The business of retail finds itself at a crucial crossroads today. Lesser affected have been the elite, high-end shopping centers and, conversely the lower-end centers, each of which cater to a defined subset of shoppers. But the majority of retail centers nationwide fall into the mid-range category. Many of the mid-tier retail centers as well as the retailers themselves are struggling which, in many ways, mimics the plight of the country’s shrinking middle-class.
Consumer tastes, preferences and budgets continue to evolve, leaving many formerly strong retail brands dying in the wake. An obvious example of this new retail reality can be found in the teen apparel sector. A closer look at who, what, when and where helps shine a light on the why — and how the industry can recover.
What a Girl Wants
A look at specialty and teen apparel-focused retailers who are struggling or have filed for bankruptcy within the past 18 months reads like a veritable “who’s who” of once proud, once strong name brands, including:
• J. Crew
• Rue21 (closing 400 of its 1,200 stores)
• Wet Seal
Additionally, Gymboree, along with its associated Crazy 8 and Janie and Jack nameplates, is closing 400 of its 1,300 stores, while, Children’s Place (closing 300 stores by 2020) and Claire’s (53 store closings in 2016) could be close to filing bankruptcy and/or shedding additional stores in an effort to stay afloat. While some retailers will no doubt emerge from bankruptcy leaner in the short term, many will inevitably find themselves right back where they started within a few years and, following in the footsteps of Radio Shack, Wet Seal and American Apparel, that means once again filing for bankruptcy, a term derisively referred to as a Chapter 22. The long-term future looks bleak for many of these retailers. Some will not survive.
Today’s teenagers simply do not feel obligated to spend a lot of money on clothing like their predecessors. As such, teens are now shopping at hot retailers such as H&M and Forever 21, which offer trendy clothing at affordable prices. There are a lot of cheap, fashionable options in the marketplace. Teens are no longer choosing to spend $75 on an Aéropostale or Abercrombie & Fitch T-shirt when they can buy one at Forever 21 for $10.99. Money earmarked for significant purchases instead goes toward technology buys such as iPhones and iPads.
Other interesting dynamics at play are taste and preference. Today’s teens appear unwilling to pay a premium for retailer logos affixed on the apparel. American Eagle, Aéropostale and Abercrombie & Fitch each used to be sought out for their emblazoned marks — a sign of peer prestige. At the root of this new preferential choice, beyond style, is, again, price. After all, why pay $80 for an A&F logo’d sweatshirt when you can find it cheaper elsewhere for $10 to $20?
In many ways the Millennial retail revolution is three years behind similar attrition within the women’s apparel industry. There, a pre-2008 economic boom and still-strong traditional mall shopping audience would lead to what would eventually become an over-build of new stores.
Retailers such as Coldwater Creek, Chico’s, J. Jill and others all embarked on new store tears in the late Nineties in the midst of the housing boom where consumers had more disposable income than perhaps ever before. That overextension led to supply not being in synch with demand. Between 2014 and 2015, Coldwater Creek filed for bankruptcy along with Ashley Stewart and Loehmann’s. Chico’s did not file for bankruptcy yet closed 120 stores. J. Crew and Gap continued their struggles as well.
The Amazon Factor
And then there is Amazon — the arch nemesis of the traditional bricks-and-mortar retailer. Let’s look at a few numbers. First, market value in 2016 for top traditional retailers:
• Sears: $1.1 billion
• Nordstrom: $8.3 billion
• Target: $40.6 billion
By stark contrast, Amazon’s market value in 2016 was an astronomical $355 billion.
When examining apparel sales, consider that in 2012 sales at Macy’s were five-times greater than those of Amazon. In 2016, apparel sales at Macy’s were $22 billion while Amazon is expected to sell $30 billion in just apparel in 2017.
Adding further insult to injury is the convenience offered by Amazon — or any online retailer. Amazon is in beta for Prime Wardrobe, which allows Prime members to ship clothing and accessories to their home to try on for free. Members must choose at least three items to ship and they have seven days to choose the products they would like to keep. The consumer receives a 10 percent discount if he or she chooses to keep three or four items from the order and 20 percent for keeping five or more. Basically, keep what you want and send back what you don’t — all from the comfort of your home (or wherever).
My, how times have changed — not just for traditional “bricks-and-mortar” retailers but also for malls and landlords. Malls are seeing their vacancy rates increasing as their tenants experience declining sales. One-time stalwart anchors such as Sears, Macy’s and J.C. Penney are closing locations across the country, causing the retailers left in the wake of the store closures to invoke co-tenancy clause violations which result in yet even lower revenue for the mall.
The New Retail Reality: Don’t Think “Retail”
Sophisticated landlords know they can no longer operate as they have in the past. Philosophically, the thought of centers offering traditional retail fare needs to be replaced with the idea of offering consumer experiences. One area is in quasi-medical and office. Fairlane mall in Dearborn, Mich., has seen hundreds of Ford Motor Co. professionals move in to repurposed retail space in recent months. Significant capital is needed to accomplish such a feat. Several retail projects are considering razing a portion of a struggling center and developing multifamily housing in markets lacking an abundance of apartments. Still others have adapted space to into a wide-range of medical facilities.
Along similar lines, trendy gyms are proving beneficial to landlords via newer concepts such as Orangetheory Fitness, the Barre Code and Dailey Method. Swim schools are also assisting by driving traffic and spurring contiguous sales to retailers and restaurants.
For the traditional retail concepts, staying afloat remains realizing a value proposition — both for their customers and themselves. For landlords, it has never been more vital to really understand their tenants’ business and sales realities and to strike an appropriate balance between playing hardball and working toward long-term, equitable solutions.
Final Thoughts at Checkout
The retail market remains extremely fluid with new realities changing our perceptions every day. Some still cling to time-worn concepts but most know we have passed the point of no return. Today, it is about moving forward with savvy, vision, creativity and a resolve to give consumers what they want, albeit in a different, integrated way.
For retail, the phrase: “Adapt or Die” has never, ever been more apropos.
Matthew Mason is a managing director at Conway MacKenzie. Lauren Leach is a director at the firm. Together they lead the firm’s real estate practice and specialize in distressed real estate; both managing large CMBS portfolios and malls, as well as working directly with retailers.
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