Despite a brief reprieve in 2018, it looks like the retail industry still has a tough road ahead of it. A new report from UBS Investment Bank is predicting that the downsizing of the industry will be ongoing over the next few years—with an estimated 75,000 stores closing by 2026. This means that almost 11,000 stores are expected to be shuttered on an annual basis, nearly double the rate of recent store closures. While these numbers may seem grave, this report is hardly the death knell for the industry at large—but rather it serves as further proof that both brick-and-mortar and online retail are evolving. In order to stay ahead of the curve and remain competitive, it’s imperative that retailers reevaluate old strategies and make room for new ideas.
Referred to in the report as “store rationalization,” these estimations are based on UBS’ analysis that “with each 1% increase in online penetration, some 8,000 to 8,500 stores will need to close.” Currently, online retail accounts for 16% of the total market share—but that number is expected to jump to 25% by 2026. Unsurprisingly, this increase is being led by Amazon, which USB analysts predict will commander nearly half of all e-commerce sales by 2026. According to the report, the biggest victim of this downsizing will be clothing retailers, which are expected to lose roughly 25% of their stores. But the home furnishings category is also in danger, with 8,000 stores (more than 30% of its current slate) predicted to shutter.
While the past decade has seen a steady decrease in physical retail stores, it’s true that the industry did experience a brief reprieve last year. In-store tickets actually increased in 2018—but that trend was short-lived. Analysts attribute the boost, in part, to last year’s tax cuts, which did not carry over to this year. Similarly, a number of malls were able to boost their consumer traffic in 2018—but that was mainly thanks to steep promotions, which are unsustainable in the long-term. “This pace of store productivity improvement is unlikely to be sustained in 2019 as the boost from fiscal stimulus fades,” UBS analysts Jay Sole and Michael Lasser wrote in a note to clients. “This will likely lead to an acceleration in physical store closures in the upcoming year.”
We’re already starting to see this uptick in physical retail closures. Only four months into 2019, and already the industry has seen more store closures than the entirety of 2018. So far this year, US retailers have announced the closing of nearly 6,000 stores—with only 2,641 planned to be opened, according to real estate tracking done by Coresight Research.
“I expect store closures to accelerate in 2019, hitting some 12,000 by year end,” Deborah Weinswig, founder and CEO of Coresight, told CNBC. “The slowdown we saw in 2018 seems to have been a brief respite in what’s a steady, long-term trend.”
While many retailers are fully shutting their doors, others are simply restructuring—eliminating “less productive” stores in order to focus more on higher performing locations. For example, J.C. Penney will close another 18 department stores and Macy’s will close eight. CreditRiskMonitor, a financial risk analysis and news service, expects that even more retailers will soon face bankruptcies due to “excess capacity and heavy debt burdens.” With more closures on the horizon, this will inevitably trigger something of a ripple effect on shopping centers. According to Cushman and Wakefield, the number of malls in the US is expected to decrease from 1,150 today to about 850 in the years ahead.
While this news may seem dire, some analysts are considering this to be a positive shift for an industry in flux. The US has long had too many retail stores, says financial services firm Cowen—with an estimated 23.5 square feet of retail for every American, compared to just 16.4 in Canada, 4.6 in the UK and 3.8 in France. According to Green Street, a real estate research firm, the number of department stores still open in the US could fill 350 average-sized malls.
“This is a healthy cleansing for the retail industry,” John D. Morris, senior brand apparel analyst for financial services firm D.A. Davidson, told the Washington Post. “We’re in the middle of a multiyear retail purge. Companies are finding that when it comes to stores, less is more.”
Cowen has come to similar conclusions, with its analysts noting that current data “suggests that the sector remains in the early innings of reduction in unproductive physical retail.” The key word there is “unproductive.” Despite the staggering number of retail closures, we are also seeing an increased investment in brick-and-mortar from select brands. Retail vacancies are being snapped up by digitally native companies like Casper, Wayfair and Warby Parker that are focused on creating more unique shopping environments. "The retail apocalypse has gotten a lot of attention,” explained Matthew Kennedy, senior IPO market strategist at Renaissance Capital. “These are the replacements.”
With all of these changes afoot, what can retailers do to keep up?
Stay Informed On Major Industry Moves
In order to effectively plan for the future, it’s essential for retailers to stay on top of all of the latest industry shake-ups. In the bedding sphere, we’ve noted two major news items that are likely to have a big impact throughout the category: first, the recent resignations of both Mattress Firm and Serta Simmons’ CEOs; and, second, Casper’s purported IPO plans.
Just last week, it was announced that Steve Stagner would be stepping down as Mattress Firm CEO and Executive Chairman—just shortly after it was announced that Michael Traub will also be leaving his post as CEO of Serta Simmons Bedding. This news had many analysts speculating that a reunion between Mattress Firm and Serta Simmons rival Tempur Sealy may be in the works. In a research note to clients, Piper Jaffray analyst Peter Keith described the abrupt termination of the Mattress Firm/Tempur Sealy partnership “an irrational and emotionally charged fallout because it made no economic sense for either party,” and noted that Stagner’s resignation was likely a necessary step towards rebuilding the “trust and durability” of the relationship. He went on to claim that a reunion between the two brands is 90% probable, and both parties are "highly motivated" to renew the deal. This speculation was further fueled by current Tempur Sealy CEO Scott Thompson, who told investors in February that his company has had “constructive” talks with Mattress Firm and noted that their relationship is “trending well.” This news, along with the resignation of Stagner, has also led analysts to suspect that Mattress Firm’s relationship with Serta Simmons may be on the rocks—especially as financial estimates have speculated that this partnership has been “much less lucrative than [Serta Simmons] originally hoped.”
On the e-commerce front, Casper is continuing to expand both its business and retail distribution—and talks of a future IPO have begun to circulate. In addition to its online sales, Casper mattresses are now sold at 20 branded brick-and-mortar stores and more than 1,000 Target and Hudson’s Bay locations throughout North America. With 200 more US stores slated to open up in the coming years, the brand is also looking to expand its distribution to Europe and Asia.
While Casper hit $400 million in sales last year, The Information is reporting that the brand still lost money last year. Coupled with the added pressure of an increasing saturated online mattress market, the company is looking for new ways to differentiate itself through new product categories. As such, Casper recently introduced its smart “glow light” lamp—and CEO Philip Krim says that more tech-driven sleep products are in the pipeline.
More than just industry gossip, these news stories underscore the fact that mattress and bedding retail remains as volatile as ever. Today’s retailers cannot afford to get too comfortable with the status quo.
Stop Playing Catch-Up—Make Bold Plans For The Future
If we’ve learned anything from the changing retail tides, it’s that playing catch-up is no longer a viable option. “Industry dynamics will inevitably favor those who are thinking long-term,” writes Natalie Kotlyar, BDO Unibank’s partner and retail and consumer products practice leader. “What worked to keep businesses afloat in 2018 may not be enough once that correction hits and retailers that are just surviving today could find themselves in trouble.”
Retailers are putting themselves at risk by operating in a “wait-and-see mode,” she explains. Instead of making bold investments in their future, they are slow to implement technology and limiting their planning to the next few quarters. Conversely, the retailers that are setting themselves up for success are those that are focusing on developing new e-commerce strategies and figuring out how to anticipate consumers’ changing needs.
“The majority of retailers are stuck in survival mode,” Kotlyar goes on to say. “Playing catch up in perpetuity is preventing retailers from seizing new opportunities and leapfrogging the competition. It’s time for retailers to get rational: Scale with stability. Focus with foresight. Invest with intention.” Or, as the full market analysis report from BDO implores, retailers need to “make the hard choices before they’re made for you.”
Invest In Omni-Channel Strategies
Not only do today’s new retail spaces look different than traditional stores, they are also serving a different purpose. Many of them function more like product showrooms that direct consumers online to make their final purchases. “The trend is toward more streamlined stores: Less chaos, less inventory, less choice,” said Morris, senior brand apparel analyst for D.A. Davidson. “If a customer wants something in a different color or size, they can find that online.”
While this approach appears to come naturally to many of the smaller online upstarts, it’s not impossible for larger big box chains to replicate it. When Target chief executive Brian Cornell promised to invest $7 billion to remodel hundreds of stores and introduce a wide range of new private-label brands, he was met with skepticism. But two years later, this bold revamp has proven to be a success. Last year, the retailer clocked its best retail sales since 2005—with comparable sales in 2018 growing by 5%. Far from slowing down, the brand plans to remodel 1,000 more stores by the end of 2020.
Beyond just renovating its stores and introducing new brands, Target has also expanded its fulfillment options—further integrating its online and physical stores. Online buyers now have the option to select curb-side pick-up at more than 1,000 Target locations—while in-store shoppers at 1,500 location can opt to have their items delivered directly to their homes, same day, through the brand’s Shipt delivery service. This has been a clear success for the chain. Target’s digital sales jumped 36% in 2018—and in the fourth quarter, three out of four of the retailer’s digital sales were fulfilled by physical stores. In addition to offering added convenience for consumers—giving them more options for how they want to shop—these new fulfillment services are actually saving Target money too. On average, order pickup and drive-up cost 90% less than shipping an item from a distribution warehouse.
Rethink Retail “Experiences”
While a more curated, omni-channel brick-and-mortar environment has proven to be effective, it turns out that the primarily “experience-based” retail model has been less successful than anticipated. That’s according to Thasos, an artificial intelligence platform that analyzes real-time location data from mobile phones. The company found that malls with “experiential” tenants—stores like Apple or Tesla that are not primarily focused on selling products—did not see increased year-over-year foot traffic when compared to malls without such retail spaces.
As such, some malls and stand-alone chain stores are shifting gears to focus on integrating non-retail companies to attract more foot traffic—adding hotels, apartment complexes and gyms. That includes offering more short-term leases to allow burgeoning brands to cycle through more frequently (gaining access to more foot traffic and shopping pattern data). In fact, Kohl’s recently announced a new partnership with Planet Fitness, with plans to downsize 10 of its stores in order to lease the extra space to the gym.
So what comes next?
While the UBS report makes it seem like a wave of mass store closures is inevitable, these projections do not have to signal the end of retail success as we know it. With thoughtful investments and strategic planning, bedding retailers still have a chance to weather the tough road ahead and create more sustainable opportunities for growth.
This article originally appeared in Sleep Retailer eNews on April 18, 2019.
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