Are We Headed For a Retail Apocalypse?

Are We Headed For a Retail Apocalypse?

Despite high consumer confidence and a relatively healthy economy, US retailers are going bankrupt and closing stores at a rate not seen since before the last recession. Household names such as Toys R Us and Gap are among the victims, with big brand retailers such as Macy’s also affected.

It’s been described the ‘retail apocalypse’, and with UK retailers such as Debenhams looking sadly at their latest profits, it seems to be happening in the UK as well.

The fact is, it’s a tough climate for retailers everywhere. Their difficulties stem from a combination of factors; the rise of eCommerce, changing consumer tastes, and residual problems from the last recession.

This retail weakness and vulnerability isn’t an economic phase, say asset management company, Cohen & Steers. Rather, what we’re seeing is the new normal. Consumer behavor has changed, and the retail landscape hasn’t yet adjusted to catch up with this.

Consumers have changed

We know that shopping habits have changed in the last 5-10 years. Customers are simply buying fewer products than they did in the past – at least in mature markets.

Millennials are popularly held to blame for the travails of many an industry, but this is by no means fair or even accurate as their apathy towards consumerism is now spreading to older generations. Mature markets are seeing consumer preferences shift away from owning things towards enjoying experiences – we’re spending less on apparel, more on hot air balloon rides.

There are other contributory factors to retailers’ current woes. It’s been argued that fashion itself is to blame for retailers’ problems because there have been no major seismic fashion changes in recent years that would encourage people to revamp their entire wardrobes.

There’s also the sharing economy but whilst this trend is certainly growing, it’s not yet big enough to make a serious dent in the retail market for categories such as apparel.

The sharing economy is a symptom of a wider trend of customers losing interest in stockpiling products. House prices are also a factor – in the West’s most prosperous cities many people have far less living space that can support a shopping habit.

Shoppers have also started to recognise retailer desperation, with many holding out from buying until they see a tempting discount.

Drapers describe the result as a ‘discounting epidemic’, which it ascribes to weak demand and over-supply. Debenhams, in particular, is thought to be a casualty of its own discounting practices; the department store’s price-cutting in the run-up to Christmas has now forced the company to issue a profit warning.

Over in the US, department stores are making desperate decisions to stay afloat. Sears is selling its tool brand, Macy’s is cutting jobs and repositioning itself as a discount retailer.

Debt catches up with borrowers

Many retailers that borrowed to get ahead in the last big recession are finding their debts are catching up with them. Whilst retailers might expect to have been able to return to a strong financial position now that the US economy is performing well, that just isn’t the case.

Those that borrowed to open more stores are now realizing that the growth of eCommerce means they now have too many. It wasn’t until 2016 that the burden of debt really started catching up with these retailers but many now find themselves in a difficult position as their previous gambles fail to pay off.

The shift to online spending is part of the problem, and the reason many retailers find they simply have too many stores. Retailers such as Gap and J. Crew are closing many units, and large retailers such as Sears and Macy’s are planning closures.

It’s a particular problem in the US, which has nearly 5 times the amount of retail space per capita as the UK. It’s a tough time for mid-market retailers in particular. They may be well-established on the high street but they are now being challenged by cheaper rivals and a marketplace that’s generally overcrowded.

Mid-market stores such as M&S and Debenhams have a large presence to maintain, but they’re finding the market increasingly difficult to navigate.

Market entrants such as Scandinavian newcomers are taking what was traditionally their market share. Nearly everyone is challenged by Amazon, which is now strong in categories such as shoes and electronics. It’s just harder to make a profit, and the bigger you are the harder it is to compete against cheaper, nimbler rivals.

UK retailers also have Brexit to worry about. With UK households seeing high inflationary pressure and low wage growth, consumer spending is weak.

The think tank KPMG/Ipsos Retail expects a lackluster 2018, warning that increased food prices will mean households have less to spend on non-food items. The outlook is bleak whether it’s a soft or a hard Brexit.

Surviving the retail apocalypse

It’s hard to pick a strategy that will ensure retailers stay afloat. It’s likely that some retailers will simply fail to survive 2018. Others may be forced to make bold choices, such as the decision by Banana Republic to trade solely online.

Mid-market fashion retailers and larger department stores are likely to face particular difficulties navigating the immediate future as they struggle to adjust to the new retail realities. The retail apocalypse is likely to see many store closures and risky readjustments made by brands anxious to survive.

But the retail apocalypse won’t just mean a bit of turnover on your local high street. Problems in the retail market are likely to have severe knock-on effects on labor markets and the wider economy.

In both the US and UK, the retail industry is one of the biggest employers of lower-income workers. Large job losses in this industry could displace these workers, disrupt local tax bases, and lead to mass defaults on personal debt such as credit cards and mortgages.

When larger retailers fall, they tend to take others with them. Not only will suppliers be affected by the difficulties of major department stores but the retail property sector may be disproportionately affected by unit closures.

If a respected department store exits from a top-end shopping mall or high street, this tends to damage the appeal of that space for other renters. This will impact on retail property returns. All in all, it’s bad news for a lot of people if the retail industry falters in 2018.

Written by Demetrius Williams
Demetrius Williams
Demetrius Williams is a Digital Marketing Specialist at TranslateMedia and has previous eCommerce experience working with a number of luxury brands in the fashion and beauty industry. He enjoys photography, binge-watching Netflix and can often be found roaming around London with a camera in his hand.

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