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Fung Global: 218% Spike in Store Closures a Necessary First Step

No matter how the second half of the year pans out, one thing’s for sure: there will be an abundance of year-end articles about how 2017 was the year traditional retail turned upside down.

Lead by turmoil in the mall-based apparel sector, this year has already seen 5,321 store closures, a 218 percent increase over 2016. Add to that double-digit bankruptcies and there’s little doubt that the retail landscape will look very different in the years to come.

Fung Global Retail & Technology’s “Deep Dive: The U.S. Retail Revolution Solution” provides insights into what precipitated this shakeup as well as a roadmap for stores looking for ways to survive.

In addition to the issues with the traditional retail model and changing consumer tastes, physical stores are also faced with a new crop of direct-to-consumer brands. Rue21, BCBG and The Limited are among the stores that have succumbed to the pressure.

And while it’s not all bad news, the good news is primarily concentrated in sectors that focus on value. Of the retailers that have announced store openings in 2017, the top three are Dollar General with 1,290 locations, Dollar Tree with 650 and Aldi, which will round out its 400-store expansion in 2018.

[See the growth plans for off-price retailers: Infographic: Off-Price Store Growth]

In the same time span, mid-tier specialty brands declined between 18 percent (Gap) and 46 percent (Abercrombie & Fitch). Urban Outfitters and Foot Locker saw the biggest gains here, at 18 percent and 23 percent, respectively.

What are traditional stores to do?

According to the report, the answer is threefold: trim, transform and take note of the convenience e-commerce offers.

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Fung Global says while the number of closures might look staggering, most are necessary to either get rid of underperforming locations or right size fleets to today’s shopping patterns.

To reclaim the sales levels department stores achieved in 2006, the report refers to Green Street Advisors which enumerates how deep the cuts would need to be. For Macy’s, that’s just 8 percent of its fleet. On the other end of the spectrum, Sears would need to cut 43 percent of its stores. Bon-Ton, Dillard’s, Nordstrom and J.C. Penney would all need to decrease store count between 15 percent and 31 percent.

[See the other ways department stores are positioning for survival: Transformation Nation: A Comparison of Department Store Survival Plans]

And as the stores go, so go the malls. Fung Global says 30 percent of the 1,221 malls in the U.S. will need to close as well.

But even in the face of this massive contraction, the report makes it clear that physical stores are still the backbone of retail. Brick-and-mortar accounts for more than 90 percent of sales in the U.S. Given statistics like that, stores aren’t likely to disappear entirely but they will need to evolve.

Fung Global says stores need to add entertainment elements like theme parks and aquariums, offer services like makeovers and classes, and focus on community building.

“Making stores a gathering place and creating a sense of community provides an additional reason for consumers to visit stores, which can eventually generate additional sales,” said Deborah Weinswig, managing director of Fung Global Retail & Technology.

The report also stresses that retailers must figure out a way to get products to shoppers quicker and with less friction. There’s no arguing the inherent convenience of packages delivered to consumers’ door. And it’s probably a large part of the reason e-commerce has doubled its market share in the last seven years from 4.2% to 8.5%.

To compete, Fung Global says stores need to focus on the last mile by ramping up click-and-collect options as well as those that allow shoppers to have packages delivered to alternate locations like area stores or secure lockers.

The report also suggests that multi-category retailers compete with giants like Amazon by diving into the marketplace model, which will allow companies to “offer customers much greater selection as well as products that complement its own brands.”

Ultimately, the report lays out a vision of smaller and more innovative stores that can help traditional retailers better fight the emergence of new players as well as the e-commerce surge.