An Update on the US Shopping Mall-Retailing Bust

I previously wrote about the US shopping mall bubble bust. Well it appears that this retail depression episode continues to linger. 

Here is an update. From a Wall Street Journal article entitled “Shoppers are Fleeing Physical Stores”

U.S. retailers are facing a steep and persistent drop in store traffic, which is weighing on sales and prompting chains to slow store openings as shoppers make more of their purchases online.

Aside from a small uptick in April, shopper visits have fallen by 5% or more from a year earlier in every month for the past two years, according to ShopperTrak, a Chicago-based data firm that records store visits for retailers using tracking devices installed at 40,000 U.S. outlets. Even as warmer temperatures replace the harsh winter weather this year, store visits fell by nearly 7% in June and nearly 5% in July, according to ShopperTrak.

New data from Moody's Investors Service shows that the shift to online sales has prompted retailers to scale back store openings and will likely lead them to pare back their fleets even more in coming years, as more than $70 billion in lease debt expires by 2018. Growth in store counts at the 100 largest retailers by revenue has slowed to less than 3% from more than 12% three years ago, according to Moody's.

The pressure comes as consumer tastes are changing. Instead of wandering through stores and making impulse purchases, shoppers use their mobile phones and computers to research prices and cherry-pick promotions, sticking to shopping lists rather than splurging on unneeded items. Even discount retailers are finding it harder to boost sales by lowering prices as many low-income consumers struggle to afford the basics regardless of the price.

While it is true that changing shopping habits of US consumers have partly been a factor, online sales are just about 6% of total retail sales where the 94% still has mainly been from brick and mortar stores.

This means US household consumption, stricken by balance sheet constraints from the previous Fed induced overborrowing (boom), has hardly recovered since the Lehman crisis. US household have been deleveraging as evident in the chart from Yardeni.com’s US Flow of Funds.

The Fed’s manipulation of money via interest rates has distorted prices that has led to the previous excessive debt financed consumption (boom), and consequently, to the race to build retail spaces and edifices.  When money tightened, the whole bubble collapsed. Vacancy in retail outlets and shopping mall surfaced. In fact, many shopping malls have been demolished.

Of course recent FED policies has only compounded the situation. By boosting (again) debt financed stock market boom, resources have been channeled into speculative activities rather than to productive activities, thus limiting economic recovery which has been transmitted to US consumption via retail sales.  

So still hobbled by balance sheet problems, consumer demand continues to languish which has been reflected on the still struggling in US shopping mall/retailing. 

And the US retailing shopping mall saga also extrapolates to a blueprint for the Philippine zero bound rate impelled shopping mall boom whose consumers are now buffeted by a sustained rise in consumer price inflation. Mounting inflation risks has forced the domestic central bank to raise interest rates. Boom will soon morph into a bust. And like the US, there will substantial vacancies and unoccupied retail spaces and malls or like China's "Ghost Malls". 

All it takes is for one to learn from history and from development in other countries. Unfortunately who in the mainstream cares about learning?

Hard Lessons from the US Shopping Mall Bust

One of the popular meme has been to project domestic shopping malls as an impregnable investing theme for the Philippines, based on the presumed unlimited spending prowess of the Filipino consumer[1].

As previously discussed and which I won’t elaborate further[2] there that the two common objections against my controversial case on the shopping mall bubble. They can be summed up in terms of sentiment and habit.

The first has been based on the tenuous notion that “crowd traffic” or the “public park” paradigm alone equals store revenues and thus extrapolates to shopping mall revenues. The crowd traffic equals revenue echoes on the dotcom bubble where “eyeballs” or “page views” had been used as justifications to boost stock market prices. Of course in hindsight we know how these misimpressions ended.

The second has been based on the feeble idea that habits are unchangeable or cultural ethos has made shopping malls immune from the laws of economics. Again there is no such thing as people operating in a stasis, as everyone will change in accordance to the changes in the environment or technology or influences in politics or the markets. In the early 90s mobile phones had been a rarity, today mobile phones have become ubiquitous. Such is an example of change.

The ongoing experience of the US shopping mall bust demolishes these objections.

In the US, department stores which peaked in the 2000 have long been in a steep decline. Again the decline of department stores coincided with the dotcom bubble bust.

A recent flurry of job layoffs has been announced in the US shopping mall-big retailing industry

Retail bigwigs such as Sears, JC Penny, Macy’s, Target and Best Buy among many others have announced a wave of store closures and job eliminations. A CNBC article noted of a “tsunami” of forthcoming retail store closures[3].

Moreover, an estimated 15% of shopping malls or retail spaces are expected to be demolished or converted into non retail space within the next 10 years. In addition, one expert believes that half of America’s shopping malls are doomed to fail within 15 to 20 years[4].

Five reasons for the continuing slump in US shopping mall-big retailing arena.

One. As heritage from the 2008 crisis. Notes the Wall Street Journal[5],

Traffic to U.S. retailers was hurt during the financial crisis and recession, when job losses soared and shoppers kept a tight grip on their dollars. But nearly five years into the recovery, it appears many of those shoppers may never be coming back.

Consumers borrowed to spend more than they can afford to pay. Eventually they had pull back as the bills came due. 

Two. Uneven economic recovery. Again from the same article

A Target spokesman said shoppers are making fewer trips as "traffic has been impacted by the uneven economic environment," but are spending more when they do show up.

The FED’s implicit support on Wall Street via the Greenspan-Bernanke-Yellen Put (Zirp and QE) has driven a wedge between main street and Wall Street.

This resonates with the stagflation story for the Philippine consumers.

Three. US $ 1 trillion of legacy debt from the recent crash are coming due over the next three years which some specialty hedge funds have been trying to offer bridge finance[6].

This is the supply side angle of the first factor: Commercial Real Estate or shopping mall or big retail developers built malls or retail outlets MORE than the consumers can afford to spend on, or simply stated, an overexpansion spree financed by debt.

Again bills have been coming due. This is more relevant to the Philippine shopping mall case.

Fourth, change in consumer preference where online sales have become a major alternative channel (again from the WSJ)

Online sales accounted for just 5.9% of overall retail sales in the third quarter, according to the Commerce Department, but they have an outsize impact on how shoppers use stores and what they will pay.

While online sales have been rapidly growing they haven’t entirely been able to replace lost physical retail sales. Nonetheless online sales will cannibalize on costly physical malls or retail space. Online sales I believe will become a dominant force.

Lastly, change in consumer preference in terms of physical stores from CNBC

One big shift in store closings has come from retailers shying away from indoor malls, instead favoring outlet centers, outdoor malls or stand-alone stores. Although new retail construction completions are at an all-time low, according to CB Richard Ellis, the supply of new outlet centers has picked up in recent quarters.

Yes Filipino consumers may not be technically the same as Americans. But the point is economic conditions, technology and shifts in social preferences will impact local habits, activities and buying patterns.

Think of it, if the US, which has a nominal per capita income of $51,704 (IMF 2012) combined with her power to tap the credit from the banks and capital markets that extends her purchasing power, have not able to sustain a debt financed shopping mall boom, how could a lowly economy like the Philippines with a measly $2,611 (IMF 2012) or a mere 5% of US per capita, seemingly parading herself as a pseudo developed economy and whom has frenetically been building malls at a rate that even Americans can’t sustain, be capable of doing so? 

Here is one prediction. Something will have to give.

Finally pls don’t entertain thoughts that today’s giants will remain so or that these so-called blue chips are impervious to any crisis of internal or external in origin. All one has to do is to think about the fate of former titans Lehman Brothers, Bear Stearns, Washington Mutual or General Motors or Enron all of whom ended up as the largest bankruptcy cases in the US[7].

And be reminded, even billions can go to zero in just a year or two as in the case of Brazil’s Eike Batista, who in 2012 was worth $30 billion and today or in less than two years has reportedly a “negative net worth”[8]

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[1] See Philippine Economy’s Achilles Heels: Shopping Mall Bubble (Redux) January 13, 2013

[2] See Phisix: Escalating Risks from the Region and from Internal Bubbles December 9, 2013

[3] CNBC.com A 'tsunami' of store closings expected to hit retail January 22, 2014

[4] Business Insider America's Shopping Malls Are Dying A Slow, Ugly Death January 31,2014

[5] Wall Street Journal Stores Confront New World of Reduced Shopper Traffic January 16,2014

[6] Bloomberg.com Hedge Funds Preparing for $1 Trillion Property Bill: Mortgages February 6, 2014

[7] Wikipedia.org Largest cases Chapter 11, Title 11, United States Code

[8] Wikipedia.org Eike Batista

Paradigm Shift: Wealthy Russians Buy US Homes

In my earlier post, I pointed out that the wealthy Brazilians, Indians and Chinese had been lending “support” to the US property sector.

Under the major emerging markets the rubric of the BRIC acronym coined by Goldman Sach’s analyst Jim O’Neil, Russia posed as the missing link.

Not anymore.

From Bloomberg, (bold emphasis mine)

Roustam Tariko, billionaire owner of Russian Standard Bank and Russian Standard Vodka, completed the most expensive home purchase in Miami Beach since 2006 when he bought a $25.5 million estate on Star Island in April.

The transaction made Tariko the neighbor of another wealthy Russian with a taste for Florida luxury living. Vladislav Doronin, chairman of Moscow-based real estate developer Capital Group, paid $16 million in 2009 for the Star Island home previously owned by Shaquille O’Neal, the now-retired professional basketball player.

“In Russia, it’s a status thing now,” Jorge Uribe, a real estate agent with One Sotheby’s International Realty Inc. in Coral Gables, Florida, said in a telephone interview. “If you’re wealthy and you say you have a place in Miami, it’s like saying back in the old days, ‘I own a place in Ibiza or Monaco.’ It’s a cocktail conversation thing.”

International investors are buying some of the priciest homes in America as the broader housing market slumps and a weak dollar makes U.S. property more of a bargain. Sales of residences above $20 million are rising in New York, California and Florida, which are popular business and vacation destinations for foreigners, according to Miller Samuel Inc., DataQuick and real estate brokers who cater to luxury buyers.

This is just one of the manifestations of the effects of globalization from fund flows (capital mobility) to the diffusion of prosperity worldwide.

The same article underscores this, (bold emphasis mine)

The precise number of foreign deals for U.S. luxury properties is difficult to calculate because many purchasers are registered as trusts or limited liability companies. Jed Smith, managing director of quantitative research for the National Association of Realtors, said the number of overseas buyers for multimillion-dollar homes is increasing, helped by the rise of emerging markets such as Russia, Brazil, China and India.

“There’s substantial growing wealth overseas,” Smith said in a telephone interview from Washington. “Just go to the Forbes list of billionaires and see that we’re no longer the only folks on it.”

Of the 214 newcomers to Forbes magazine’s annual global ranking of billionaires this year, 54 were from China and 31 from Russia. The Asia-Pacific region had more billionaires than Europe for the first time in more than 10 years and gained the most of any region, with 105 additions, according to the list. Moscow displaced New York as the city with the greatest number of billionaires with 79, compared with New York’s 58.

If there is anything that would be considered as certain or permanent, (aside from death and taxes) that would be ‘change’.

US Home Bubble Cycle: Upside Directly Proportional To Downside

Floyd Norris of the New York Times posted a chart in his most recent article which I think fittingly illuminates how the bubble (inflation) process works.

This from Mr. Norris, (all bold highlights mine)

``IN the last eight years, home prices in the United States have almost exactly kept up with inflation. But it has been a wild ride.

``During the period, the Standard & Poor’s Case-Shiller 20-city composite index of home prices rose almost 21 percent. The Consumer Price Index also rose almost 21 percent.

``The period, from June 2001 through the June 2009 figures that were reported this week, can be separated into two periods: the five-year boom and the three-year bust. There are limited indications that prices have started to rally in some areas, but the overall index’s move in June just kept up with inflation.

``During the boom, home prices outpaced inflation by 10.7 percent a year for five years. During the bust, they plunged, trailing inflation by 13.6 percent a year."

The interesting observation isn't just "what comes up must go down", but instead "the degree of ascent is almost directly proportional to the scale of decline"...very much like Newton's third law of motion:

For every action, there is an equal and opposite reaction.

This "stages in a bubble" chart has been a frequent post here to underscore how the bubble cycle culminates...



Nevertheless Mr. Norris concludes, ``Now foreclosures are still rising, even as home sales and prices seem to have stabilized. If the worst is over, it will have been a wild ride that ended very close to where it began, but with many people much worse off for the experience."

Lessons:

1. Property prices fundamentally reflects on the degree of the impact from inflationary policies undertaken (extremely loose monetary policies, administrative policies promoting home ownership and tax policies encouraging debt or credit take up).

2. Bubble or inflation policies has had a net negative effect on society, (consumes capital), which requires a lengthy and painful period for healing or rebalancing.

To quote Stephen Cecchetti, Marion Kohler, Christian Upper of Bank for International Settlements in a recent paper Financial Crisis and Economic Activity

``By altering attitudes towards risk, as well as increasing the level of government debt and the size of central banks’ balance sheets, systemic crises have the potential to raise real and nominal interest rates and consequently depress investment and lower the productive capacity of the economy in the long run. We looked for evidence of these effects and found that a number of crises had lasting, negative impacts on GDP. In some countries this was a result of an immediate, crisis-induced drop in the level of real output combined with a permanent decline in trend growth. In other cases, we find that the growth trend increased following the crisis but that the immediate drop was severe enough that it took years for the economy to make up for the crisis-related output loss."

Unfortunately yet, policymakers never seem to learn and continue to adopt short term oriented bubble blowing policies. This would lead us from one crisis to the next but transitioning towards a bigger scale, as the imbalances which needs to be adjusted will have simply been postponed. However, these are accumulated until the laws of nature will ultimately force an adjustment.

In essence, bubble policies are best signified by the idiom jumping out of the frying pan and into the fire.