RETAIL THERAPY
RETAIL THERAPY Why the retail industry is broken – and what can be done to fix it
MARK PILKINGTON
BLOOMSBURY BUSINESS Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA BLOOMSBURY, BLOOMSBURY BUSINESS and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2019 Copyright © Mark Pilkington, 2019 Mark Pilkington has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. Bloomsbury Publishing Plc does not have any control over, or responsibility for, any third-party websites referred to or in this book. All internet addresses given in this book were correct at the time of going to press. The author and publisher regret any inconvenience caused if addresses have changed or sites have ceased to exist, but can accept no responsibility for any such changes. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Names: Pilkington, Mark, 1957 author. Title: Retail therapy : why the retail industry is broken – and what can be done to fix it / Mark Pilkington. Description: New York, NY : Bloomsbury Publishing Plc, [2018] | Includes bibliographical references and index. Identifiers: LCCN 2018037077 (print) | LCCN 2018044148 (ebook) | ISBN 9781472965134 (ePDF) | ISBN 9781472965127 (ePub) | ISBN 9781472965110 (eXML) | ISBN 9781472965103 (hardback) Subjects: LCSH: Retail trade–Management. | Electronic commerce. | Competition. Classification: LCC HF5429 (ebook) | LCC HF5429 .P545 2019 (print) | DDC 381/.1–dc23 LC record available at https://lccn.loc.gov/2018037077 ISBN: HB: 978-1-4729-6510-3 ePDF: 978-1-4729-6513-4 eBook: 978-1-4729-6512-7 Typeset by Deanta Global Publishing Services, Chennai, India
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CONTENTS
Introduction – an overview of the crisis 1 PART ONE Retail apocalypse now! 7 1 2 3 4 5 6 7 8 9
A tale of two bankruptcies 9 The great stores meltdown 13 No longer a nation of shopkeepers 25 Dark Satanic Malls 29 My kingdom for a horse – the knock-on effect on branded suppliers 36 The next big short? 42 Killing more jobs than China 47 A global problem 54 The impact of public policy 68
PART TWO The causes of the crisis in retailing 75 10 The classical retailing model 77 11 The rise of e-commerce 84 12 The broader impact of the technological revolution 93 13 The generational revolution 98 14 The death of brands 108 15 Passing peak consumption 118 16 Conquering the final mile 125 17 The dawn of a virtual world 133 18 This is your fridge talking 137 19 Algorithm’n’blues 140 20 Veni, Vidi, 3D 145 21 See you later, incubator 149 22 Direct is best 156
vi CONTENTS
23 Retail derailed 165 24 Bankers away! 175 25 Can the last one out switch off the lights? 187 PART THREE How to save retail 191 26 The importance of simplicity 193 27 Go with the flow 195 28 Cannibalize, cannibalize, cannibalize! 200 29 Lean and mean 203 30 Brand Theatre 208 31 The Third Space 212 32 Re-tech 216 33 Becoming the conversation 220 34 The price is right 224 35 Inclusive is the new exclusive 233 36 Virtuous reality 237 37 The hacker way 242 38 Reinventing shared shopping spaces 246 39 Advice to governments 254 40 Summary – the new rules for survival 265 Notes 269 Index 309
Introduction – an overview of the crisis
The world of retailing, as we know it, is going under. Unlike a stock market crash, this isn’t a sudden crisis – mainly because that is not the way retailing works. But day after day the news just keeps getting worse and worse. Since 2015, we’ve seen the escalation of the most severe crisis ever to hit the global retailing industry. In the UK, many retailers have gone under, and hundreds more are struggling. Among the insolvencies are high-profile casualties such as House of Fraser, Mothercare, Toys“R”Us, BHS, Carpetright, Maplin, Jacques Vert, East, Jaeger, Austin Reed and HMV.1 In the United States, the situation is even worse, with over 300 retailers going into Chapter 11 or closing all their stores, in recent years, including major names like Sears, Kmart, Toys“R”Us, Henri Bendel, Sports Authority, Claire’s, Quiksilver, Aeropostale, Gymboree, Payless ShoeSource, BCBG, Wet Seal and The Limited.2 Over 8,000 major brand chain stores closed their doors in 2017 in the United States alone.3 To give some perspective to these numbers, the previous worst year – 2008 – only saw 6,000 closures in total, and this was at the height of the Great Recession. In the UK, nearly 2,000 stores closed in the same period. And these closures have not been limited to weak brands, as in the past; some of the brands affected include some of the most powerful in world, such as Polo Ralph Lauren4, Victoria’s Secret5 and Marks & Spencer.6 The problem is affecting all sectors, from fashion to banking, and at all price levels, from luxury through to discount. A number of premium brands and luxury houses have seen periods of flat or declining sales, particularly in the
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North American market, including Prada, Tommy Hilfiger, Coach, Armani, Burberry, Ferragamo, Michael Kors, Tiffany, Ralph Lauren, Diesel, Tod’s, Canali, Lanvin, Mulberry and Roberto Cavalli.7 At the other end of the spectrum, discounters – which have enjoyed many years of uninterrupted growth – have also faced a slowdown in sales growth. And in the middle market, brands like J Crew, Mothercare and Gap have all come under increasing pressure.8 Overall, about 90 per cent of US retailers have experienced sales declines. But nothing is as frightening as what is happening to the department stores. Companies like Debenhams and House of Fraser in the UK, and Sears, JC Penney and Macy’s in the United States, have seen their businesses badly affected in the last few years. They are closing thousands of stores between them, and there is a real question mark as to whether the organizations themselves will survive.9 Warren Buffet, the famous investor, appeared to make this official when, in early 2017, he said: ‘I think that retailing is just too tough for me; just generally’, and ‘The department store is online now’.10 It is not just the retailers who are suffering. As their businesses decline, the brand suppliers who depend on them are also experiencing significant problems. Highly successful companies like Procter & Gamble, Under Armour and Mattel have seen declining sales as their retail customers cut back, especially in the US markets.11
Where did it all go wrong? All round the world, there are signs of a retail sector in crisis, and the problem is not limited to the UK and the United States. Retailers are struggling and going bankrupt across Europe, Russia, South America, the Middle East and the Far East. And unlike in 2008, it is not the economy that is causing the problem. It is true that 2008 was a very difficult time for retailers, but it was also
INTRODUCTION – AN OVERVIEW OF THE CRISIS 3
understandable – it was in the middle of the worst economic downturn since the Second World War. The current storm, on the other hand, has blown up out of the clear skies of a growth economy that has been enhanced by low unemployment and booming stock markets. What on earth is going on? Well, it appears that the slow death of retail, which has been predicted and discussed for so long, is finally happening. People often say, ‘But is this really new? After all, retail seems to have been struggling for a long time.’ Well, yes, individual retailers have struggled; but this is different – this has the potential to affect almost everyone. Because retailing is a high fixed-cost business, with heavy investments in store construction, long rental leases and significant stocks of goods, it only takes a few years of sales decline before the whole thing tips over like the Titanic filling with water.
Why retail is so important? Why should you care? Well, you may be a shopper, concerned about the disappearance of your favourite brands from your local shopping district or mall. You may be someone who works in retailing, or in one of the suppliers who depend on the retail sector. Or you may be an investor, worried about what all this means for the future of the economy.
Employment Whoever you are, the truth is that retailing affects all of us. Shops, and the suppliers that they support, are one of the biggest parts of the global economy. Retailing globally had sales of US$23 trillion in 2015, and represents 31 per cent of global GDP, employing literally billions of people.12 In the UK alone, it employs 3.5 million people directly and it is estimated that another 3.5 million people depend on it as suppliers and other counterparties.13
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In the United States it employs fifteen million people directly and another fifteen million jobs depend on it, including suppliers.14 This is far bigger than, for example, manufacturing or mining, despite them attracting more political attention. Retailing and its suppliers employ fully 25 per cent of the working population, so what affects retailing will ultimately affect the entire economy. As retail declines, it will cause a major rise in unemployment. For example, from mid-2016 to mid-2017, department stores in the United States laid off more than 100,000 people, which is more than all the coal miners and steel workers in the whole of the country.15 And the retail decline is only just beginning to gather speed. In the next few years, that momentum will increase and it will begin to threaten the whole economy. If you look at the types of jobs that retail provides, these are often a godsend for the more vulnerable groups in society. It is almost the only type of job that does not require much in the way of qualifications, and those jobs are disproportionately weighted towards women, ethnic minorities and school leavers. These jobs provide work and incomes to people in every community, large and small, across the world. With manufacturing in decline, it has become almost the only type of job that is available in poorer areas, and those retail-related salaries are often the only things supporting fragile families.
Property and real estate Retailing also plays a major part in the property market. Shops lease spaces in malls and on shopping streets, and the property itself is often owned by Real Estate Investment Trusts (REITs), which obtain their income from the rents paid by the retailers. As retailing declines, the malls and shopping streets are also being hit. All across the United States, for example, malls are starting to fall apart, especially in poorer communities. It is estimated that over 400 malls (out of a total of 1,200) will have to close in the next few years.16 Even prime shopping areas like the so-called ‘Golden Triangle’ in Manhattan’s Upper East Side, or selected streets in London’s West End, are
INTRODUCTION – AN OVERVIEW OF THE CRISIS 5
starting to experience serious levels of vacancies for the first time ever. In total, over US$2 trillion of assets are invested in retail in the United States alone, and, in every market, retail makes up a significant proportion of the financial markets.17 A retail collapse threatens to deflate these assets in an extreme manner, and it is not too much to say that it could be a prime cause of the next global economic crisis.
What lies ahead? What are governments doing about the crisis? Are they helping to support this industry which gives sustenance to so many communities across the world? Far from it – in fact, in some ways, they seem bent on hastening its decline. Whether it be the impact of Brexit, the national living wage, the high business rates and the apprenticeship levy in the UK, or the restrictions on immigration, the import tariffs and the fact that many internet companies have been permitted to avoid state sales tax in the United States, governments seem almost to be working against the retail industry, in complete ignorance of its vital role in society. In fact, retail gets very little attention, politically speaking: retail workers are not strongly unionized and they lack the photoopportunity appeal of hard-hatted white male miners and steel workers. So what can we do to stop the retail collapse, and the economic crisis that it is precipitating? Fortunately, solutions do exist. There are things that governments, brands and retailers can do to avoid the worst of the crisis. Unfortunately, there seems to be a lack of understanding of the underlying problems – many retailers around the world are burying their heads in the sand, and national governments seem to be almost unaware of the problem at all. The biggest issue is that even so-called retail industry experts are failing to really understand the problem. The causes of the retail apocalypse are multiple and complex. People blame it on e-commerce, and it is true that this is a key
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factor in the story. Yet there are many other causes, including the information revolution, generational changes, the role of private equity (PE) in increasing retail debt levels, and self-inflicted wounds from the retailers themselves. Until all these causes are fully understood, there is little chance that either the retailers, the brands that supply them, or the governments who are charged with looking the health of our economies will be able to prevent the looming crisis that threatens us all.
Using this book This is what this book will try to address. It will take a long hard look at the crisis and its causes, and will then attempt to outline and discuss some meaningful and practical solutions. Part One takes a closer look at the nature of the retail crisis – read this part in particular if you want much more information about the underlying problems themselves. If it has not yet reached your part of the world yet, rest assured that it will. My recommendation would be to try to stay ahead of the curve by understanding how and why these events have had such an impact on established markets in the West. Part Two looks into the causes of the problem, and the trends that are likely to make things even worse. This is important if you want to look behind the headlines and have a deeper understand of how current developments are likely to affect the retail sector in the near future. Part Three looks at what can be done to save retailing as we know it. Given the issues that we’ve already discussed, this topic lies at the very heart of the book. Despite the doom and gloom, there are ways in which retailers can fight back and attract customers back into both their physical and online stores. Now please read on … .
PART ONE
RETAIL APOCALYPSE NOW!
1 A tale of two bankruptcies
Toys“R”Us – A leader in the UK/US toy market On 28 February 2018, Toys“R”Us UK went into administration, following the move by its US parent which filed under Chapter 11 in September 2017. With these decisions, 900 stores were scheduled for closure, and as many as 40,000 employees were to lose their jobs. The store group which had been so integral to the lives of several generations of children would open its doors no longer. The shares of major toy suppliers like Mattel and Hasbro dropped sharply. It was a depressing end for a once-proud company, its employees and suppliers. Toys“R”Us had been in operation for seventy years since it was founded by Charles Lazarus in 1948. Its big-box, out-of-town stores were a success, making it the largest toy retailer in the world by the 1990s. Problems started to appear in 2005, after the company was acquired by a consortium of venture capitalists, including Bain Capital Partners, KKR & Co and Vornado Realty Trust, in a US$6.6 billion leveraged buy out. According to multiple sources, including Bloomberg, The Washington Post, Reuters and Fortune, the new owners proceeded to do what a lot of venture capitalists do, and loaded the Toys“R”Us balance sheet with a massive US$5.2 billion of debt, which alone required US$400 million of interest payments every year. At the same time, they took out US$470 million in advisory fees, interest and other payments.
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On top of this financial burden, the growth of internet companies like Amazon began to take large amounts of business away from Toys“R”Us, and the company struggled to build its own e-commerce business. Sales declined, and the company fell into losses from 2014 onwards; great efforts were made to turn it around, but in the end such activity was simply delaying the inevitable. Despite its US$11 billion of sales and its 15 per cent share of the US toy market, Toys“R”Us met its end in 2018. The effect of the Toys“R”Us debacle on workers, communities and suppliers – in both the United States and the UK – has been immediate and severe. The 33,000 US employees remain at risk of not getting any severance payments (other than for the minimum sixty-day notice period), despite executives receiving US$8 million in bonuses a week before filing for bankruptcy. Wayne, New Jersey, where the company was headquartered, is also likely to suffer, as the toy firm was the region’s third largest taxpayer. And suppliers have been left with heavy unpaid bills. ‘We have a US$14–$15 million payment due that hasn’t been paid,’ Isaac Larian, chief executive of Bratz dolls maker MGA Entertainment, said. ‘If I was a guessing man, I wouldn’t think I’d get all of it back.’ The closure has caused panic among smaller toy suppliers, many of whom are now at risk themselves.1
British Home Stores – A major British department store On Monday 25 April 2016, British Home Stores (more commonly referred to as BHS) called in the receivers, ending eighty-eight years as a leading UK department store. Founded in 1928, by a group of American entrepreneurs who sought to emulate the success of Woolworths by selling everything for a shilling or less, BHS was a mainstay of the British High Street for decades, with nearly 200 department stores at its height. In the late 1980s and 1990s, it began
A TALE OF TWO BANKRUPTCIES 11
to lose ground to retail rivals, but its real fate was sealed when, in 2000, it was bought by controversial business magnate, Philip Green, for £200 million. According to many credible sources, including a Parliamentary Select Committee report, Green’s family and other shareholders then proceeded to take over £586 million out of the business – in dividends, rent and interest – and allowed a £225 million deficit to open up in the company’s pension scheme. By 2015, the company had been wrung dry, and Green, under pressure from the UK Pensions Regulator to top up the pensions scheme, opted instead to sell BHS on to Dominic Chappell – a bankrupt ex-racing driver, with no experience of retailing – for the princely sum of £1. Chappell and his company, Retail Acquisitions, then took a large amount of money out of the company in the form of loans, fees, salaries, interest and dividends, before BHS finally gave up the ghost a year later. Not only did 11,000 employees lose their jobs, but 20,000 BHS pensioners saw their pensions threatened, and thousands of suppliers were left with £1.3 billion of unpaid bills. ‘No one is to blame’, said Dominic Chappell. Philip Green denied all responsibility, saying: ‘If you buy my house and it falls down, is it my fault?’ The Parliamentary Committee report concluded that the ‘systematic plunder’ of BHS represented the ‘unacceptable face of capitalism’. By the time of the bankruptcy, the potential pension deficit had swollen to £571 million. It should be noted that Philip Green has, under extreme political and media pressure, now agreed to pay back £373 million to the Pension Regulator.2
Summary These two tragic stores illustrate a number of the themes that will dominate this book: the rise of e-commerce, the failure of retail management, the role of private financiers, the wrecked careers of the employees and the communities who are left to pick up the tab at the end.
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You might say: ‘Well, it’s certainly tragic, but isn’t this just capitalism at work? Surely this is normal.’ Unfortunately, what we are witnessing is not ‘normal’. It is not just individual retailers who are suffering – many industry commentators believe that we are witnessing the death throes of an entire industry.
2 The great stores meltdown
Toys“R”Us and British Home Stores are but two examples of a phenomenon which is spreading rapidly across the UK, the United States and the rest of the world. A substantial portion of the retail industry suddenly seems to be going under all at once. Every day brings news of fresh bankruptcies, store closures and shuttered malls. The retail industry, which appeared to survive the Great Recession of 2008, seems to be suddenly sinking despite the apparently benign global economy.
Closing down Retailing in the UK is under severe pressure, with recent retail sales volumes showing their weakest growth for more than five years.1 In addition, Brexit has led to a fall in the value of the pound against the dollar, which has pushed up retail product sourcing costs by around 20 per cent.2 Labour costs, rents and business rates have also been rising sharply, which have all created a perfect storm for UK retailers. And the damage has been immediate and obvious. Labour costs, rents and business rates have also been rising sharply, creating a perfect storm for UK retailers. And the damage has been immediate and obvious – the high street has been emptying out before our very eyes, with a shocking litany of insolvencies, including House of Fraser,
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Toys R Us, Mothercare, BHS, Carpetright, Maplin, Jacques Vert, Jaeger, Austin Reed, HMV, Joe Bloggs, East, Multiyork, Agent Provocateur, Brantano, Blue Inc, New Look and Select.3 Nearly 2,000 more stores closed than opened in 2017, far more than ever before!4 The situation in the United States is very bad, with thousands of store closures announced. Over 8,000 stores closed in the United States in 2017 alone. This is significantly worse than in the Great Recession of 2008, but unlike in 2008 it is not the economy which is causing the problem – the US economy has been growing at a reasonable rate of 2–3 per cent in recent years, and this growth is projected to continue in the near future. Unemployment is less than 5 per cent, and is falling. The stock market was at near-record levels in 2018. Normally, retail brands would be thriving under such circumstances. Yet despite these positive conditions, over 300 US retailers went out of business or became insolvent in the first half of 2017 alone.5 It is true that some of these were relatively small operations, but the casualty list contains a surprising number of major household names, especially in the fashion and apparel sectors. Apart from Toys R Us, these brands include the following major names: Sears, Kmart, Sports Authority, Claire’s, Quiksilver, Aeropostale, Bebe, Gymboree, Payless ShoeSource, BCBG Max Azria, Wet Seal, The Limited, Nine West, Charming Charlie, True Religion, Fredericks of Hollywood, American Apparel, Pacific Sunwear, Radio Shack, Eastern Outfitters, Brookstone, Coldwater Creek, ALCO Stores, Bon-Ton Stores, HH Gregg, A&P, Gordmans Stores Inc., Gander Mountain, Alfred Angelo bridal, Hancock Fabrics, Family Christian, Rue 21, Joyce Leslie, Tamara Mellon, Deb Stores, Karmaloop, Cache, Yogasmoga, Papaya Clothing, Perfumania, Aerosoles, Styles for Less, Southeastern Grocers (Owner of Winn-Dixie), Tops Markets, Charlotte Olympia and Rockport.6
THE GREAT STORES MELTDOWN 15
In addition, a large number of retailers have had their credit ratings downgraded by ratings agencies such as Fitch, Moody’s and S&P, including Neiman Marcus, J Crew, Tom’s Shoes, Charlotte Russe, NYDJ Apparel, Vince, David’s Bridal, Men’s Wearhouse, Boot Barn, Calceus Acquisition (owners of Cole Haan), Christopher & Banks, 99 Cents Only Stores, Bluestem Brands, Everest Holdings (owner of Eddie Bauer), FULLBEAUTY Brands, Academy Sports & Outdoors, PetSmart, SSH Holdings (owner of Spencer’s and Spirit), Evergreen AcqCo (owner of Value Village and Savers thift stores), HT Intermediate Holdings (owners of Hot Topic), The Fresh Market, Guitar Center, Bluestem Brands (owners of Fingerhut, Old Pueblo Traders and Appleseed's), Fairway Group grocery, SHO Holding (owners of Shoes For Crews), Things Remembered (gifts) and Indra Holdings (owner of Totes Isotoner).7 Being downgraded indicates a higher risk of bankruptcy. So bad is the problem that nearly a fifth of the US retailers covered by the ratings agencies have poor debt ratings. In the UK, 19 per cent of retailers – or over 6,500 companies – are showing signs of insolvency, and many more are in distress.8 Some major brands, which even a few years ago would have been considered untouchable have not been spared. The following brands have seen sustained periods of same-store sales decline and/or substantial store closures in the US over the past few years – Victoria’s Secret, Polo Ralph Lauren, Express, Michael Kors, Abercrombie and Fitch, J Crew, Banana Republic, Guess, Foot Locker and Dick’s Sporting Goods.9 These are top brands, rather than weak players, so the fact that they have experienced issues is very shocking. In the UK, major companies like Marks and Spencer, Debenhams, John Lewis, Top Shop, Next, Clarks, The Body Shop, Laura Ashley, Early Learning Centre, Halfords and Sports Direct have seen either declining same-store sales, drops in profits or substantial store closures.10 Sectors outside of fashion and clothing have also been affected. For example, in the pharmacy sector, companies like Walgreens, CVS, GNC and Vitamin Shoppe have been suffering from declining jobs 11, and in the UK, Boots and
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Lloyds Pharmacy have been cutting stores or jobs.12 Furniture retailing has been hard hit, with companies like Pottery Barn in the United States, and B&Q, Homebase and DFS in the UK seeing sales drops. The problems facing the sector was given a poignant symbol in May 2018, when Homebase was sold by its Australian parent, Bunnings, for just £1.00.13 In the office supplies business, Office Depot and Staples have been badly affected.14 The grocery retail business has historically stood up quite well against the internet, but there are signs that it too is now feeling the pressure, as leading supermarket chains like Kroger and Albertsons in the United States, and Sainsbury’s and Asda in the UK have begun to experience problems.15
Department store woes But if there is one class of stores that is right out on its own in terms of the scale of the meltdown, it is department stores. This category has been declining for a long time, but now it feels like the sector is approaching the end of the road. In the United States, over 1,700 store closures have been announced by groups such as Macys, Sears, JC Penney and Kohl’s.16 In the UK, companies like House of Fraser and Debenhams have seen major drops in same-store sales and/or profits, and in the former case, insolvency.17 Such is the scale of the meltdown that analysts are questioning whether the large department store groups will survive at all. Perhaps the most shocking case is that of Sears, which went into Chapter 11 in October 2018, having already reduced its number of stores from 3,555 in 2010 to 1,002 in 2017, on the back of massive drops in same-store sales. Sears Holdings’ remaining 800 or so stores and 89,000 employees were placed at risk by its insolvency. Sears Canada had already filed for bankruptcy in 2017, with the closure of 59 stores and the loss of 12,000 jobs.18
THE GREAT STORES MELTDOWN 17
The disappearing restaurant It is not just retail shops which are getting hit; other categories of retailing are also coming under extreme pressure. As retail stores close down, it has a knock-on effect on the number of people eating in the nearby restaurants, and the restaurant sector has seen a serious decline in many areas. For example, in the United States, the casual dining sector has seen a sustained drop in sales in 2016 and 2017. Like retail, the sector had over-expanded in recent years, and it is now widely seen as ‘over-restauranted’. There is also a growing trend towards people ordering food from alternative sources, such as meal kits, food trucks and of course home delivery. Meal kits are estimated to generate US$1.5 billion of sales, food trucks US$1.2 billion and home delivery US$22 billion. The total sales of the US restaurant industry were US$799 billion in 2017, so this represents only 3 per cent of the total, but the trend is strongly upwards, with an anticipated 19 per cent annual growth in home deliveries, leading to an estimated market of US$45 billion by 2022.19 In the UK there were over 1,000 restaurant closures in 2017, with the Handmade Burger Company, Jamie’s Italian, Prezzo, Square Pie, Byron, Barbacoa and Viva Brazil Steakhouse all falling into insolvency, and Carluccio’s, Strada, EAT, Bella Italia, Café Rouge, Pizza Express and Chimichanga experiencing declining sales, profits or branch closures. The number of restaurants declaring bankruptcy has risen by 13 per cent in 2017, and up to 20 per cent of UK restaurants (or 15,000 outlets) could close in the next few years.20 Even Starbucks has seen declining sales in the UK.21 In the United States, the problems faced by the suburban middle class has been reflected in a catastrophic decline in the fortunes of many casual dining brands which have formed the backbone of Middle America for the past twenty years. A number of chains have gone bankrupt, including Logan’s
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Roadhouse, Champps, Bailey’s Sports Grille, Garden Fresh Restaurant and Sweet Tomatoes. Many others are closing or selling their stores.22 Starbucks has announced the closure of all 379 of its Teavana stores (acquired in 2012 for US$675 million), and also issued a cautious forward forecast. CEO, Howard Schultz said: ‘We can’t hide behind the fact that there is a seismic change that we’re experiencing as a brick-and mortar retailer.’23 Tim Horton’s reported declining same-store sales in 2017,24 while Famous Dave’s has seen declining sales, store closures and losses in the same year25 and Ruby Tuesday closed 100 locations between August 2017 and January 2018;26 Subway announced in 2018 that it was planning to close 500 stores, while Applebees said that it would close eighty, on top of the ninety-nine that it closed in 2017; IHOP released plans for closing thirty to forty branches, on top of the twenty three it shuttered in 2017; Joe’s Crab Shack announced closure of forty stores in 2018; Papa Murphy – sixteen company-owned stores in 2018; Pollo Tropical – thirty stores; Bloomin’ Brands, owner of Outback Steakhouse and Carrabba’s Grill – forty three outlets and Noodles & Company – fifty five outlets.27 TGI Friday has seen several years of declining sales28; Sonic DriveIns saw same-store sales down 3.3 per cent in 2017,29 while Chili’s owner, Brinker International, reported same-store sales down 2.1 per cent in 2017.30 All in all, it represents an apocalypse just as violent and destructive as anything happening in retail.
Estate agents also affected The UK retail estate agency business has been very badly hit by a combination of growing online competition, increased property taxes (stamp duty) and uncertainty over Brexit. Online agencies such as Purplebricks (the brand leader), Yopa, Tepilo, Emoov and HouseSimple have been growing rapidly, by offering lower commissions and simpler mobile-enabled processes. The leading publicly-quoted retail estate agencies, have reported major reductions
THE GREAT STORES MELTDOWN 19
in profits: in the first half of 2018, Countrywide (the largest group, which owns Hamptons, John D Wood and Abbotts) saw a 98 per cent reduction in profits, while Foxtons suffered a 64 per cent reduction in profits. Countrywide has also been closing branches. Accountancy Moore Stephens reckon that nearly 20 per cent of estate agencies are at risk of going bust in the near future.31
And the disappearing car The automotive retail sector is also seeing very difficult trading, despite reasonable gas prices in the period 2015–17. It is so bad that people are calling it ‘Carmageddon’. In the UK, new car registrations dropped by 5.7 per cent in 2017, the first drop in six years, according to the Society of Motor Manufacturers and Traders (SMMT), and the SMMT also predicted a similar fall in 2018.32 In the United States, total sales of cars and light trucks dropped by 2 per cent in 2017, according to Autodata, an automotive data-provider.33 This is the product of two trends. Firstly, fleet sales have collapsed due to the challenges faced by the car rental industry, which is suffering from the growth of the ride-share companies such as Uber and Lyft. Secondly, on the retail side, volumes have been dropping due to the tendency of consumers to buy second-hand cars, rather than new ones. Debt-strapped consumers are struggling to keep up payments on car plans, with auto-loan delinquencies at a level worse than during the height of the Great Recession. The 2017 sales would have been even worse without the one-off replacement of 1 million cars which were destroyed in the autumn 2017 hurricanes, temporarily shifting the burden of the downturn to the insurance companies! The performance of the big three US automakers tells a grim story. General Motors sales dropped by 2.4 per cent in 2017, and income from continuing operations was considerably down.34 Ford has announced US$25.5 million of cost cuts by 2022, based on dramatically cutting its forward-going car range to only two cars!35 Fiat Chrysler Automobiles (FCA) reported a 7 per cent drop in
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its sales in the NAFTA region in 2017.36 And in the UK, according to a survey by KPMG, automotive executives expect that almost half of all car dealerships will disappear by 2025, as more buying moves online.37
The vanishing bank Retail banking has also been very badly hit. In the UK, the four big banks closed nearly 1,000 branches in 2017 alone38; since 1989, the total number of branches in the country has reduced from 17,831 to 8,000.39 In the United States, over 10,000 branches have been closed since the financial crisis, reducing America’s retail banking network from 100,000 to 90,000 over the past ten years.40 This equates to around three banks closing down per day. And the pace of closures is accelerating, with more than 2,000 occurring in 2017 alone, an 18 per cent increase from the previous year.41 Wells Fargo, the largest retail bank, reduced its branch network from 6,314 to 5,977 between 2014 and 2017, and has announced plans for further cuts to its network to take it to around 5,000 branches by 2020.42 Bank of America has closed around 1,500 branches from 2009 to 2018.43
The beginning of the end? So whatever category one looks at, whether it be shops, restaurants, estate agencies, retail banks or motor dealerships, the whole of physical retail appears to be going through a substantial structural decline. As a consequence of this, it is likely that we will see a wave of merger activity as retailers try to consolidate their overhead costs, or sell themselves before they go under. Already we have seen Michael Kors buying Jimmy Choo and, as of September 2018, in talks to buy Versace, Coach acquiring Kate Spade, Aldo buying Vince Camuto, Essilor buying Luxottica, VF Corp (owner of Wrangler and Timberland) buying
THE GREAT STORES MELTDOWN 21
Dickies and Workrite and Home Depot acquiring The Company Store. The two top German department stores, Karstadt and Kaufhof were scheduled to come together in 2018. Rite Aid merged part of its network with Walgreens and tried to merge the rest with Albertsons, though this latter move was abandoned. Eddie Bauer merged with Pacific Sun in 2018. In Europe, L’Oreal sold The Body Shop to Brazilian cosmetics manufacturer, Natura, and Sainsbury and Asda proposed a merger in 2018, while JD Sports acquired The Finish Line, and the Co-op acquired Nisa.44 On the restaurant side, there has also been a wave of mergers, including Global Franchise Group (owner of Great American Cookies) and Round Table Pizza, JAB (owner of Krispy Kreme, Keurig, and Peet’s Coffee & Tea) and Panera, Restaurant Brands International (owner of Burger King and Tim Hortons) and Popeyes Louisiana Kitchen, Darden Restaurants and Cheddar’s Scratch Kitchen and FAT Brands (owner of Fatburger) and the Ponderosa and Bonanza steakhouse chains.45 However, even this activity is being stymied by the depth of the crisis. It appears that people do not want to pick up retail brands at the moment. For example, Abercrombie and Fitch tried to sell itself recently, with potential buyers including American Eagle and Cerberus Capital; but talks fell through, causing its stock to drop by 20 per cent. ‘Perhaps the reason the Abercrombie deal didn’t get done was that they’ve got way too many stores in way too many malls that don’t make any money, and the cost to unwind those pieces and get out of those stores is just too great to compensate for the upside,’ said Mark Belford, a retail specialist at KPMG Corporate Finance.46 Nordstrom has also struggled to find a buyer in 2017, when it attempted to take itself private.47 American Apparel tried to sell itself, before giving up and declaring bankruptcy. ‘Oftentimes, the companies themselves aren’t growing, so it doesn’t solve the underlying challenge,’ said Josh Chernoff, managing director, Retail at consultant Parthenon-EY, ‘If you tie two rocks together, they sink just as fast or faster.’48
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The finance factor The other issue, particularly in the UK, is pension liabilities – many of these retailers have under-invested pension funds, and the resultant contingent liability makes them unattractive to potential buyers. We have seen that this was an issue with British Home Stores, and it was also a factor complicating the financial restructuring of House of Fraser. If a company’s pension fund is underfunded, then the Pensions Regulator has powers to force companies to top up the schemes. And in the event of the company wishing to restructure through a Company Voluntary Arrangement (CVA), the Pension Protection Fund can act for the pensioners as a ‘creditor’ to potentially block the process. Put simply, these kind of liabilities can put off potential buyers, rendering the struggling retailer effectively worthless.49 Even venture capital companies, which have been enthusiastic buyers of retail brands over the last twenty years, have grown wary of the risks. The three largest recent deals have all ended badly. The largest, Apollo Global Management’s US$3.1 billion leveraged buyout of Claire’s Stores in 2007, ended with Claire’s in Chapter 11 in 2018. The second largest, J. Crew Group, which TPG Capital and Leonard Green & Partners bought for about US$3 billion in 2010, attempted to restructure its debt in 2017.50 The third largest was Gymboree Corp, which was purchased by Bain Capital for US$1.8 billion in 2010, but filed for bankruptcy in 2017. Victor Khosla, senior managing partner of Strategic Value Partners, a US$6 billion distressed debt hedge fund, summed up his concerns as follows: ‘Trying to figure out the bottom is hard. We have spent a lot of energy understanding these businesses, and have concluded that the vast majority of them are uninvestable. Many of these were great businesses at some point in time, but the internet and changing consumer habits have destroyed them.’51 With no one willing to risk buying them, today’s struggling retail brands look like they have nowhere to go – except into Chapter 11.
THE GREAT STORES MELTDOWN 23
Some of these brand names are etched into the fabric of the American Dream. The iconic Sears catalogue was integral to the attainment of that dream in the 1940s and 1950s – bringing a cornucopia of previously unattainable products to the great public. When asked what single book he would put into the hands of a Russian communist, President Franklin Roosevelt replied: ‘The Sears, Roebuck catalogue.’ Sears was the first retail IPO in US history in 1906, and at its height, it had sales of US$56 billion and more than 3,500 stores – the largest retailer in the United States. Macy’s is also integral to America’s sense of itself. One of the oldest department store groups in the United States, it has been famous for decades for its enormous Herald Square flagship – in its time the largest store in the world – the Macy’s Thanksgiving Parade and the eponymous Fourth of July firework display. To think that these mighty symbols of American power may be under threat is very shocking to the collective psyche of the United States. And in the UK, the fact that venerable names like Marks & Spencer, House of Fraser and Mothercare are under pressure is equally unsettling to the average person.
Summary It only seems a few months ago that the retail sector was going through a growth bonanza. US mall openings grew at double the rate of population growth during the period 2000 to 2015. Store openings had been at record levels during the same period; between 2000 and 2015, more gross leasable area (GLA – the industry term for retail space) was opened than at any other time in US history. In the first quarter of 2015, one prominent real estate consultancy said, ‘Demand for retail space is at record levels, and supply is simply not keeping pace.’ As a consequence, rents rose by 40 per cent between 2010 and 2014. Many retailers were reporting record results up until mid-2015. American and British retail brands were seen as world beaters – investors all
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round the world flocked to franchise shows, keen to take on board these iconic names. Stores opened up all round the world, and malls from Dubai to Hong Kong sported huge new Victoria’s Secret and Marks & Spencer stores. Massive fees were charged, and billions were invested to build these brands all over the developing world. Yet in a short space of time, the wind has changed, and all the news is negative. We all grew up thinking of retailing as embodying a kind of social optimism – with the shiny malls and bustling high streets appearing to offer a promised land of new products and services, a symbol of a society where we were always on the up-escalator of life. The language of retail reflects this positive outlook: ‘Shop ‘til you drop!’, they said, and we did with abandon, leaning ever more heavily on our credit cards. Shopping was even attributed medicinal powers – people were invited to cheer themselves up with a little ‘retail therapy’, and we were told that ‘when the going gets tough, the tough go shopping’. Meanwhile the savings rate was dropping steadily from 10 per cent plus in the 1970s to almost nothing, and our debts were building up. It could not last, and we were heading on a slippery slope towards disaster. The Great Recession of 2008 should have been a wake-up call, but instead the answer was yet more debt, this time at the governmental level. For a time, the music appeared to start again, but now it is fading once more, even when the macro-economy appears to be ‘healthy’.
3 No longer a nation of shopkeepers
Nowhere has this sudden change of wind been more obvious than in the streets of towns and cities, both in North America and in Europe. The ‘High Street’ as it is known in the UK, or ‘Main Street’ in the United States, is literally disappearing before our eyes. Research from Deloitte shows the number of High Street insolvencies in the UK rose by 28 per cent in 2017,1 while the number of planning applications for new shops and shopping centres in England has fallen to 6,000 in 2017, as against 13,500 in 2008.2 As a result, retail vacancy rates have risen to more than 12 per cent.3
The High Street exodus Of course, it is not the first time that the High Street has been under pressure – from the 1980s onwards, out-of-town shopping centres have been luring shoppers away from Britain’s congested town centres. Given the familiarity of complaints from high street retailers, many people are inclined to treat their current expressions of concern as being a case of ‘crying wolf ’ one too many times. However, the reality is that the current retail crunch is of a different order of magnitude from previous problems. In many streets, fully half of
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the stores are boarded up, and the situation is far worse in the poorer areas of the country, such as parts of the North of England, Wales, Scotland and Northern Ireland. The worst affected areas are towns such as Burslem near Stoke-onTrent, which, according to the Local Data Company, has nearly a third of its shops closed; another example is Dewsbury in West Yorkshire, at 29 per cent; and third is Newport in South Wales with 27 per cent. Richard Hyman, an independent retail analyst, is in no doubt who is to blame: ‘Local authorities have been far too greedy, jacked up rates but done little or nothing to improve services in return. Councils need to take a more proactive role in protecting and supporting their towns. If you think about all the job losses, it’s been totally predictable, and government has done nothing about it.’4
Burslem Burslem is an old Potteries town, which was the home of Josiah Wedgwood’s first factory in the eighteenth century. In the heyday of British manufacturing it thrived, and the high street was packed with shoppers. But its decline was accelerated following the closure of big ceramics companies such as Royal Doulton. Funding cuts led to the closure of a museum celebrating the town’s pottery industry in 2011. Problems increased with the growth of e-commerce after 2000, and high rents and excessive business rates only added to the pressure, as well as other issues like a lack of parking. ‘Issues like parking are just one thing driving businesses round the bend,’ shop owner Amit Patel said, ‘There are double yellow lines everywhere.5 As we have seen, a lot of the national chains have been busy closing down their worst-performing branches; unfortunately, towns like Burslem tend to be high up on their hit lists. Burslem’s branches of Lloyds, NatWest and Boots all announced their closure recently, and there are fears that yet more will come. Stoke-on-Trent City Council is planning to make a £10 million investment in
NO LONGER A NATION OF SHOPKEEPERS 27
new retail sites and homes in order to drive traffic to the area, but it seems like a case of too little, too late.6 This is a prime example of how local government has often taken retail for granted, taxing it excessively and generally making life difficult, only to realize that, without it, their town centres have been effectively destroyed.
Newport Newport, in South Wales, is another example of town with a previously bustling high street that has fallen on hard times. The city was badly hit by the Great Recession, and lost more jobs than many areas of the UK. The closure of major retailers such as Marks & Spencer, Burton’s, Monsoon, Top Shop and Top Man left the High Street and Commercial Street shopping area with twenty vacant stores as of mid-2018. Sue Jones, a shopper from the Welsh valleys is disappointed that her favourite indulgence – a chicken sandwich from Marks & Spencer – is no longer available, due to the store’s closure: ‘That’s a real shame,’ she says, ‘I hadn’t heard it had gone. Every city centre needs an M&S. That’s really depressed me. It was always one of my little treats.’7
Summary Even the shops that remain in British high streets are changing – in the place of thriving fashion stores have come charity shops (with their business rates relief, free labour and gifted products), vape stores, betting shops, pawn shops, ‘pound’ stores and rather down-at-heel service businesses – nail bars, tanning shops and waxing/threading salons. This matters for the British, because the High Street has more than a purely functional relevance. It also has an emotional value, because it is where people meet and socialize. Although they own cars, there is nothing so satisfying as
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walking into town to meet friends for coffee, do a bit of shopping, and perhaps have a pub lunch. It was a place where people knew each other, exchanged pleasantries and engaged in small acts of kindness. So to see it boarded up, and roller-shuttered, leaving gaps like missing teeth in a formerly attractive smile, creates a deep sense of loss and of foreboding.
An insightful review of the collapse of the traditional retail sector in the West, and a roadmap for its potential recovery.
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