits are from the in-store sales, but all the growth is happening out the “back door”.

By 2030, it will all be over. Most retail businesses will get 25-30% of their sales from e-commerce. They will all have cool apps, frictionless check outs, one-hour delivery and so on. Ecommerce growth and brick and mortar growth will equalize and once again, we will need more retail space to accommodate the growth. Until then we don’t need anymore retail space in the US, we just need to repurpose what we already have.

Occupancies will Return to their Peak Level

We are halfway there. In the case of open-air retail centers, occupancies fell in 2020 by 1-2% and they will likely fall the same amount in 2021. Beginning in 2022 the recovery will reverse those losses and within 5-7 years, occupancies will return to their peak level.

This cycle of going from 8% vacancy to 12% in a short time and then spending the next 5-7 years climbing back to 8% has repeated itself over and over again during the last 35 years. Some things never change. There is no retail apocalypse, it’s just normal business cycle contraction.

Top Secret: Florida Big Box Market

Top Secret: The big box market was unchanged in 2020 in Florida. The market was very resilient even against the pressures of total shutdowns. In 2020, JC Penny and SteinMart closings were a big drag on Apparel; Earth Fare and Lucky’s drove down Grocery, and Pier 1’s shutdown pulled down Other.

Tenant Occupancy Cost

Stop assuming your retail tenants are healthy if they pay 10% of their sales or less in rent. This chart show that rents should vary by use type. Thanks Melina Cordera at CBRE for sending this. Always be learning.

Flat Line for Open-Air Big Box Openings & Closings

At the end of 2020, these big box users had nearly 11,000 Florida locations totaling about 320M square feet.

 Woolbright tracks the 105 brands that operate stores containing over 10,000 SF and with 15 or more locations in Florida. At the end of 2020, these big box users had nearly 11,000 Florida locations totaling about 320M square feet. The big boxes occupy 80% of the open-air GLA and as it goes for them, it goes for retail.

In 2020, the Florida the big box inventory remained unchanged with 347 openings and 341 closings. No change means there was no retail apocalypse in 2020. Sure, there were some big losers: Pier 1 closed 72 locations, Earth Fare closed 14, Lucky’s closed 21 and SteinMart closed 44; combined these groups, that liquidated their chains, shuttered about 3.0M square feet or just less than 1% of the box space in Florida. 

But all the losses from the Florida’s big box closings were offset by new big box openings. Most of the 105 brands opened just a few stores each; however, there were a handful of companies that dominated the growth in 2020. Those standouts added at least 200,000 square feet of net space to their store network as shown in the table below.

Surprisingly, several notable retailers, that have historically driven the growth with new openings, did not open a single store in 2020 in Florida, those include Walmart, Costco, Home Depot, Lowes, Kohl’s, Marshall’s, and TJ Maxx. There will be more closings in 2021. One notable area to watch in 2021 is the merger of Staples and Office Depot which could result in a third of their stores closing. On the other hand, closings will be offset when the second richest guy and the 4th richest family in the world will open dozens of new grocery stores over the next few years in Florida as the grocery apocalypse begins in earnest, but that story is for another post.

Population Growth: Southwest United States

In 2020 over 500,000 people were adder to the Southeast which in nearly 60% of the net US gain. Unfortunately, without immigration growth the US grew at only 30% of its normal rate.