Retailers have acted quickly and closed thousands of stores this year as they adjust to a changing consumer.
The number of store closings revealed in the first quarter of 2015 increased by 58 percent over the same period last year according to a report by ICSC Research. Of the 3,558 store closings, 46 percent are apparel companies. While many of these closures come from retailers that have gone completely out of business, others come from relatively healthy chains that are adjusting their store base to meet the needs of a new consumer.
Not so long ago, high store counts were a measure of success.
“You would look at store openings versus store closings,” said Andrew Nelson, economist at Colliers International. “But now strategies are changing.”
In many cases, investors are now seeing store closures as a sign that retailers are rightsizing operations and not a sign that the chains are in full retreat.
Blame the great store shrivel on the rise of e-commerce and outlets.
While e-commerce only represents 7 percent of all sales, it has forced retailers to change their ways. They don’t have to have huge stores stuffed with inventory anymore. If a customer tries on a black dress, but wishes they had the blue one in stock, sales associates can whip out a tablet and have the shopper purchase the blue version online. This omnichannel version of retail where the technology of online stores gets married with brick-and-mortar means retailers can get more out of fewer stores.
“Retailers have become e-tailers,” said Bill McComb, former chief executive officer of Kate Spade & Co. predecessor, Fifth &Pacific Companies Inc. “It’s having the natural effect of migrating out to a blend of retail and online. What that means is they need fewer brick-and-mortar stores.”
Colliers’ Nelson agrees saying, “E-commerce is affecting retailers. They are encouraging shoppers to do both. Shop the store for size, but go online, too.”
Nelson said there could be a silver lining for malls as stores move to formats that require fewer square feet. “Smaller stores can make the shopping environment more exciting,” said Nelson.
Full-price retail maybe shrinking, but that isn’t the case for off-price retail. According to Value Retail News, there are 48 outlet mall projects in the pipeline for 2015-2017 adding 18 million square feet of gross leasable area. VRN found that sales increased 11.4 percent at the outlet malls from 2012 to 2013. Sales growth is why retailers are choosing to shrink the full-price stores and expand the off-price stores.
Gap Inc. is closing 175 units and will have 300 outlet stores to its 500 regular stores. Sean Piazza in Global Corporate Communications at Gap said, “These changes will help Gap specialty showcase its brand in the most successful locations, and enable the brand to remain focused on offering consistent, on-brand product collections and enhancing the customer experience across all of our channels, including a smaller, more vibrant fleet of stores.
Express stores is closing 23 stores this year and 50 during the next 36 months. Marisa Jacobs, vice president of investor relations at the chain, said that e-commerce and mall traffic were the reasons behind the closures. She even pointed out that some locations were profitable, but looking forward it was likely to trend downward.
While Express is shutting down some of its full-price stores, it is picking up more space at the outlet malls. Jacobs said Express is doubling the amount of outlet stores this year. They opened the year with 40 outlet stores and will end the year with 80. “It’s a clear opportunity to reach a different customer,” she said. “Outlets are a destination. It’s a lower price points more value sensitive customer and at times a less fashion sensitive.”
Abercrombie & Fitch, which has closed 275 stores since 2010 and will shutter 60 this year alone, will open nine outlet stores this year. Nordstrom Inc. will double its outlet stores, called Nordstrom Rack, to 300 by 2020 and will open 10 Racks in the first quarter of 2015. Macy’s is also getting into the game and will open six Macy’s Backstage outlet doors in the New York metro area this year.
Carlene Benz in Corporate Communications at Abercrombie & Fitch Co. said, “I can say our U.S. outlet stores have now generated positive comp sales for the third consecutive quarter and we continue to be pleased with the performance of our new stores, particularly in the Made for Outlet space.”
Even though Gap is closing stores, it plans on having every three outlet stores for every five specialty locations. Coach, which has struggled with competition from Michael Kors and Kate Spade, will close 70 full-price stores this year, but open 10 outlet doors.
Emanuel Chirico, chairman and chief executive officer of PVH Corp. said the company was closing 120 Izod stores and blamed it on the outlets saying, “We have made the difficult decision to exit the Izod retail business, as it has become clear that its business model can no longer achieve acceptable return metrics as a result of the increasingly competitive environment driven by more premium brands in the outlet retail channel.”
Closing stores can hurt a company’s top line, because fewer stores means fewer sales. However, analysts like Jeff Van Sinderen know that mall traffic is light and recognize the consolidation stores are going through. “The multichannel stores will do the best,” said Van Sinderen.
McComb added, “It’s a healthy sign they are moving into a more enlightened phase.”
Colliers’ Nelson, however, did sound a note of caution about the continued expansion on the outlet store side.
“I wonder how long-lived they will be,” he said. “If they start putting outlets in every town, will we see too many? Penetration is getting high and there will be a saturation point.
But that’s tomorrow’s problem, today’s problem is getting the outlets built fast enough.