Why Retail Companies Are Closing Stores

Macy's
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Traditional U.S. retailers are on course to close more stores than they did in 2017, when major retail chains closed a record 8,139 stores. Through July 5, 2019, large U.S. retail chains announced 7,062 store closures, according to Coresight Research. That compares with 5,864 store closings for all of 2018.

If the pace continues, major retailers could shutter as many as 12,000 stores by year-end, Coresight forecasts. In that case, the number of closures would come close to doubling the 6,163 that occurred in 2008, the only full calendar year in the Great Recession.

Online Competition

Part of the explanation for retail chains' difficulties since 2017—what some have called the "retail apocalypse"—is the continuing trend of Americans making purchases online. Consumers enjoy the freedom of shopping on their computer or phone and avoiding trips to a store that may not have had what they were looking for anyway.

As of the first quarter of 2019, e-commerce purchases accounted for 10.2 percent of all retail sales, according to the Federal Reserve Bank of St. Louis. That percentage has risen steadily since 2000.

Amazon.com, the largest U.S. e-commerce company, had about 103 million paying subscribers to its Amazon Prime service in March 2019. That figure represents about 80 percent of U.S. households.

The Decline of Malls

Another contributor to the surge in store closings is the rise and inevitable fall of largely suburban malls as a shopping destination. The number of U.S. malls grew more than twice as fast as the population from 1970 to 2015, The Atlantic reported, citing Cowen and Company research. Eventually, substantial numbers of malls were certain to fail in such an oversaturated retail environment.

As some of a mall's stores begin closing—especially anchor tenants such as a Sears or Macy's—the mall loses favor with shoppers, and the declining foot traffic means more stores lose revenue, which leads to more store closures.

The vacancy rate of malls in the second quarter of 2019 remained at the 9.3 percent level reported for the first quarter, according to Reis.

The provider of commercial real estate data and analytics said that prior quarter's vacancy rate was the highest seen since the third quarter of 2011. 

The Great Recession also caused shoppers to stretch their declining or flat disposable incomes at lower-cost, big-box stores, such as Target and Walmart, that are generally not located in traditional shopping malls.

Furthermore, people of all ages—but especially younger people—are increasingly shifting their spending preferences from things to experiences. They want shopping excursions to be fun rather than just a search for consumer goods. That's why malls that offer diversions like roller coasters or aquariums have outperformed their retail-only peers.

Private-Equity Debt

Yet another reason for store closings is the leveraged buyouts of retail companies by private-equity firms that saddle the retailers with tremendous amounts of debt.

For example, Gymboree Group, which sold children's clothing in stores with the names Gymboree, Gymboree Outlet, Janie and Jack, and Crazy 8, first filed for bankruptcy in June 2017, almost seven years after Bain Capital purchased it in a deal that involved $1 billion in debt. Gymboree emerged from bankruptcy after turning control of the company over to its creditors and closing 375 stores. The company filed for bankruptcy again in January 2019, when it said it would close its remaining stores.

Quarterly Announcements

Traditionally, the first quarter of any calendar year is the biggest for store closure announcements. That's because retail companies have determined how well they did during the all-important holiday shopping season and which of its stores performed poorly enough to merit closing.

More and more, however, national retailers are making such announcements throughout the year. For publicly traded companies, the news of store closings can be positive for their stock if the businesses are still performing well overall; it's seen as culling the weak members of the herd. But too many store closings—and poor quarterly revenue and profit reports—are potential signs of a company heading for bankruptcy and can lead to stock declines.