The first half of 2016 may mean lights out for hundreds of retail stores, if online data from Black Friday weekend are any indication.
Total Web-based sales for Thanksgiving weekend increased by 26% from a year earlier, said IBM in a report on Monday. Thanksgiving was the fastest-growing online shopping day over the four-day holiday weekend, with sales rising 25% to a record $1.7 billion, according to Adobe, which also said Cyber Monday spending may hit a record $3 billion this year.
Within the online sales numbers, this is the first holiday season, I think, where buying on mobile devices has played the role of serious disruptor. Retailers have upgraded the mobile shopping experience to take advantage of bigger smartphone screens and high-speed data plans, offering expanded selections, more product reviews and quicker checkout. Checking product availability on a mobile device has also become integral in boosting mobile sales. Consumers realize they no longer have to order from a desktop to secure a fair deal on a must-have holiday item. Amazon (AMZN) offering mobile-only deals was a huge vote of confidence in mobile shopping, and was a major win for the Internet giant, seeing as how brick-and-mortar retailers did not follow suit.
Fast fact: The first two days of the holiday selling season, Thanksgiving Day and Black Friday, amassed some $4.45 billion in U.S. online purchases. Mobile devices, led by smartphones, accounted for a record $1.5 billion of the amount spent online, with $2.72 billion spent on Black Friday and $1.73 billion on Thanksgiving. Those are huge numbers, and a big thanks goes to Samsung, Apple (AAPL) and Google (GOOGL), which are putting out these high-powered phones and tablets.
What stellar online numbers like these mean is that retailers will have to seriously reconsider the size of their store base and what's being sold in the stores. I have been warning about this for some time, but it was brought to light nicely in a piece by my colleague Carleton English on Macy's (M). The consumer is telling retailers rather emphatically that they don't have a need for five stores within a 25-square-mile radius. Until now, retailers haven't listened.
The amount of square footage in retail is still a major issue that hasn't been addressed seriously by retailers, other than Macy's and J.C. Penney (JCP) closing a few stores a year and Abercrombie (ANF) closing hundreds. There is over 45 square feet of retail space per capita in the U.S., compared to 2 square feet per capita in India, 1.5 square feet in Mexico, 23 square feet in the United Kingdom, 13 square feet in Canada, and 6.5 square feet in Australia, according to the latest Census Bureau data. The International Council of Shopping Centers estimates there are still a massive 109,500 shopping centers in the United States ranging in size from small convenience centers to the large super-regional malls. These are startling numbers to look at as investors in retail, and even the broader economy, for several reasons:
1. It suggests there are significant underperforming assets on the books of major retailers. Which is why, as Carleton noted, you want to favor retailers that are trying to monetize their assets. Retailers with executives clinging to the old ways of doing things should be frowned upon. Although Macy's declined to form a REIT, I like what it is doing to extract value from stores -- such as working with outside vendors to spruce up top stores and sell off valuable real estate for redevelopment by others. The company, outside of dying Sears (SHLD), which is closing stores to stay alive, has been very diligent in closing underperforming stores to improve the bottom line over time. On the flip side, a Kohl's (KSS) is not doing enough of this work, and in fact is continuing to add square footage.
2. As retailers close physical locations, vendors will be losing places to physically stock their inventories. Yes, an Under Armour (UA) will receive prominent placement on a website, but losing access to humans wandering stores reduces sales potential to a certain extent. Also, it means vendors will have to invest in more capex in terms of storage and analytics to assess online buying. The market hasn't adjusted for those pressures, but it has to start at least considering the impact from a drastic number of store closures over the next five to 10 years. (Amazon and Under Armous are part of TheStreet's Growth Seeker portfolio.)
3. Amid more store closures, there will be fewer job opportunities for people with low-level skills. Many of these folks will likely have to relocate to places near online fulfillment centers (which stand to explode in number) or give up working in retail altogether.
I think investors are going to be very surprised by the store-closure announcements shared by companies after this holiday season. It's one reason why shares of mall developers such as Simon Property (SPG) should be approached with caution.
On the other hand, it's one reason to view a Starbucks (SBUX) favorably. The company actually becomes more powerful with each store it opens thanks to its best-in-class mobile ordering platform, which allows it to tap into the growing on-demand economy. (Apple, Google and Starbucks are part of TheStreet's Action Alerts PLUS portfolio.)
Obviously, more store closures play into the hands of Amazon. I think over time you will see Amazon be a buyer of shuttered department stores and off-mall stores like Kmart, using the sites for fulfillment centers or launch pads for drones.