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

McKinsey Quarterly On The New Japanese Consumers

McKinsey Quarterly has an interesting outlook about the changing habits of Japanese Consumers.

1. A shift to value.

Japanese consumers have been switching preference from classy and branded products to discount stores and online retailers. The reason according to McKinsey Survey: expensive products, “annoying stuff” and “inability to shot at my own pace”

And shifting to value also means bulk buying

[my comment: an aging population is expected to spend less on material things and spend more on health, as noted below this appears to be compounded by economic stagnation.]

2. Home entertainment.

Japanese have also been more “home” oriented in terms of entertainment. And part of the homeward bound lifestyle is that the Japanese have gradually embraced digital revolution through online shopping

Japan is said to lag the US and UK in spite of high penetration level of broadband, and the past reasons for this according to McKinsey have been,

-Japanese consumers love the physical shopping experience;
-mobile-phone screens are too small;
-the density of retail establishments means that online shopping has less of a convenience advantage;
-credit card penetration is low.

However this seem to be changing as more Japanese spend online.

The online market for physical goods (excluding ticket sales and electronic downloads of media such as music, movies, and software), notes McKinsey, is estimated to be nearly $30 billion, compared with only $1.3 billion in 1999



A noteworthy quote ``It’s worth underscoring the tight relationship between online shopping and broader shifts in consumer behavior. In a consensus-driven society where individual choice and expression have historically been frowned upon, the ability to browse products, compare prices, and make purchases relatively anonymously is creating new attitudes and empowering consumers.” (bold highlights mine)

[my comments:

-Online activities are growing not only in Japan but in most parts of the world. Perhaps the reason for the shift to value is that online provides more opportunities for comparison and thus end up with least expensive but still high quality value products choices.

-In addition, since our assumption is that Japanese have broadband connectivity at home, social activities by the youth are conducted online, than in malls.

-Third, the online experience is promoting "individual choice and expression", which probably means more appreciation of freedom]

3. More Travel.

They’ve been more willing to travel more to take advantage of discounters. And one apparent beneficiary of this shift has been private label products.

4. Individualized healthcare

The new trend also suggest that the Japanese are also “directing their own healthcare” spending or that Japanese are spending more for health.

According to McKinsey ``One effect of the greater interest of the Japanese in directing their own health care has been the growing popularity of drugstores, which have been Japan’s fastest-growing retail channel since 2000: store numbers have increased by 4 percent and sales by 8 percent.”

[my comment-Politically perhaps this implies the trend towards less dependence on government welfare.]

5. They have reportedly been receptive to affordably priced “environmental consciousness” products.

Reasons for the shift:

Mckinsey says part of this comes from the recent downturn compounded by the economic weakness in the past 2 decades where the consequences has been the “disappearance of life-long jobs and the increase in part-time and temporary labor”.

McKinsey adds that the emergence of a new generation which characterize “Less materialistic youngsters” had possibly been a product of an era “never knowing the boom times the two previous ones experienced.”

The new lifestyle has “prompted the nickname the hodo-hodo zoku, or “so-so folks” (or, even worse, “slackers” or “herbivore men”).”

[my comment-that's likely plus the web 2.0 factor]

A third of final factor possibly contributing to such changes in behaviour have been a “series of small, largely unrelated” regulatory adjustments

McKinsey notes that ``Japan’s government reduced the maximum freeway toll on weekends to ¥1,000 regardless of the distance traveled—a huge discount that encouraged trips outside Tokyo to big-box discounters and large-format retailers such as Costco and Ikea. Other examples include regulations allowing the wider sale of over-the-counter drugs; a mandate that all employees over the age of 40 (about 50 million people) take a test to determine whether they are at risk for conditions such as diabetes and high blood pressure and, if they are, requiring them to exercise and diet; and recent changes to reduce underage smoking. The Japanese government has also pushed to increase awareness of and access to health remedies, in part to address the challenge of paying to treat these conditions.”