What an estimated 80,000 store closings say about the future of US retail

Clothing stores are among those likely to see widespread closures in the next five years, according to UBS.
Clothing stores are among those likely to see widespread closures in the next five years, according to UBS.
Image: Reuters/Jonathan Ernst
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Before Covid-19, e-commerce had already upended the economics of stores. The pandemic-driven explosion in online sales is likely to force retailers to take an even harder look at their store footprints, resulting in an estimated 80,000 locations shutting their doors in the next five years, according to a forecast by investment firm UBS.

That’s roughly 9% of the 878,000 stores it currently counts in the US. Of course that still leaves nearly 800,000 stores. What Covid-19 has made clear is that while stores may still be essential, they also need a clear purpose—or purposes—if they’re to go on existing.

The pandemic pushed US shoppers online in record numbers. UBS notes that in 2019, approximately 14% of Americans bought goods online. Last year that number jumped to 18%. Its analysis predicts e-commerce penetration will rise to 27% by 2026.

This shift will naturally siphon sales from brick-and-mortar shops. For every 1% increase in e-commerce penetration, about 8,000 stores would need to close, by UBS’s calculation. At the same time, costs such as rent and worker wages are expected to keep increasing. To remain productive as expenses rise, stores need sales to grow at a rate of about 3% to 4% annually, according to UBS, which concludes retailers will need to shut 80,000 locations to maintain this growth while e-commerce draws away sales.

Stores as e-commerce fulfillment centers

The number of closures actually could have been even greater. The analysis factors in the financial advantages of stores also filling online orders. Many retailers still treat their physical and digital operations like separate businesses, fulfilling online purchases from distribution centers with their own inventory. But another trend the pandemic accelerated is a merger of online and offline operations, where retailers are shipping orders from stores or allowing shoppers to pick up online purchases at their nearest physical location.

The economics are better at stores that serve this additional role. Right now, UBS estimates just 10% of online orders are fulfilled by stores. But that share will double in the next five years, it predicts, helping to offset some of the closures that would have taken place otherwise.

Some retail categories are more vulnerable to closures

Some types of stores are likely to be hit much harder than others. Categories such as groceries and auto parts have lower e-commerce penetration and the ability to fulfill online orders more easily through stores. Those on the other side of this divide, such as clothing and consumer electronics, will see larger numbers of stores closing.

Stores located in regional malls that were struggling before the pandemic are also at greater risk, as are small chains that lack the scale advantages of big rivals.

The scenario outlined is UBS’s baseline. If e-commerce penetration grows faster than expected, more stores might need to close. If it moves slowly and retailers quickly pivot stores to filling online orders, UBS believes store counts might even grow.

Either way, stores are under more pressure than before to justify their existence. There are those that will continue to be vital because they provide necessary services to a local community, as many grocery stores do. But numerous others need to do more than that, like acting as showrooms for customers to see and test products, or providing immersive branded experiences. And many will need to find ways to work with e-commerce, not despite it.