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Retail Interruption Featured Signal of Change: SoC1181 September 2020

Author: Martin Schwirn (Send us feedback.)

Although the changes that the retail landscape has experienced during the past six months are dramatic, many of the changes are only continuations of existing developments; however, the coronavirus-disease-2019 (covid-19) pandemic accelerated the pace of these changes. The effects of related changes will affect employment markets, logistics, and city planning and development for several years and perhaps even decades to come.

As the retail landscape changes, entire urban environments will change with it.

Perhaps a good—albeit gloomy—way to start discussing the changes that the retail landscape is experiencing is to look at the US market and a list of well-known retail chains that filed for bankruptcy or bankruptcy protection since the covid-19 pandemic reared its head in March 2020: fitness-center chain 24 Hour Fitness Worldwide (San Ramon, California); clothes retailer Ascena Retail Group (Mahwah, New Jersey), which owns several clothing-store brands, including Catherines and Lane Bryant; luxury-clothing retailer Brooks Brothers (New York, New York); Chuck E. Cheese–chain operator CEC Entertainment (Irving, Texas); CMX Cinemas (Cinemex; Mexico City, Mexico); Gold's Gym International (TRT Holdings; Dallas, Texas); car-rental company Hertz Corporation (Hertz Global Holdings; Bonita Springs, Florida); apparel-and-accessories retailer J. Crew Group (New York, New York); department-store operator J. C. Penney Company (Plano, Texas); bakery-chain Le Pain Quotidien (New York, New York); Lucky Brand Jeans (Leonard Green & Partners; Los Angeles, California); Modell's Sporting Goods (New York, New York); household-goods retailer Muji (Ryohin Keikaku Co.; Tokyo, Japan); luxury-department-store operator Neiman Marcus Group (Dallas, Texas); NPC International (Eldridge Industries; Greenwich, Connecticut), which is the largest franchisee of Pizza Hut (Yum! Brands; Louisville, Kentucky) and Wendy's (The Wendy's Company; Dublin, Ohio); home-furnishing retailer Pier 1 Imports (Fort Worth, Texas); and kitchenware-retailer Sur La Table (Seattle, Washington). Many other retailers have closed thousands of stores. In reality, the pandemic and the effects of the resulting shelter-in-place orders on consumer shopping just accelerated a development that has been ongoing for a decade as online purchases have been becoming increasingly common. But no matter the reason for the timing of all the filing for bankruptcy or bankruptcy protection, the retail landscape has changed and will continue to change. And as the retail landscape changes, the commercial-real-estate landscape and entire urban environments will change with it.

Multiple factors are exacerbating this problem. Shopping in brick-and-mortar stores is at a historical low point, and the shelter-in-place orders that authorities issued because of the covid-19 pandemic are resulting in members of various demographic groups' shopping and conducting other transactions online when under ordinary circumstances they might never have become truly open to online commerce. For example, members of elderly segments of the population now have to learn about search mechanisms, shopping carts, and online-payment options. Once they learn how to use such tools and interact with online environments, they will likely find online shopping convenient and fast. They may not resume old shopping behaviors once they have the option to do so.

Effects of retailers' shutdowns will have ripple effects for product categories and brands—ripple effects that will be very subtle to observers outside the affected industries. Although most product categories will experience changes in their retail environment, a particularly interesting example is the beauty-products product category. Sephora (LVMH Moët Hennessy – Louis Vuitton; Paris, France) and Ulta Beauty (Bolingbrook, Illinois) both had plans to expand their retail presence in North America (by 100 and 75 new stores, respectively); however, these plans are now in question, and the companies are actually facing some store closures. In the past, online environments faced uphill battles with selling beauty products and other experiential products that consumers want to touch and feel in stores before they make a purchase decision. Because physical contact is a disadvantage during the covid-19 pandemic, direct-to-consumer brands and brands with a strong online presence now have the upper hand. In addition, the changes in the retail landscape are reshuffling the world of beauty-products marketing and logistics. Sephora has store-in-store operations at some 660 of J. C. Penney's nearly 850 department stores. Already, as part of a restructuring, J. C. Penney is eying 242 department stores for closing. How many of those closing department stores contain Sephora stores is unclear, but J. C. Penney's fortunes will have a direct effect on Sephora's ability to serve the market (although Sephora still operates some 460 independent stores in the Americas, with the number of stores around the world exceeding 2,600). Some observers now wonder if the shake-up could enable Ulta, which operates more than 1,260 stores in the United States, to grow its market share. Sephora's diminishing footprint could also lead some consumers to begin buying beauty products online, thereby accelerating this product category's shift to online commerce. Factors other than consumers' shifting to online shopping and the challenges that physical stores face affect the retail landscape. In the United States, the Black Lives Matter movement has put a spotlight on the hurdles that black business owners must overcome in the marketplace. As a result of current discussions, several retailers have taken a pledge to devote 15% of their shelf space—which functions as a gatekeeper in the retail industry—to products from black-owned businesses. Sephora was one of the companies that took the pledge. This pledge represents another shift that will affect the retail landscape in the coming years.

Sephora should be able to manage the effects of J. C. Penney's department-store closures, but the situation is an example that showcases the dynamics in retail that occur beneath the surface of store closures. The cumulative effect of physical-store closures will likely be substantial. Considering all the current store closures and filings for bankruptcy protection, Jeff Gennette, CEO of department-store chain Macy's (New York, New York), explains that "we see there's about $10 billion worth of opportunity that's up for grabs right now based on what's going on with the competitive climate" ("Macy's CEO: $10 billion in sales are up for grabs because of retail bankruptcies," CNBC, 21 May 2020; online). Undoubtedly, much of this $10 billion will move to online commerce, and (Seattle, Washington) is a major beneficiary—and driver—of this development. But other physical stores should be able to pick up some of the freed-up consumer spending.

In the United States, retail blight could result in hundreds of abandoned shopping malls unless new concepts for this type of real estate emerge. Countries other than the United States are experiencing a similar development. SoC723 — Retail Strategies: Brick Responding to Click from 2014 highlights problems with sales among brick-and-mortar retailers in the United Kingdom, where observers fear what the future of the nation's high streets might look like. And Galeria Karstadt Kaufhof (Signa Holding; Innsbruck, Austria), Europe's second-largest department-store chain, recently decided to close one-third of its stores in Germany, creating concerns about the future vitality of city centers.