NordstromÕs undulating glass facade on 57th Street.

Retailers are getting stricter about grading their stores.

It’s typically an annual process for companies to review their brick-and-mortar fleets. But now retailers, spurred by the impact of COVID-19, are working double time to get out of, or revise, leases and rethink the balance of brick-and-mortar versus digital in the overall business.

They see Americans fearful of getting infected by visiting malls, continuing to shift to online shopping, fleeing big cities to the less dense suburbs, and bankruptcies creating more vacancies in shopping centers. Considering all that, retailers are recalibrating sales and profit goals, and recasting a lot of stores as undesirables. Just months ago, they would have thought otherwise.

This week, Nordstrom, among the stronger retailers in the country, revealed plans for 16 store closings, representing roughly 15 percent of the upscale department store’s fleet. Retail experts suggest Nordstrom would never have made such a sharp downsizing were it not for the impact of the coronavirus. Some experts are also wondering how much business Nordstrom’s 57th Street flagship, opened last October with great fanfare and success, can recover with many Manhattanites certain to stay away from the city even after the lockdown on nonessential stores is lifted.

The criteria is changing — productivity and profit goals for brick-and-mortar are getting loftier. Retailers must factor in additional costs of operating stores differently, including regular sanitizing, reconfiguring store hours and staffing needs, and equipping associates with PPE. It will all be necessary for as long as there is the threat of the coronavirus and no vaccine against it.

Macy’s Inc., in February before the coronavirus outbreak, disclosed it would close 125 stores over three years. But chief executive officer Jeff Gennette said last week that the company, which operates Macy’s, Bloomingdale’s, Bluemercury, and off-price outlets, is now considering a greater number of store closings. Some sources pin the number at closer to 200 or more stores.

Neiman Marcus Group, on the verge of filing for Chapter 11 bankruptcy — some say it could happen Monday — will close some weaker units. Neiman’s locations said to be on the hit list are in Natick, Mass., and downtown Dallas.

Lord & Taylor, owned by Le Tote, is expected to liquidate all 38 of its locations once the stores can be reopened and has already fired most of its executives at the L&T headquarter offices in Brookfield Place in lower Manhattan, as first reported by WWD on March 31.

“Companies like Gap, American Eagle, Abercrombie & Fitch, Hollister have hundreds of leases that will expire this year and many won’t be renewed,” predicted one retail expert.

“There’s no question retailers have more concerns about profitability and sales levels,” said retail analyst Walter Loeb. “There are also changing demographics, and retailers are even taking a close look at where their stores are in proximity to distribution centers. If there are some that are too far away, they’re thinking about the time and money it takes to get the goods shipped to those stores.”

J.C. Penney, noted Loeb, could close hundreds of stores, particularly smaller ones on the Main Streets of America. They have low operating costs and still serve a purpose in the communities, but as Loeb also noted: “They haven’t been renovated for 20 years and still take up management’s time.”

While Penney’s is expected to go bankrupt or be liquidated, some retail experts believe the department store chain could be acquired by a developer because closing Penney’s stores would trigger covenants regarding co-tenancies that would enable other retailers to vacate malls without penalty.

“There is a real possibility that retailers in some locations will leave their stores dark or negotiate a closing with the landlord if they believe that their store will never get back to the productivity level required to make it cash break even or profitable,” said Janet Kloppenburg, president of JJK Research Associates Inc. “You are going to see store-by-store, mall-by-mall analyses by brands to see if particular units are still viable for operating profitably. The hurdle rate for stores to be open is much greater. Productivity levels are going to be much lower because, number one, we are in a recession and, secondly, retail is in a state of digital transformation. More people are going to shop online now because they got used to the convenience, and because many people are going to be afraid to go to the mall,” due to fears of being infected by the virus.

“If you have a store in a mall, and an anchor like Macy’s or Penney’s goes dark, it could take two or three years to fill that space again,” Kloppenburg said. “So why would you open your store there, particularly if it hasn’t been a high-producing store. You have co-tenancy kickout clauses which allows retailers to get out of a lease if one or two anchors go dark.”

“For the past decade, department stores have made fitful attempts to trim their store fleets and retail square feet, but until the last few years, the efforts were too little/too late,” said Craig Johnson, president of Customer Growth Partners, in a research report on department stores. “Since 2015, however, aggregate department store fleets have fallen 24 percent, from 5,210 stores to 3,935 today, while total square footage declined a similar 24 percent, from 583 million square feet to 443 million square feet.

“Still, the steep decline in department store capacity was not enough to offset the sharp plunge in store sales productivity, indicating that the stores remain behind-the-curve in matching supply and demand, with in-store sales productivity well behind past levels, even with inflation. Moreover, true operating productivity metrics show that, even including online sales, operating income per square feet has plummeted in recent years, on average by more than 40 percent, indicating that most department stores still need to take more radical steps to shrink their fleets, while rethinking the value proposition they are offering today’s consumers.”

See Also: 232 Million Retailers, Wholesalers Imperiled by Pandemic, ILO Says

Nordstrom plans to reopen stores in a phased, market-by-market approach where allowed by local authorities and with the health and safety of employees, customers and communities as a priority. No store reopenings have been disclosed yet but they are expected to begin very soon.

“You’ve got to look and think about where the population is going to live,” said Michael Gould, the former chairman and ceo of Bloomingdale’s. “If people aren’t going to be working and living in Manhattan, and there’s a lot less international travel, how does that change how people look at their flagships? The ripple effect of this is far-reaching. Shopping pattens will change. With online shopping, you lose all that impulse shopping when you are in the stores.

“Retailers will have different hurdle rates,” added Gould. “Maybe the store isn’t cash flow positive anymore,” with all the impact from COVID-19. “Maybe they think they have two of their stores too close to each other. I don’t need two stores that are a 15-minute drive apart. I could create one great ‘headquarters’ store in that trade area that captures some business from the store I’m closing. I have the customers names from the other store, and I can pick up business online.”

“If I could sign a new lease tomorrow, it would just be percentage rent — end of story. Percentage rents protect your business,” said one upscale fashion executive with retail shops. “You also want co-tenancy rights. If an anchor goes dark, what do you want to do?”

“We’ve been investing in our digital and physical capabilities to keep pace with rapidly changing customer expectations. The impact of COVID-19 is only accelerating the importance of these capabilities in serving customers,” said Erik Nordstrom, chief executive officer of Nordstrom Inc., in a statement Tuesday. “More than ever, we need to work with flexibility and speed. Our market strategy helps with both, bringing inventory closer to where customers live and work, allowing us to use our stores as fulfillment centers to get products to customers faster, and connecting digital and physical experiences with services like curbside pickup and returns.”

Read more from WWD: 

The New COVID-19 Economics for Retail

Retail Tenants, Landlords in L.A. at Odds On Rent Relief

Luxury Fashion in the Era of Coronavirus

WATCH: Get an Inside Look at How PPE Is Made

load comments
blog comments powered by Disqus