Ithaca Mall is a lot emptier these days, and for good reason. The entrance of Amazon have had many clamoring on about the “death” of the retail industry, a $900 billion sector which represents 5.9 percent of U.S. GDP. At the core of the business, these companies sell primarily merchandise they procure, rather than produce themselves —think of the traveling merchants of the 1800s, except now they reside at malls and strips instead of an ox-wagon. But because of overwhelming advantages that internet competitors possess, like convenience and leaner costs, brick-and-mortar retail seems to be doomed now. Recent second quarter earnings reports from the sector, however, prove otherwise. Some companies indeed remain dead in the water, but others like Target, TJX Companies (owner of TJ Maxx and Marshalls) and Walmart are surviving, and even pushing back against the tide. How?
To begin with, low prices seem to be indispensable to survival in the post-recession economy. The two large macro forces of rising internet convenience and a long-winded economic recovery have rendered consumers to be much more price savvy now than they were ten, twenty, thirty years ago during the golden era of retail. Shopping on screens simply makes price comparisons a lot easier than physically hunting across the mall.
While consumer spending has regained and continue to grow, the percentage of money spent on non-essential goods like apparel seemed to have also been dampened. According to the BLS’ most recent Consumer Expenditures Survey, consumers have increased their spending on most goods and services except for “Apparel and Services,” which fell 2.3 percent from 2015-2016. This trend rings true particularly for one segment: young people now entering the market, with the trauma of a global economic meltdown sealed in their memories, have proven themselves to be actually very frugal. In terms of economic efficiency, I believe the pressure on retail price tags is beneficial, because we are now getting closer to the true value of these goods, which are made very, very cheaply overseas.
On the firm side, it is primarily the capital expenditures that are killing the business, especially real estate and rent. Giant, gaudy (and very expensive) stores just do not attract customers much anymore. Just ask Toys “R” Us, which had to axe its 110,000-square-foot flagship store in Time Square, once a tourist attraction with an indoor ferris wheel in Midtown, as the firm declined. Due to the glut of mall and store expansions of the 1980s, retail companies now have to be extra vigilant about store spaces and learn how to increase sales without necessarily increasing square footage. Urban Outfitters, for example, which had just posted positive second quarter earnings, made sure to show its investors statistics of decreases in net capital expenditures and an unchanged store count. In a more dramatic collapse of economies of scale, Sears’ management is continuing to chop stores and has further identified “100 non-profitable stores, of which 72 will begin store closing sales in the near future” according to its most recent press release to the market. The Bon-Ton Stores, on other hand, has simply filed for bankruptcy, liquidated its assets and closed all stores across the line, its location at Ithaca Mall being one of them. The liquidation was apocalyptic — I was at The Boston Store, a Bon-Ton subsidiary, in Madison, Wisconsin over the summer and saw that even the clothes racks were being sold off for cash themselves. Sears, of course, also left Ithaca in 2014.
Inventory is the other cost to be reckoned with. Retailers largely do not make anything: they buy goods from suppliers and sell to consumers at a higher price, profiting the difference. So inventory has to sell or it is a loss. Changing preferences and a smarter consumer base have demanded more creativity of this original retailing model. The stores that are doing particularly well during this retail killoff offer a “treasure hunt” experience for the customer. TJ Maxx is the master of this model, and its recent earnings performances reflect so. By importing extras and leftovers and deeply discounting them, their goods fly out of stores way quicker than other stuffy department stores.
Another trend is the increase of “private label” offerings: items that manufacturers produce, but stick on the retailer’s brand instead of their own. These items are only sold at the specific store, often at a discount compared to well-known name brands. They help loosen price margins and give retailer more control over quantity, distribution, etc. And increasingly, I’ve noticed that shoppers don’t mind switching over to the private label for a discount, as long as there is no discernable or drastic decline in quality. The item may even enhance the store’s brand itself if it were decent. In response, Walmart, Target and even Amazon have invested further in this field.
Retailers definitely still have a role in this economy, just like the merchants of the past. Most importantly, they sought out and verify manufacturers from places far away like China and India, tasks that normal consumers would never be able to do. Just consider how sketchy an eBay transaction still is. There is economic value in this service and retailers should still be rewarded for it. But the days of ridiculous markups and behemoth shops are over. As profit margins tighten and stores close, sellers have to search further within themselves and provide convenience and comfort at a reasonable price, to consumers. Some are indeed succeeding. And those who aren’t have to simply drop out during this time of change in the industry.