It’s no longer news that retailers all over the world experience decline in sales, which leads to store closures or even worse, liquidations.
So far in 2017, more retailers have filed for bankruptcy than in all of 2016, and we’re not even half way through the year!
We read and hear about how Amazon is the reason why retailers are in distress, and while that’s true, Amazon is definitely not the only contributor.
There are at least 6 other contributing factors as to why:
- Yes, online sales are increasing, but..
It only accounts for 6,8% of total sales in Australia and 8,5% in America. Still, we can’t ignore the fact that online retail sales are growing, with Homewares (19,9%), Groceries (16,7%), and Fashion (15,7%) being the categories with the biggest share of online spend in Australia. And yes, Amazon is a big threat to bricks and mortar retailers in America and will have a huge impact on Australian retail when the time comes.
- It’s (almost) all about experience!
Last year Millennials surpassed Baby Boomers as the largest living generation. A 2014 study by Eventbrite showed that Millennials made up $1,3 trillion in annual consumer spending. The problem for retailers is that Millennials are fuelled by experiences, not things. The same study revealed that 3 in 4 (78%) would choose to spend money on a desirable experience or event over buying something desirable. Experiencing FOMO (69%), too is another big reason for the rise of the Experience Economy.
Also, the Sharing Economy, where we turn to new sets of services that provide access to products without the burden of owning (think Uber, Airbnb and Netflix), is another contributing factor as to why retailers are fighting for survival. We no longer have the want or need to own things because a few clicks on our phone and we can still get from A to B, have a roof over our heads while traveling, and watch a movie or our favourite TV show.
- Chapter 11
In late 2005 major changes to the bankruptcy code went into effect, making it harder to turn around a struggling business once a Chapter 11 bankruptcy filing has been made. Previously it was common to be in bankruptcy for about 18 months, but the law now only allows for 210 days to decide whether to renew leases or close doors. This means that if businesses are unable to turn around the business within the time limit, they are forced into liquidation.
- The US mall penetration
The US have five times more than the UK, 10 times more than Germany, and an astonishing 40% more shopping space per capita than Canada. Safe to say Americans are not short of shopping options! Still, if we more and more often go online to do our shopping – or choose experiences over goods – this must surely have taken its toll on hundreds, maybe even thousands of malls.
- Great Recession Retail Depression
2008 was a memorable year with the Financial Crisis leading to the worst recession since the Great Depression in the 1930s. Stagnating wages led to decrease in discretionary spend. This meant retailers were struggling as a result, which led to shopping centre landlords giving concessions, like lower rent or better lease terms, to retailers to avoid empty malls.
According to some restructuring experts, many retailers should have filed for Chapter 11 around the time of the recession, but because they had loans at historically low interest rates, they were able to continue business as usual.
But now the time has come to pay back their loans to their creditors, and because of the recent retail sales decline, they have to close stores or file for bankruptcy to be able to pay back what they owe.
- Private equity ownership
… Or at least partially. Around half of the retailers filing for Chapter 11 this year are owned or partially owned by private equity.
Why is that?
Like CNBC puts it:
“Decades ago, it was among the most popular of leveraged-buyout plays. The popular notion was that these firms could buy a retailer, make the business more efficient while expanding its footprint in new markets, and then sell the company or take it public at a higher price.”
And then along came the Internet, which barely anybody at the time saw as a threat or something that would spread like wildfire the way it did. And by the time the Internet blew up and online stores became a thing, many retailers had accumulated so much debt that the high-interest payments prevented them from being able to invest much in e-commerce.
So yeah, if you’re worried that Amazon is or will be the death of many retailers, you’re probably right. But Amazon alone will not be the sole contributor.
As we can see:
THIS IS NO COUNTRY FOR OLD RETAILERS