Store closures could make their way back to the forefront of retail again.
From a current retail store base of 940,000 locations, at least 50,000 doors are estimated to close over the next five years, based on new data from UBS retail analyst Michael Lasser. That estimate presumes retail sales growth of 4 percent annually and e-commerce penetration up from 20 percent to 26 percent by Fiscal Year 2027. But a protracted recession where retail sales grow just 3 to 3.5 percent annually would place downward pressure on closures, raising the forecast to 70,000 to 90,000 locations.
The last time the tally for store closures shot up was in 2020, following the Covid outbreak when more than 11,000 fashion-related doors shuttered after many banners ended up in bankruptcy.
Post-Covid, the costs of doing business for retailers has gone up, mostly due to higher hourly wages, the largest component in running a store. And with retail rents per square foot also up 1.8 percent, the overall costs keep climbing, increasing the “hurdle rate to keep stores open.” This comes with an inflationary backdrop that is far from kind for retail in general.
Lasser and the UBS retail team, including softlines analyst Jay Sole, on Tuesday disclosed in a report that the pace of store consolidation is “set to accelerate” due to a slowdown in consumer spending, a reduction in the availability of credit and a rise in the penetration of e-commerce. That would mean a minimum of 5 percent fewer stores in the U.S., excluding gas and food service, by the end of 2027 and presuming there is no prolonged recession.
Who will benefit? Large, well-capitalized retailers such as Walmart, Target and Costco, or specialty chains with a unique point of differentiation, such as Academy Sports and Outdoors. Another that could take market share from weaker competitors exiting the market is Dick’s Sporting Goods. The analysts estimate that average sales per store is $5.7 million, putting $285 billion of retail sales “up for grabs,” presuming 50,000 doors close. If 26 percent of sales move online, that would leave $210 billion in sales, or $1,600 in annual spend per household, that could shift to retailers such as Walmart, Target or Costco. All three also have robust online channels, as well as enhanced digital fulfillment capabilities.
Not surprisingly, retailers most at risk for closure are smaller chains, and doors operated by independents due to their limited access to the capital needed to develop a robust omnichannel offering. UBS proprietary data indicated that smaller chains shed 40,000 stores in the past 10 years, while retailers with over 500 employees added 17,000 doors. The data points also show that store closures accelerated five quarters after banks began to pull back on credit. Currently, banks are reporting a 20 to 30 percent decline in willingness to make consumer installment loans, the UBS report said. The analysts see this as a leading indicator of store closures going forward. Households with less capital to spend on goods also mean fewer entrepreneurs will have the wherewithal to create new retail businesses.
By subsector, a minimum of 14,000 apparel and accessories stores—12 percent of the current base of 119,062 doors—could close, and that’s on top of the 10,612 doors that have shuttered since the first quarter of 2018. Going back to the fourth quarter of 2007, the apparel store base has declined 17 percent.
In addition, 4,000 home furnishings locations, or 9 percent of the current base of 47,769 could close, on top of the 2,142 closures since the first quarter of 2018. The count for home furnishings is high because furniture and bedding are discretionary categories that have a high percentage of sales that are financed, the UBS analysts concluded.
Most at risk are retailers with a large number of stores in shopping malls. And within softlines, store closures at department stores and specialty retailers are expected to surpass the recent trend in store openings. That would mean brands that have a strong direct-to-consumer focus such as Nike and Levi Strauss should do well. Also cited was American Eagle Outfitters, considered a strong omnichannel retailer.
“We remain bearish on Nordstrom, Kohl’s, Macy’s and Dillard’s,” the analysts concluded. Regional chains, mostly with locations in shopping malls, are expected to “continue closing stores and potentially go out of business,” the report said. Meanwhile, department stores are expected to continue to lose customers to off-price retailers.