Friday, July 19, 2024

New breed of retailers offset store closings

Massive changes are coming to America's malls as retailers try to transform themselves to fight back against the wild popularity of online shopping.

Big box and traditional department stores are closing stores or refocusing them in new ways to take advantage of changes in retailing. At the same time, increased competition is giving rise to a new breed of savvy specialty chains.

Walmart, Sears, J.C. Penney and The Gap are among the chains that have announced widespread store closings. Meanwhile, chains like H&M, Zara and Primark, which specialize in rapid turnover of stylish yet inexpensive goods, are rising, powered by constantly updated merchandise that keep customers interested when they can always opt to go online for just about any purchase.

The simultaneous store closures and openings is the cyclical nature of retail, an industry that has seen its share of changes for decades. But now the industry is coping with a phenomenon that is forcing change like never before. Online and mobile shopping is surging and buying habits — especially among younger shoppers — have changed to favor experiences over physical stuff.

That leaves retailers fighting for every dollar. As Sears CEO Edward Lampert pointed out in a note to shareholders Thursday, explaining his company's poor fourth quarter performance, shifts in buying behavior and e-commerce have become so dramatic that no retailer or company is immune. Everyone from Walmart to Whole Foods "have felt the impact of disruptive changes from online competition and new business models," he said.

To be sure, physical stores are not disappearing and the majority of shopping still takes place in them. But these trends have given way to the rise of specialty retailers and off-price stores that give customers both value and style in a more curated setting, while traditional brands are scaling down their businesses.

"As consumers shift more and more to online purchasing, retailers are stepping back and looking at right-sizing their portfolios," says Michael Brown, head of the retail practice at consulting firm A.T. Kearney. "How many stores are required by a certain type of retailer is still yet to be understood over the next three to five years."

Some retail consultants say more than 1,000 stores in the U.S. is too many for any chain. J.C. Penney has more than 1,000 stores; Walmart, as the largest retailer in the country, has more than 4,600, Sears has a little less than 1,700 Sears and Kmart stores. Other legacy companies like Macy's are on the verge of excess with more than 700 locations.

"Anybody with a store count of over 800 stores in a mall is reducing store count," says Ken Nisch, chairman of retail marketing consulting firm JGA. One of the reasons is many of the stores are no longer profitable or attracting enough traffic.

This year already alone, Walmart announced it would close 154 U.S. stores. Macy's will close 36 stores. Sears said it would speed up the closure of 50 stores. Those closures are just the latest in a spate of storefronts that have shut their doors in recent years. J.C. Penney closed 39 stores last year, Macy's closed 14, Gap closed 140 and teen apparel brand Aeropostale closed 126.

These companies have one thing in common: They matured and saturated the market in a less competitive time for retail, before online shopping shifted the sales dynamic; now, they are desperately trying to reverse course and keep shoppers, and investors, happy with leaner business models that put digital capabilities and superior customer service at the forefront.

But don't count these traditional chains out.

Even as they shed stores, chains like Macy's and Walmart are also opening new ones. In some cases, they are following the same path as the up-and-coming value-based brands. Macy's, for instance, is venturing into the popular off-price space with a brand of stores called Macy's Backstage. It opened six last year and plans to open one more this year. Kohl's is doing the same, announcing Friday that it would close 18 underperforming stores this year but pilot seven smaller-format stores and expand its new discount stores too.

Even aside from the influence of online shopping, many of the changes reflect demographic shifts and stores stuck in locations that are now less desirable, says Tom McGee, CEO of the International Council of Shopping Centers. This is the time of year when store closures are typically at their peak, following the holiday rush. But don't expect those glaring empty spaces in malls to stay empty for long.

Some specialty chains are hungry for store space. Sweden's fast-fashion brand H&M plans to open 21 new stores in the U.S. this year after opening 57 last year. Primark, a United Kingdom fast-fashion brand that made its U.S. debut in September, plans to have nine stores open by the end of this year. Growth of the Zara brand, owned by Spanish company Inditex, has been relatively slower given it first entered the U.S. market in 1989, but it still opened nine stores between February and October last year to bring its count to 62.

These brands have tapped into a desire among Millennial shoppers to invest in things that require less commitment — the clothes are stylish and fashion-forward yet inexpensive, ideal for rotating in and out of your closet just as quickly as trends change.

Ultimately too, the majority of shopping still takes place in physical stores. That fact combined with the quick rotation of products at places like H&M is getting shoppers off the Internet and into stores to see, and try on, the latest styles — for now, at least. Eventually, the hot new brands may find themselves downsizing just like their old-school counterparts.

"The only true axiom in life is the bell curve," says Robin Lewis, founder and publisher of a retail strategy publication called The Robin Report and co-author of The New Rules of Retail: Competing in the World's Toughest Marketplace. "You grow, you mature and then you die."

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