The great rationalization of physical retail

25,000 stores are expected to close this year, and what's left might look different from your traditional retail model

[Note: Originally posted June 10, 2020 on my now-defunct Substack]

Bloomberg said that as many as 25,000 US stores could close permanently this year, with mall-based stores in particular the victims of COVID-19 and a broader shift in the retail landscape.

Just like most things that have happened since the coronavirus crisis took hold in the US, this is an acceleration of an existing trend, not the result of some massive change in consumer behavior.

If anything the changes we've seen in consumer behavior - like the big pivot to ecomm - have been the result of years of investments by a number of retailers to make that transition as seamless as possible. The goal was maybe not to run brick-and-mortar retail out of existence, but to make it but one part of a much larger ecosystem.

The Bloomberg article said...

The U.S. has the most retail selling space per capita of any country and the lowest sales per square feet, according to commercial real estate company Cushman & Wakefield. Most retailers have been reluctant to shrink their store networks, but the pandemic has forced many to rewrite their playbooks.

That was always the problem. There was little operating leverage that could be captured from larger and larger balance sheets. The most valuable assets to retailers are IP and logistics.

So who will be the biggest winners coming out of the pandemic? Another Bloomberg story says it won't be highly-leveraged companies, who have to divert resources from expanding their businesses to meet creditor operations.

Walmart, Costco, Tractor Supply might be some of those companies with solid balance sheets that can capitalize on the opportunity. Companies that are all levered up and/or are junk rated will have a more difficult time staying afloat.

The other retail winners? Tech.

Tech platforms that support the shift to ecomm. Vogue Business said...

There are inherent benefits to shopping online beyond avoiding contagion. Online data allows brands to scale personal recommendations in a way that would be hard to pull off by sales associates; Zegna, for example, merges its data using Microsoft’s cloud computer platform, allowing it to offer supplemental information to stylists and to personalise marketing campaigns. Even exclusivity — an important tenet of luxury — can be recreated online. Shopify, for example, allows product drops that can be limited by time or geographic region.

That could benefit smaller, nimbler retailers, who are willing to turn over the keys to analytics, fulfillment, advertising to the established tech platforms. That's how scale happens quickly and (fairly) cheaply.

And best of all for those retailers, this is the golden moment to take advantage of those trends. In an interview tilted the Future of retail, UC Irvine's Eric Spangenberg recently said…

Stay-at-home orders have been in place long enough for people to develop new habits, and the reopening process has been gradual enough that the online shopping habits many people have acquired will become their default go-to routines for many things.

This is a perfect example of the go-for-it window+: amid a backdrop of accelerating technological capability, pandemic-driven consumer behavior is setting up a massive opportunity for those retailers with a massive opportunity. It's a hanging curveball for a lot of retailers - as long as they're ready to swing.

The takeaway:

  • Digital channels will only have more and more of an impact on retail. The trend exposes a changing risk/reward setup around physical assets, like stores - will they be there to support an omnichannel consumer experience, or will they be the brick that slowly (or in some cases, quickly) drags those retailers underwater?

+ Coined by David Perell https://www.perell.com/blog/go-for-it-window

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