Will the next recession devastate mall-based retailers?

Discussion
Aug 23, 2019
George Anderson

Seventy-four percent of U.S. business economists expect a recession to hit the U.S. by the end of 2021, according to a survey by the National Association for Business Economics. With many retailers having struggled in recent years during relatively good times, there is real concern over what will happen to those very same businesses if consumers pull back spending in an economic downturn. 

“If there’s another recession — and I think there will be soon — everyone gets knocked down,” Mark Cohen, director of retail studies at Columbia Business School and the former CEO of Sears Canada, recently told The Washington Post. “The strong get back on their feet. The weak don’t recover.”

The Dallas Morning News reports that many of the weakest retailers have built their businesses in malls. Earnings at chains with stores located in U.S. malls fell 29 percent during the first half of the year, according to data compiled by Retail Metrics. Retailers operating stores outside of malls produced earnings that were up three percent.

Retailers issuing second quarter earnings reports support the view that mall-based chains face an uphill climb in times both good and bad. This is true even of chains that have sought to minimize their downside risk by experimenting with new concepts, opened off-price and showroom outlets in non-mall locations and thrown financial and human resources at building revenues through digital channels.

A case in point is Nordstrom. The company reported that net sales for its namesake chain fell 6.5 percent during the second quarter while revenues at its off-price Nordstrom Rack business were down 1.9 percent. Nordstrom, which used cost cuts and inventory reductions to post better than expected earnings for the quarter, did see its digital sales improve four percent year-over-year. Digital revenues now account for 30 percent of its total business.  

“It’s an enigma why their business isn’t better,” Chuck Grom, a senior analyst with Gordon Haskett Research Advisors, told The Wall Street Journal prior to Nordstrom’s earnings announcement. “They have one of the best websites. They don’t have too many stores.”

Other mall-based retailers such as J.C. Penney are in more precarious positions. The chain, which is seeking to rebuild its debt-laden business under current CEO Jill Soltau, reported a six percent decline in same-store sales during the second quarter (excluding discontinued appliance and furniture product categories). 

DISCUSSION QUESTIONS: How does the current health of retail in the U.S. compare to where the industry was before the start of the Great Recession? Do you think the fallout from the next recession to hit the U.S. will be more devastating to retail businesses than those that came before it?

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"A recession will accelerate current trends and those retailers currently posting bad results will see even more attrition."

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20 Comments on "Will the next recession devastate mall-based retailers?"


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Neil Saunders
BrainTrust

Most retailers are now much leaner than they were going into the last downturn. That’s a good thing, but it means those that are struggling will have very little room to maneuver should another recession strike. Basically, there’s not much fat to cut.

In my view a recession will accelerate current trends and those retailers currently posting bad results will see even more attrition. That’s certainly going to produce more failures. Harsh as it may sound, I am not entirely sure that’s a bad thing. Clearing out the weak so that stronger and newer alternatives have more room to grow is kind of evolutionary.

Lee Peterson
BrainTrust

I’m on board with Neil’s point of view. There are so many retailers teetering on the brink that even a minor consumer-driven recession will see them falling into the abyss. Think of specialty retail alone and all the marginal middle players like J.C. Penney and department stores. As outlined above, I’m not so sure it’s a bad thing, especially for consumers. The players that should be sweating though are mall developers and real estate crunchers. The time to re-think all that empty space is now, before the inevitable.

Lee Peterson
BrainTrust

Interesting all the negative hits throughout this segment: recession deniers? Or we think there’s a lot of well positioned retailers today? Really?

Joan Treistman
BrainTrust

While it’s important to understand the health of retail prior to the past recession, I believe it’s the consumer impact over the “recovery” that sets the stage for a next recession. Consumers learned how to constrict spending and that included going to malls less often as well as cutting back on gas to get there. Online sales have benefited from that learning. Of course, there is more to the success of online but lessons learned in the past recession impacted consumer behavior then and continue to influence shopping today. Anticipation of a new recession will reflect lessons learned and new shopping patterns.

Cathy Hotka
BrainTrust

The last recession had several lasting impacts, including a turn away from designer labels and toward the treasure hunt. The mall that is closest to my home in Florida is only one third full; it’s easy to imagine that a significant economic downturn could shutter it.

David Katz
BrainTrust

Never waste a good recession. For industry leaders and disrupters, a recession provides an opportunity for growth in market share… for those less fit to survive, recessions are extinction events. The meteor is coming; no one is sure where or when it will hit.

Paula Rosenblum
BrainTrust

We have had a generational shift in the past decade, and retailers still haven’t quite figured out how to attract these new entrants. We’ve seen the emergence of fast fashion, and now its market saturation. And the recognition of its bad impact on the environment.

I think retail has been healthy but shaky since the recession and between tariffs and other potential recessionary trends, the industry is at serious risk. Not just malls. The whole shebang.

Rich Kizer
BrainTrust

First off: With this recession threat, the current health of many retailers is somewhat shaky. The last recession saw big numbers of strip center stores close primarily due to traffic and sales, against rental rates. Now when all that open space became available, many strip centers, in the recovery, dropped or offered hybrid leases: a base plus percentage lease, allowing a new crop of retailers (who took advantage of those leases) to enter into those spaces, thus elevating occupancy for the landlords. IF, and I hope not, another recession should be on the horizon, I think the opportunity of these basically under-capitalized retailers will go, and blank spaces will once again occur. In malls, it’s primarily a different story. Large companies with stores will have a much more impatient view of performance of stores. I think malls will counter with percentage rents for the short term in trying to hold tenant count. I hope this doesn’t come to pass! Just my thoughts.

Bob Phibbs
BrainTrust

It is not an enigma that luxury brands like Nordstrom and Neiman Marcus are not growing. Luxury brands alone don’t make you successful – conversions make you successful.

Until and unless Nordstrom and the others pay attention to how many sales they could make but didn’t, they’ll be stuck in adding ancillary events and services to mask the fact they can’t sell what they stock. That takes training. That takes people. That takes work.

Ryan Mathews
BrainTrust
This is asking for a conclusion based on a false equivalency, since there were other factors at work. While the numbers vary (wildly) depending on who is counting what, based on a blended average e-commerce took roughly 5.1 percent of total retail sales in 2007, the year the Great Recession began, and last year captured somewhere in the neighborhood of roughly 14 percent of all retail sales. Again, individual reporting may differ but, directionally, the results all agree in terms of the general sales trajectory. So did the Recession boost e-commerce sales at the expense of physical retailers? Would the sales loss have occurred anyway? Or would e-commerce grown even faster in a healthy economy, taking more and more share away from traditional retailers? The answer, of course, is we will never now what might of happened, just what did. Even among physical retailers, the market has significantly changed. The list of brick and mortar retailers that have closed, gone bankrupt, been acquired, and/or closed significant numbers of stores between 2007 – 2019 is far,… Read more »
Shep Hyken
BrainTrust

Retail overall is good today. Any loss in confidence and the impact of a recession will impact sales. It always does. But consider this… Noah didn’t build the Ark after it rained. We know a recession is looming ahead. We also know that digital/online sales are playing a factor in traditional brick-and-mortar and mall sales (and traffic). It’s time to plan, and if done well, will help minimize economic impact. It will be there, but it will be the retailers that can adjust that will survive.

Jeff Sward
BrainTrust

Good point about Noah!

Jeff Sward
BrainTrust

Recessions are tipping points, filters if you will. It’s not apocalyptic and it’s not Armaggeddon. Resilient businesses that have demonstrated adaptability will do OK. Will Target survive? Of course. Will J.C. Penney survive? Doubtful. Theoretically every retailer is doing their best right now to adapt and create some new kind of model. Theoretically. So it might come down to balance sheets. Good ideas with strong balance sheets — no problem. Weak ideas with weak balance sheets, nice knowing you. In between is a coin toss.

David Naumann
BrainTrust

The retailers that are hanging on by the skin of their teeth will not survive the next recession and malls that are currently struggling to maintain tenants will be hit hard. I agree with Neil Saunders that many retailers have become leaner (smaller footprints and inventory levels) and that will help them weather the storm.

Ralph Jacobson
BrainTrust

We are in the longest-running bull market in history. Although many pundits are saying the sky is falling, most prominent economists do not expect a recession until the 100-year history of economic cycles repeats a downturn in the next 4-7 years. No promises and there is no guarantee for that, however, based upon the most recent downturns and more impending online competition, mall-based retailers have much more to worry about than the next recession.

Craig Sundstrom
Guest

Before we read tea leaves, I think it’s important to realize the retail scene is different that it was ten years ago: i.e. there has been a large — though overstated – shift to online, much of it with companies that didn’t even exist then. There’s also been a large decline in a few companies — Sears, JCP, even Macy’s — that enjoy an oversized presence in people’s minds.

So if the pattern of the next recession follows the last one, i.e. weaker players go out-of-business, and it favors largely invisible “.com’s” at the expense of highly visible store-based sellers, then the downturn would have the appearance of being worse … even if that’s not the case.

Ananda Chakravarty
BrainTrust
The retail market is growing at a healthy 3.4% according to the US Census last I heard. More important, the current health of the market has little to do with the Great Recession — every recession was unique and causality was specific to the times. There’s no reason to believe in a new real estate bubble right now causing a subprime mortgage crisis. We don’t have a run up in excess investor funds as there was from 2000-2007. Mall based retailers have some of the best websites, have accounted for excess physical space and continue to take steps to make sure they are not caught in difficult business scenarios. Of the top 1,000 retailers, how many have actually gone out of business? We’re talking about numbers you can count on your hands. The top 100 retailers alone have over 150,000 stores, with an estimated 3.8 MM retail stores in the US. Store closures in the thousands are less than a tiny percentage. Retail in the US alone is comparable to the GDP of Germany. This… Read more »
Cate Trotter
BrainTrust

It’s a tough one. As others have pointed out, things are different compared to the previous recession. A lot of retailers have shed some of their stores where they can, or worked to foster new business models that will hopefully stand them in better stead. Some are gone from the market entirely. I think another recession will be tough on those retailers and it may well speed up the demise of certain retailers who are struggling now — not necessarily changing the final outcome, but bringing it about faster. There may be new opportunities though. A recession could mean that those retailers who are making in-roads in resale and rental now may fare better, for example.

gordon arnold
Guest

We need to look at retail sales and not stores for the answer to this question. Brick & mortar store activities have been adjusted by means, e-commerce vs. B & M, since the turn of the century. This is far more a growth due to consumer demand with little influence from GDP strength.

Let us be clear in this question. Any recession and/or depression, like the depression of 2008, is measured in terms of GDP, Gross Domestic Product, and not retail only. In fact production is by far the leading factor.

Pointing to government, inflation, bank rates, the weather or any other non controlling factor(s) is a clear picture of how little we know about consumer trends and needs. If you want to grow in any economy you must never be distracted by surrounding conditions or uncontrollable. Get in front of the market that you are in and stay relevant to today’s needs and wants.

Scott Benedict
Guest

The US Retail industry remains one of the largest and most financially-successful sectors in the US economy. The unfortunate reality has been that our industry was horribly overbuilt, with 5x the square footage per capita of other developed nations according to NRF. That said, yes, some weaker malls and weaker mall-based merchants might not survive … and perhaps they shouldn’t. However, their potential demise does not mean that retailing is weak, but rather that the weaker players will not survive the next downturn.

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"A recession will accelerate current trends and those retailers currently posting bad results will see even more attrition."

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