It’s not a good sign for retail when a top executive in the industry compares things to the 2008 housing-market collapse that plunged the US economy into a deep recession.
On a call with investors yesterday (March 8) to discuss Urban Outfitters’ lackluster results for the quarter—sales grew less than 2%—CEO Richard Hayne offered a dim assessment of the retail landscape, likening its overabundance of stores to the housing market in the mid-2000s. The threat to the broader economy may not be as dire as the one posed by housing bubble, but for the retail industry, the consequences are proving harsh. According to Hayne, ecommerce owns a good part of the blame.
Online sales, he said, are cannibalizing store sales, reducing foot traffic and eroding margins. The giant physical footprints retailers such as Urban Outfitters and department stores built up over years have become a massive financial burden.
The US market is oversaturated with retail space, and far too much of that space is occupied by stores selling apparel.
Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce. Our industry, not unlike the housing industry, saw too much square footage capacity added in the 1990s and early 2000s.
Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst. We are seeing the results, doors shuttering and rents retreating. This trend will continue for the foreseeable future, and may even accelerate.
The glut of stores has also pushed retailers into their endless cycle of discounts, he said. That reliance on promotions to get customers to shop has been a drag on both retailers’ and brands’ bottom lines.
Chains such as Macy’s and J.C. Penney have been working to correct these problems by shuttering hundreds of stores. And that may just be the start. A report last year by Green Street Advisors, a real estate research firm, concluded department stores would collectively need to shut down about 800 locations, roughly 20% of the anchor space in malls around the US, to get back to sales productivity levels of 10 years ago.
Retailers such as Gap, J.Crew, and Urban Outfitters have also struggled to keep stores profitable as shoppers move online and spend less on apparel.
Stores, of course, aren’t disappearing entirely. But their purpose is in the midst of a shift toward offering customers experiences, rather than just a place to buy stuff. Shoppers, after all, can just do that online.