The retail apocalypse that began a decade ago with the widespread closing of many traditional brick and mortar retailers throughout North America is likely to pick up steam in the latter half of 2020 as a result of the devastating effects of the coronavirus pandemic. Over 9300 stores were closed in 2019, up from 5844 closures in 2018.1 Once prominent retailers such as Payless Shoe Store and AC Moore are gone entirely, while former stalwarts JC Penney, Sears and K-Mart continue to operate despite closing many locations. Even before the coronavirus pandemic, traditional retailers were in the midst of tremendous upheaval in trying to reinvent themselves and adapting their business models to compete within a rapidly changing industry sector that was being ravaged by online shopping and a reduction in foot traffic in malls across the nation. With retailers being forced to indefinitely shut down operations as a result of the coronavirus pandemic, analysts are expecting a massive surge in bankruptcy filings and as many as 15,000 closures for 2020.2
The news gets worse. Mall vacancy was at an all-time high prior to the coronavirus shutdown at close to 10%.3 Malls in general are no better as Credit Suisse estimated several years ago that as many as 25% of all malls would shutter by 2022 as a result of increased vacancies. 4 Fast forward to the present as affected by the coronavirus and you have traditional retailers being forced to shut down the majority of their physical stores for an indefinite time period and laying off millions of workers. With the lights off and plummeting revenues, retailers are not paying rent. A recent sample of 118 national retail and restaurant chains conducted by Datex Property Solutions showed that 16% of those tenants had not paid rent as of the middle of April.5 This means that April rent, which is due in March, was not paid by these tenants, with March being a month that was only partially subject to store closures for the majority of these tenants. With the entire month of April being subject to the shutdown, it is likely that an even higher percentage of tenants will not pay rent for April. The list of tenants not paying rent is a fairly prominent one, including such companies as The Gap, Barnes & Noble, Nordstrom and Neiman Marcus just to name a few. The coronavirus shutdown has turned up the heat on companies that were struggling to innovate alongside the changing industry beforehand, accelerating the retail apocalypse by looking to expedite the shuttering of many iconic traditional retailers that were left falling behind the curve.
Looking at the most heavily shorted stocks on the market, it’s impossible to overlook just how many traditional retailers are at the top of the list. Short selling is a strategy that is used to profit from the decline in value of a security where investors look to capitalize on the depreciation in value of a security by initially selling the security at a higher price before subsequently buying the security back at a lower price. Investors short a stock when they feel that company is going to underperform. The higher the level of short interest in a company’s stock, the more investors believe that the stock will perform poorly. The most heavily shorted stock in the entire market on a percentage basis is brick and mortar retailer GameStop with 86.9% of shares held short.6 Such a high percentage of short interest indicates that investors are outright and unabashedly betting on the outright failure of this company. GameStop sells video games and video game equipment the old-fashioned way, inviting customers to make purchases at a physical retail location despite the trend of the gaming industry towards digitalization. Aside from GameStop, there are 25 more retail names among the list of the top 100, all with short interest percentages above 17%.7 Bed Bath and Beyond, Dillard’s, Macy’s, Nordstrom and several retail mall operators are all companies with significant amounts of investors betting on their stocks to fail. These companies are all representative of traditional retailers that have either struggled or failed to adapt their models to an increasingly digitalizing economy where consumption preferences are emphasizing flexibility and convenience. The investment world seems to be sending a very clear message to antiquated retailers-innovate or die!
Innovation is not something that develops overnight. Rather, it is a process that can take quite some time to develop into something practical and usable. It’s this tangible application of a concept or an idea that brings value to the innovation. Amazon was founded in 1994 as an online bookstore, and did not turn their first annual profit until 2003.8 Apple was founded in 1976 as a floundering pc maker, not introducing its first i-phone until 2007.9 Regardless of their initial failures or stagnation, both of these companies serve as excellent examples of how necessary it was to adapt via innovation or face extinction. Their persistence in evolving into companies that could meet, anticipate and ultimately influence consumer demands is what has made them leaders of the modern economy. Just as struggling retailers don’t go out of business overnight, trends develop over long periods of time giving companies the opportunity to change their business models as such trends proliferate. Not doing so serves only to put stagnating companies further and further behind until an inflection point that forces the ultimate capitulation. Yes, online sales are up while brick and mortar sales are down. Customers like shopping on their phones and having their products delivered to their doorsteps. Companies like Netflix, Uber and Instacart are changing the way we play, work and shop. For every company like Sears or K Mart that is unable to adapt, there are companies like Target and Walmart that have been able to adapt. Companies like Amazon and Apple are not killing traditional retail and causing the retail apocalypse, they are just leading the way in showing how it should be done.
Individual retailers have always come and gone, while stronger and more adaptable players have stood the test of time. Woolworth, Blockbuster Video and Sports Authority are some of the more memorable names that have faded away, while Macy’s, JC Penney and Sears may be among the next iconic brands to vanish. While storefronts are closing and malls are either vacant or reinventing themselves as amusement destinations, the amount of people using their mobile devices to shop on different websites is rapidly increasing as e-commerce is supplanting brick and mortar for everything from clothes to food to professional services. What’s most important to remember is that retail itself will never go away. Rather, like any good industry, it will continue to reinvent itself at different points in time based on prevailing sentiment, trends and preferences with more dynamic companies taking the place of their archaic predecessors. It’s all the same, just different.