President Barack Obama shops in 2014 at The Gap \ The Obama Diary photo
By John F. Di Leo -
Reflections on the future of retail…
As the new year began, right in the midst of outgoing Resident Barack Obama’s ever-more-urgent pleas for a “legacy,” two announcements hit the news: the family of Sears and K-Mart will close yet another 109 K-Marts and another 41 Sears’ stores in 2017, and Macy’s will close another 68 of theirs.
It was to be expected, of course. The analysts say that these stores are of an old breed that hasn’t kept up; they still use brick and mortar, unlike the darlings of the new age of retail, Amazon and Etsy et al, which don’t have the pesky challenges of rent, cashiers, décor and inventory to cover. And there is some truth to that.
But amidst all these depressing numbers – 220 store closings, 20,000 job cuts, all these fresh mall vacancies, etc. – such analysts forget some other key numbers.
Despite their huge losses – both in the tens of millions of dollars per year – each of these giants still does tens of billions of dollars in sales every single year.
Clearly, brick and mortar stores DO still fill a need – or at least a serious desire – on the part of the shopping public. It’s just more and more of a challenge to make enough sales to turn a profit, in today’s economy.
This is not to say that the concerns aren’t real. If you can’t make a profit, you have to close. But these tens of billions in sales prove that the dismissive claim of the analysts that “the days of brick and mortar are over” is, in fact, nothing short of a lie.
To use a well-worn cliché: the buggy whip industry didn’t die out because buggy whip manufacturing was in bit a more challenging environment. It died out because nobody had a use for buggy whips anymore. That’s simply not the case with traditional retail. People still spend billions every year as willing customers of brick and mortar stores, it’s just not quite enough to push those stores past the finish line.
So, rather than giving up on an industry that takes in hundreds of billions a dollar a year in willing purchases and employs millions of people – often providing people with their critical first job – perhaps we should analyze instead just what the challenges are that make it possible for these stores to take in tens of billions of dollars but still lose out on the bottom line.
In any business analysis, we must look at the labor costs first. Has anything happened to make its workforce more expensive in recent years? Oh yes indeed. The cost of labor is up. More and more cities, and even states, are raising their minimum wage (nineteen states raised theirs, on January 1, 2017). This minimum wage increase works as an elevator, a rising floor that raises every employee group’s wage, not just the subset of entry-level employees.
But even more importantly, we have seen tax-and-benefit costs climb, as businesses must pay more for health insurance, 401-K matching and management fees, and other benefits for their employees. Obamacare, the Americans with Disabilities Act, and countless other federal regulations have increased the costs of every business sector; retail hasn’t missed out on these new pains. Has this issue alone made it impossible to hire? No, not in most cases. But it makes a difference.
Rent and Utilities
The next zone to address is the cost of providing that brick-and-mortar environment itself. Department stores are huge, taking up square footage in rental space and using up energy for lighting, air conditioning and heat.
What has happened to these costs in recent years? Mall space has often gone up in price as property taxes have climbed; the mall management company must pass on these costs to their tenants. Cities, counties and states often view commercial property as a gold mine, a taxable entity that cannot vote them out of office, so they rob these businesses blind at tax time, creating an ever-growing cost that is passed on to the store in increased rents.
And what of lighting, A/C and heat? Remember how cheap those incandescent bulbs in your desk lamp used to be… Versus what the now-mandated CFL or LED versions cost? If you have dozens of these bulbs in your home, your local department store has hundreds, or even thousands. These costs have skyrocketed, courtesy of the Pelosi Congress that irresponsibly declared so many kinds of cost-efficient bulbs illegal. And what of the energy that heats, cools, and lights these stores? The Obama administration’s concurrent wars on coal, nuclear, gas and oil power, combined with their laughable green energy favoritism, have caused your local mall’s heating, cooling and electric bills to skyrocket as well. Does this explain the whole difference? No, not in most cases. But it’s made for a more challenging environment than it needed to be.
Crime and Security
If you’ve served in the military during wartime, you have probably spent time in a war zone (and if so, the rest of us can never thank you enough for your service). The rest of us, however, particularly at home on US soil, do not expect to encounter such dangers.
More and more American shopping areas, however, have become dangerous. While terrorism threats are a rare and special risk, relatively and hopefully controllable with rational federal policy, the more general crime risks of our cities and malls have been growing steadily for generations. Malls and localities must spend more on security measures and personnel, and even with such spending, shoppers know which retail establishments are no longer safe, and wisely avoid them.
This first affects the evening traffic, and then, before you know it, the stores empty in the daytime too, as miscreants eventually use the shopping center as a regular hangout. How many downtowns have deteriorated, how many whole malls have emptied, first of shoppers and then of stores, because uncontrollable thugs have driven away their clientele?
No matter how much a shopper may like to shop, the risk of a car being burglarized, a purse being snatched, or actual physical assault will drive any sane shopper away. Many hundreds of malls, small and large, enclosed and outdoor, have closed or severely shrunk in recent years, and one can pinpoint the commencement of the rapid decline to the sightings of gang activity, the increase in burglaries, and most visibly of all, a new threat: the marauding gangs known as “flash mobs” that suddenly take over a store, ransack it, and escape before security can react.
A Common Thread
No matter how popular the products may be on store shelves, no matter how aggressively individual stores or whole malls or chambers of commerce may advertise, these issues – taken together – can be insurmountable challenges. Stores can find a way to be cost-effective, through purchasing in scale, advertising for volume sales, and offering products different enough and desirable enough to maintain a market, if there are shoppers walking in the door.
But if their every effort at cost-efficiency and marketing is met by another external challenge – criminals pouring in, utility costs skyrocketing, taxes climbing, and labor costs rising – then we cannot expect them to succeed.
It’s not that retail is dying, as we are always told… it’s that retail is being assaulted, from the outside.
The common thread is government. Government has made these utility costs rise, as government has shuttered coal mines and power plants, denied permits for drilling and pipelines, raised taxes to fund unproductive windmills, idiotic solar panels, and even algae farms. Government has unnecessarily made healthcare more expensive as a benefit, caused unemployment and workmen’s comp rates to rise, and released hundreds of thousands of criminals into the neighborhoods, through ridiculously short sentences, technicality acquittals, and even outright prison-emptying binges by left-wing judges.
The source of the challenges to retail, on almost every front, is our government. As government has raised up these roadblocks, only government can take them down.
This is not to say that, without these roadblocks, everyone would stop shopping online and suddenly return to the stores. But they don’t need to. Plenty of people already shop in our brick and mortar stores; plenty of money is already spent in them. We need to move the needle a few degrees, that’s all, to save this sector.
As just one example, Sears reported that the 150 stores they are closing reported sales of $1.2 billion last year, and a $60 million loss. As bad as that sounds, it’s only a five percent loss. Bring back the customers who are scared away by crime, lower the taxes and utility costs by electing rational people to public office who don’t view the retail sector as a money tree to shake until it dies, and these numbers could easily be flipped from a five percent loss to a five percent profit.
The stores have been doing all they can, for years, to fix their problem. It’s time for government to stand up and admit its culpability, and to stop making everything worse for them.
The Major Obstacle
But all of the above won’t help if the primary obstacle to retail sales is left unaddressed, and it should be the most obvious of all: Disposable income is down in America. Down. Way down.
We have all seen reports that average wages in America have been generally flat for over fifteen years. Annual wage growth outside of cost-of-living increases virtually stopped late in the Clinton administration, and never returned after the 2000 recession. Even though the economy grew moderately during the majority of the GW Bush administration, wages never recovered, and the recession that began with Nancy Pelosi’s takeover of the House in the 2006 election just cemented the crisis.
The biggest problem that the retail sector faces, therefore, is the fact that their potential customers don’t have disposable income. With 95 million Americans of working age outside the workforce, with an employed population enduring fifteen-plus years of flat wages, and with such economic uncertainty that even many who do have money to spare feel compelled to save and invest in case the bottom drops out again, the American consumer simply doesn’t have the money to spend anymore.
A generation ago, a common sight in a shopping mall was to see crowds with shopping bags from multiple stores, year-round, proving that most people who went to a mall did so to actually shop.
Today, by contrast, in addition to the general emptiness we encounter even in our bigger and better malls, we see that people carry only the one thing they came to buy; there’s much less impulse buying today. Shoppers may go to buy a specific item, then have lunch in the food court or in a better mall restaurant, but the days of regular shopping excursions that the middle class could once enjoy are long gone, for a significant segment of the population.
Worse still, many of the people in our malls are not shopping at all; they use them as a comfortable indoor walking track. They show up on their lunch breaks dressed in their business attire, or at off hours in sweatsuits, and walk the perimeter of the first floor, then the perimeter of the second floor… then return to their cars, to their homes or jobs, never having set foot in a single store. Not that there’s anything wrong with exercise, of course… but this trend just contributes that much more to the lack of actual shopping going on.
In the final analysis, we find that the reasons for brick-and-mortar retail pain are varied, but they have a common thread. The government has made it harder for the stores to compete with cheaper but less satisfying online merchants, and in addition, the government has robbed their potential customers of the money to shop at either.
High corporate taxes, crippling utility costs, and a painful regulatory environment have driven America’s employers out of business or out of the country. Those that remain here have less money to pay their employees, so employees have less to spend. It’s as simple as that.
Our government has been holding down the economy for years. When we bring back growth, we will bring back disposable income for our consumers.
And when our consumers have the money to spend, they will support both online and brick-and-mortar stores, because they will want to… and because they will finally be able to again.
But Does It Matter?
At this point, we will still have detractors, people who claim that the window has shut on brick-and-mortar retail, that its time has passed and we can do without it. Let it go, they tell us.
Such analysts forget the many positives that retail provides. For example:
Seeing the Goods: Even online shoppers want to see the goods in person first, or in the case of clothes, to try them on and check the mirror. They may not buy when in the store; they may go home and buy online, often from that same store’s online presence, when they have the money, a month or two later, but the physical store will always be a critical part of the shopping experience.
A Personal Touch: While many shoppers are content to make decisions on their own, many customers want that retail salesman to explain the product and help make the right choice. And many products lend themselves to this; not every purchase is the brand-name toy or hardcover book that lends itself to the online shopping environment.
Government Revenue: It’s hard to make a case for taxes, but this is an important point: Local stores pay local taxes. The property taxes and sales taxes generated by retail shopping are critical to the revenue stream of most local government. Many a county receives a quarter or more of its income from a major shopping mall. Let that mall close, and you will see the taxes on residents and other businesses skyrocket to make up the shortfall.
Support for Other Industries: The retail center – whether an enclosed mall, a strip mall, or a traditional downtown shopping district – is a magnet, bringing potential customers together, not just for retail, but also for other businesses with symbiotic relationships. The restaurants and food court outlets, the movie theaters and comedy clubs, the auto dealers and auto repair shops, the banks and travel agencies… all these and many other businesses, not traditionally thought of as “retail”… work together to both create a draw and make the most of that draw, once accomplished. The people who come for the restaurant or theater stay to shop; the people who come to shop may do their banking and have the car serviced while there. Remove the stores, and many of these other businesses will fail from lack of business as well.
Employment: While most career counselors would agree that retail, in general, is not the best longterm career choice for any but a narrow population (short of upper management, it’s not a path to wealth), all would agree that it’s a terrific starting point for entering the workforce. Working part time at a department store – while in high school and college, or as a second job afterward while just starting in one’s real career – remains a time-honored, valuable part of anyone’s time on the ladder to success. Spending time after school and on weekends operating a cash register and dealing with the public shows a future employer that one is responsible enough for that full-time job. Remove these stores, and we remove the first step on the ladder for millions of Americans.
Retail is challenged, like it has never been before. More than that, it is threatened by those who live in a zero-sum world, and don’t acknowledge that economies can grow and challenges can be overcome. A growth economy will solve most of these problems. But we need it soon, before more malls close, before more chains fail, before more shops give up the ghost, turning that many more shopping centers into deserts.
Who's fault is the seeming demise of brick and mortar retail?
Who owns this challenge? The Left is responsible for the taxes and regulations; Barack Obama himself is responsible for the challenging economic environment we now suffer. While we cannot lay it all at his feet, he’s the one who appointed the EPA Administrators, the Labor and HHS Secretaries, and the Attorney Generals who have turbocharged the tax-and-regulation environment that made it all so much worse these past eight years.
Mr. Obama is said to be afraid of “losing his legacy,” but he needn’t worry. The thousands of shuttered storefronts littering the landscape, the 95 million people outside the workforce, the many once-successful Americans who’ve lost everything in the Obama economy, will stand for years as a living reminder of these two unnecessarily miserable terms.
There is indeed a great deal to be done, now that the adults are back in charge of the reins of government.
To paraphrase the old saying: Reports of retail’s death have been greatly exaggerated… but even so, there’s no time to lose.
Copyright 2016 John F. Di Leo
John F. Di Leo is a Chicagoland-based Customs broker, international trade lecturer, writer and actor. His columns are regularly found in Illinois Review.
Permission is hereby granted to forward freely, provided it is uncut and the IR URL and byline are included.
A most insightful analysis of the current situation with retail in the U.S. May God help us to revive this whole economy!
Well done Sir, Well done……
This article is real quality. So thorough and insightful. Thanks. Sharing.
Excellent article. I wonder if there is another twist to this, though. Since more folks are ordering online, has there been a boom in the packaging and transportation industries? We ourselves have mountains of empty boxes from ordered merchandise, and someone had to pack all that stuff, as well as drive the trucks to deliver it. Most items seem to come via UPS, so has their bottom line gone up? How about Uline, that sells packaging material? I also wonder if “stand alone” stores are becoming more popular, since (as you note) people usually shop for one item and it is quicker to go to one store rather than navigate a mall. I wonder if it is just the mall concept that is now out of date.