Op-Ed: The Only Constant is Change—But at What Speed?

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About two hours into L2’s Clicks & Mortar conference on Feb. 16, I looked up from my email to hear Sandeep Mathrani, CEO of General Growth Property (GGP), say, “We’ve been in an evolution since the Roman empire. If you think the speed of evolution is fast, I think you are all wrong. Real speed was when we invented electricity or the car. Every era thinks it is in rapid evolution, but change is what life is all about, it is exactly the way progress is made.”

That the CEO of the second largest owner of shopping centers in the U.S. is biased toward an evolutionary process of the status quo is no surprise, but to many retail operators, consumer products companies and apparel wholesalers and brands, we are living through revolutionary times. New ways of shopping and meeting demand along with generational shifts are making traditional retail channels and brand concepts obsolete. The digital revolution is ravaging the retail landscape as we know it.

In short, to quote Hamlet’s mother Queen Gertrude, ‘the gentleman doth protest too much, methinks.”

Contrast Mathrani with Brian Cornell over at Target, who sparked a sell-off of retail stocks two weeks later on Feb. 28 when he addressed the investment community, stating, “We’ve been on a multiyear journey to redefine the future of our company, to compete and ultimately win in this new era of retail. For the past several years, we’ve been watching several key consumer trends emerge. People are placing greater value on experiences. Often, they’d rather live it than own it, especially young people. When they buy, they want to buy into a greater purpose, not just a product. Taken together, these changes can only be described as a profound shift in the consumer mindset. Then combine that with the different behaviors around how and where consumers are choosing to shop. Today, there’s total transparency. Ease and speed are paramount. The shift in channel preference is real and only gaining momentum. Our industry is in a midst of a seismic shift.”

Cornell’s comments came after weeks of mostly weak retail earnings announcements, reports of store closures and retail bankruptcies, and pessimistic 2017 sales and profit outlooks. Target sees 2017 (and 2018 and 2019…) as an investment year—in store service, the digital shift, new brand development, stores and gross margin, which is expected to reduce 2017 EBIT $1 billion in tandem with an expected low single digit comp sales decline. Strong digital growth is not expected to fully offset in-store sales declines, but hey, self-cannibalization is better than losing it all to Amazon.

Target is far from alone, among retailers with cautious and/or attenuated sales and/or profit outlooks for the coming year are Best Buy, Chico’s, Fossil, J.C. Penney, Kohl’s, L Brands, Macy’s, Michael Kors, Starbucks, Sears and Under Armour. Analysts see more bankruptcies ahead. Just the day before Target’s announcement, Moody’s released a report claiming distressed retailers are on the rise, with the number of U.S. retailers on its most distressed rating tier tripling in the past six years. Retailers rated Caa or Ca represent more than 13 percent of Moody’s total retail portfolio, the highest level since the Great Recession, when this tier accounted for 16 percent of the total portfolio.

Further, with this large a pool of distressed retailers, desperate measures may well ensue and further de-stabilize the retail arena. Intense promotional activity to raise cash by troubled retailers will impact healthier retailers who can respond by meeting lower pricing or forgoing the sale. Either way, sales and profits are adversely impacted.

This picture isn’t pretty, whether you call it evolution or revolution, it may well last through 2020 when some posit about half of retail will occur digitally. Mathrani said, “Fundamentally, the U.S. is over-retailed or under-demolished” and he didn’t see accelerated demolition near term. Retailers have (finally) acknowledged, regardless how beloved they are to their customers, that they need fewer stores; shopping center operators apparently think it’s the other operator, their competition, that is too exposed to retail saturation.

Over-stored translates into too many apparel offerings at the shopping center. It also means too many department stores; approximately half of the U.S. retail square footage is department stores, which compares with about 27 percent in the U.K. and 15 percent in Asia. At General Growth Properties, while traffic is up 2 percent, it is down at apparel retailers, “People are buying less apparel, regardless of channel” Mathrani commented.

For GGP, they do own some of the best in class retail in the U.S. And they are smart operators, investing and changing with the times. For instance, Mathrani spoke of the firm’s recapturing department store square footage and repurposing into grocers, movie theaters and sporting goods retailers; of its efforts to move from apparel retailers and increasing entertainment, food and restaurant offerings. According to GGP’s focus groups (they survey 88,000 people annually) the number one desire in a shopping center is a bowling alley (53 percent) followed by a grocery store (48 percent). Mathrani sees apparel coming down to 30 percent to 40 percent of shopping center offerings, while home furnishings, electronics, high-end autos and food increase square footage.

He has a cogent argument and the GGP high-quality portfolio is relatively insulated from Macy’s planned store closings (only one within its portfolio). That said, the company was part of a joint venture that purchased teen retailer Aeropostale at a bankruptcy auction, with plans to shrink the store base from approximately 800 to 230; I doubt this was driven by the desire to be a retailer.

Many years ago at a Bear Stearns retail conference I sat in on a Real Estate Investment Trust session where I heard a shopping center developer say, “It isn’t a question of if a specialty retailer will fail, it’s a question of when,” at which point I realized there was very little—if any—strategic relationship between the landlord and the retail tenant. Perhaps that is changing too, and wouldn’t that be a good thing.

Marie Driscoll, CFA is an industry analyst focusing on apparel brands, retailers and luxury goods and providing consulting services to academia, industry, investors and non-profits through her firm, Driscoll Advisors. 


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