The top retail story last year was no doubt the record number of store closures. And believe it or not, that same narrative might dominate the headlines in 2018.
Cushman & Wakefield’s vice president of retail research for the Americas Garrick Brown, is predicting that the number of doors that close this year could surpass last year’s total by as much as 30 percent.
That’s the bad news.
The good news, he said, is that’ll pretty much be it in terms of big store closure numbers for awhile.
“In a lot of ways we’ll be back to some of the same trends that fueled the retail apocalypse story line,” Brown said.
In 2017, nearly 9,000 stores closed across retail sectors. In 2018, Cushman & Wakefield said that number will be between 10,000 and 11,000 doors—and that’s fewer than the 13,000 the analysts initially forecast, thanks in part to Simon Properties’ legal action attempting to block Starbucks from closing Teavana locations.
Bankruptcies
At the department store level, Brown sees as many as 1,000 locations or more going dark, especially if some of the retailers teetering on the brink of bankruptcy topple.
The two topping his watch list are The Bon-Ton Stores, which recently hired a restructuring firm, and Sears, which holds a perennial spot on most retail death watch lists.
“If Bon-Ton goes down and no one bails them out of bankruptcy, which I think is the likely outcome for most department store chains, that’s about 260 stores. If Sears goes down, that’s about 580 more,” he enumerated.
One struggling retailer that could be spared a bankruptcy filing is Neiman Marcus. Brown said if history is to repeat itself, he anticipates the recent tax reform bill will pad affluent shoppers’ pockets, giving luxury a needed boost in the new year.
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[Read more about how bankruptcies played out last year: 2017 Bankruptcy Infographic: Apparel Retail’s Year of Reckoning]
Contraction
Beyond bankruptcies are the department store chains like Macy’s and J.C. Penney that are actively trying to trim their fleets.
And as these large retailers pull out, it will cause a ripple effect throughout the mall, giving chains like Gap, Burberry or Victoria Secret that may also want to reduce their footprints a “get out of jail free card.” Thanks to archaic co-tenancy clauses in retail leases that give stores to right to exit if the mall loses key anchors, these chains will be able to close doors pretty rapidly.
While A malls will remain largely immune, lower rated properties that can will turn to alternate tenants like off-price players. Beyond that, the news is not great.
“We have 1,150 malls. As this wave of closures hits, the weakest malls will go into death spirals,” Brown said.
Beyond malls, the closures will impact the entire supply chain. Just look at distribution centers, Brown said. These facilities are positioned near brick and mortar stores; as those numbers thin out, retailers will have a new dilemma.
“If [a distribution center] just served your stores, does it make sense to create the capability to supply stores as well as e-commerce? That’s the kind of questions all of these retailers are facing, and the formula’s different for each retailer,” he said.
M&A
Though malls only represent 9 percent of retail real estate, their struggles gives the whole industry “an image problem,” Brown said.
That tarnished impression is what will fuel another big trend this year.
“2018 is going to be a year of record retail merger and acquisition activity,” Brown said, echoing similar sentiments from his analyst peers. “You’ll have activity coming from Walmart, Amazon and private equity players.”
Beyond these big three, 2017 closed out with the acquisition of Westfield malls by Unibail-Rodamco for $15.8 billion and already in 2018, surf brand Quiksilver’s parent company snapped up Billabong for $155 million.
“You’ll see the smart money on Wall Street looking at undervalued retailers that are profitable but have suffered because their stocks have been damaged by the dumb money on Wall Street that assumes all retail is monolithic and troubled when its not,” he said, adding “You’ll see some very strange bedfellows.”
The odd pairings started last year with the Walmart ModCloth deal. Initially, most in the industry couldn’t see the logic. But once the mass retailer also snapped up Bonobos and announced plans to team up with Lord & Taylor online, the vision became clearer.
Expect more head scratchers, Brown said, as retailers look beyond omnichannel to what he terms the new commerce, where seamless online integration is a given and the old rules governing retail are upended.
In the midst of all this change is opportunity, he said—but only for those that keep their heads.
“When the market is spooked and there is all sorts of conflicting narratives, this is where the smart players basically build their fortunes,” he said, adding a quote from one of his favorite shows, Game of Thrones, for them “chaos is a ladder.”