Why do so many retailers fail?

[John23]

I'm not an expert on retail, but it seems like an unbelievably tough business, I wonder why so many fail. Why so many have the same strategy, or similar strategies.

-Very few seem to last more than one business cycle. Look at all the companies that are recently bankrupt...mrs fields, sharper image, etc.

-In some industries, it seems like no one breaks out and makes money (i.e. toys, toys r us, kbtoys, fao schwartz).

-Tastes are very fickle (look at fashion). I go to the mall and look at gap, j crew, abercrombie, banana republic...what seperates them? It would make me nervous if I was an investor or shop owner.

-Seems like so many of them are all the same...same level of service, same selection, following the same trends. Same store layouts.

None of them really stand for anything. Remember Circuit City's, "Service is state of the art?"

-Then on the demand side. If consumer credit goes down, or wages go down. Or the loss of big employers in the city where you are.

-Or changes in how you shop...indoor malls vs outdoor, lifestyle malls.

Any successful retailers here? Or investors. Thoughts on the industry as a whole?

 

[CyclingInvestor]

Retired 2y, 50yo. In general I would not touch retailers with a 10 ft pole - the failure rate is way too high, The only one that meets my criteria is WalMart, and even it I watch carefully. However, I do like some of the retail property REITs, such as KIM. They have much more stable business models.

 

[cute fuzzy bunny]

Yep retail sucks.

Your note of failed businesses is pretty straightforward. When money gets tight people reconsider paying $3 for a mediocre cookie, twice as much for gadgets they dont really need that can be purchased for less elsewhere, etc. A lot of businesses depend on frivolous expense to realize some purported destination. A whole lot more are simply poorly run businesses that continue to stick around because a red hot economy keeps buffeting them along.

Nobody stands for anything because the buying public doesnt care. They want cheap prices. Many companies will put money into a marketing campaign that alleges some sort of advantage or benefit but its rarely realized by the customer.

If you want retail, maybe folks like walmart (who does well in all economies), trader joes/costco type outfits that actually DO good customer and employee service...

 

[mickeyd]

Reason for retail failure:

Lack of capital.

Inability to borrow same.

 

[Ultimate Cheapskate]

Why do so many fail?

Because so many start.

Seriously, believe it or not, there's some limit to how much stuff people can consume, although America in recent decades has been at the forefront of figuring out what that limit is.


Stay Cheap!
-Jeff Yeager

 

[haha]

I think we are overlooking the history that for investors at least, retail may be risky but it also can offer huge payoffs. Some of the biggest stock market successes have been retailers. Dell, McDonalds, The Gap, The Limited, Wal-Mart, Michael's Stores, Starbucks... The list goes on and on. Granted they are usually not set-it and forget-it investments, but not many things are.

Ha

 

[Gardnr]

Thoughts on the industry as a whole?

I can't help but think that the next 3-5 years minimum will be a brutal time for most of the retail industry. The financial retrenchment that needs to be done after the debt-driven consumer party we've been having in this country will dampen consumption quite a bit.

The party's over for a while.

Wal Mart and it's like will continue to prosper though as they sell the stuff people need for daily life for the lowest possible prices.

 

[audreyh1]

In the last 5 years, traveling around the country, I have been amazed at the massive construction of high-end retail shopping centers. I kept wondering - gosh, are there really enough people who can afford to buy all this stuff? It just boggled my mind.

Now, looking back, I can't help but believe it was a function of super cheap credit. I'm not sure why all those national retailers felt the need to expand so aggressively, but I can't help but believe there will soon be a lot of shopping centers that suddenly go half empty.

Audrey

 

[John23]

There's a few that stand out in my mind.

In N Out Burger on the west coast (here in California, and Nevada, Arizona). They're always packed, they stick with a simple menu (burgers, fries, drinks). They don't try to be all things to all people (no kids menu, no chicken sandwiches, veggie meals). No price wars with McDonalds. They stick with what they're good at. It's a private company, but I think their sales are among the highest in the fast food business (at least per store).

They've kept their expansion to a minimum (unlike, say Krispy Kreme that exploded everywhere). Slow and steady growth.

There's a few other that impress me as a buyer like walmart, costco.

But some are painful to watch (Circuit City's stock). The department stores...JC Penny's stock is where it was in 1990. Office Depot. Foot locker is where it was in 1986.

And these are the good times! We haven't had a real retrenchment yet.

Traditional retail marketing has been an illusion for 20 years. Supposed "differentiation" with music, or models or store layout (or selection), but people want cheap prices. Wouldn't be suprised if a 1/3 of the industry contracts in 10 years.

 

[al_bundy]

each one is unique, but Circuit City makes it very hard to pay for something. a few times i had to stand in line for 30 minutes in mid july. best buy is a lot faster most times.

otherwise trends change. the service/price trend changes and the old guys can't keep up. look at Whole Foods Market. Everyone i've been in is always busy. Compared to Stop and Shop which is mostly empty half the time

 

[HFWR]

Anecdotally, the malls and big-box stores are still crowded as hell here in Stepfordville. But, again, anecdotally, they're throwing up new strip centers and office buildings like crazy, and with the credit "crisis", and a slowing economy, could be a while before all this has been absorbed, and reaches equilibrium. I recently lowered my exposure to REITs for these reasons, though the divy of IGR that I hold is now > 15%... Wonder if that will last?

 

[cute fuzzy bunny]

Retail and commercial was ridiculously overbuilt here in the last 4 years. Most of it was never occupied. They're still building (which is stupid) but the pace has slowed.

Lots of medical building construction thats still well utilized.

But we've got strip mall after strip mall with no tenants. Some have 12 storefronts with one tobacco store, a taco joint and a nail salon, all paced out 3-4 empty stores apart.

Whats really weird is landlords around here. My wife told me both her gym and hairdresser have asked their landlords for a cut in rent to help them deal with drops in business. Heck, property rates have dropped and there are dozens of suitable empty storefronts within walking distance of where they are now. Landlords wont budge.

So both of them are going to move from the 20 year old locations in an old strip mall that has no major anchor other than a gas station across the street to a brand new location right next to a major supermarket. The landlord in the old place will NEVER re-rent those spots, and if he does, he'll end up getting less rent than the reduced proposal.

When there are 500 empty commercial rentals in a radius of 5 miles, you've gotta be smarter than that.

 

[audreyh1]

I think I remember this happening in the early 1990s in TX after the S&L crisis. Older shopping centers were abandoned and businesses moved to the newest, nicest shopping centers.

Audrey

 

[Martha]

Retail and commercial was ridiculously overbuilt here in the last 4 years. Most of it was never occupied. They're still building (which is stupid) but the pace has slowed.

Lots of medical building construction thats still well utilized.

But we've got strip mall after strip mall with no tenants. Some have 12 storefronts with one tobacco store, a taco joint and a nail salon, all paced out 3-4 empty stores apart.

Whats really weird is landlords around here. My wife told me both her gym and hairdresser have asked their landlords for a cut in rent to help them deal with drops in business. Heck, property rates have dropped and there are dozens of suitable empty storefronts within walking distance of where they are now. Landlords wont budge.

So both of them are going to move from the 20 year old locations in an old strip mall that has no major anchor other than a gas station across the street to a brand new location right next to a major supermarket. The landlord in the old place will NEVER re-rent those spots, and if he does, he'll end up getting less rent than the reduced proposal.

When there are 500 empty commercial rentals in a radius of 5 miles, you've gotta be smarter than that.

A large portion of my old firm's work was commercial finance and real estate development. Today it is very busy working on pipelines and powerlines and medical facility financing.

If I was working I could be rich!

 

[cute fuzzy bunny]

Pssst...you ARE rich!

 

[retiringby50]

Funny... I went to the mall today and saw crowded parking lots (as I do everytime) and declared, "If we have another 'Great Depression', I think the malls will still be so packed."

Are they pickier about their purchases? I truly see the restaurants still have lines, and the parking lots are full. Strange.

 

[Midpack]

Will high gas/energy costs eventually lead to de-suburbanization? If yes, will that hurt the huge WalMart's and other large volume big box stores (and mega malls) who rely on a very mobile customer base. IOW, if we start walking and riding (bikes) more, you can't cluster enough people around a WalMart to support it. Imagine back to smaller Mom&Pop stores again. I am not talking in a few years, but 20-30 years from now...

 

[cute fuzzy bunny]

Many of the restaurants around here are practically empty most of the time. Given the slide in food quality at some of them as the owners try to pinch pennies, I'd expect the slide to continue. 2:1 coupons have become highly available again after disappearing for about 3 months.

I still see lots of people at the mall, but nobody at the bankrupt mrs. fields or at the starbucks. Not many people in the big anchor restaurants or the ultra fru fru stores. Mostly people at the taco place, sears, penneys, etc.

 

[haha]

I still see lots of people at the mall, but nobody at the bankrupt mrs. fields or at the starbucks. Not many people in the big anchor restaurants or the ultra fru fru stores. Mostly people at the taco place, sears, penneys, etc.

This is nevertheless very different from the 70s. Malls were lonely spots. OTOH it was hard to find a parking spot alongside the road where so many cars were broken down and abandoned. At least it was that way here in Seattle and 'burbs.

Yesterday I went to an upscale open air mallette. It was packed! High end jewelry stores, nice eateries, outdoor seating at both Starbucks all mobbed.

Ha

 

[Milton]

Retailers typically fail for several reasons:

1. because there are very low barriers to entry, the competition is cut-throat;
2. margins are generally low (refer to reason 1);
3. they are dependent upon fickle consumers who can easily go somewhere else or simply decide to cut back on discretionary spending.

And I'm sure there are many other reasons, too.

The real question is not why so many retailers fail, but why so many investors choose to buy their stocks in the first place.

 

[free4now]

Yep, I learned my lesson when i bought Hot Topic a number of years ago. I liked their plan to stay on top of what's "cool" by quickly ramping up chinese production of whatever their scouts at rock concerts said was becoming stylish. I had grand hopes that would allow them to avoid the cycles that other retailers fall prey to. But in the end their stock has sunk for the last 5 years. That was yet another factor that led me to get out of individual stocks and into indexes.

 

[FinanceDude]

The retailers that failed eitehr were not adaptive enough to changing environments or grew too fast.

Boston Chicken; Grew too fast

Montgomery Wards: Put their heads in the sand and eventually died//////

 

[Dudester]

Any successful retailers here? Or investors. Thoughts on the industry as a whole?

Here's some (probably) not very insightful speculation on my part.

I've occasionally read that an interesting metric to study is number of square feet of retail space per capita. An article I read perhaps 10 years ago basically said that there was about 2 to 3 times as many feet^2 per capita as in the 1960's/1970's. If you assume that the amount of retail floor space was sufficient to serve the needs of the populace in the 60's/70's, then these numbers would suggest that everyone was buying 2 to 3 times as much as they were in in 60's/70's. At the time I read the article, I was much wealthier than I was in the 60's/70's, but I'm pretty sure that I wasn't buying 2 to 3 times as much stuff as before. For example, I wasn't eating 2 to 3 times as much food or wearing more then a pair of shoes at a time. Thus the numbers suggest that there is way too much retail (not a big surprise, I know).

If we assume the survival of the fittest, then forces must be at work to correct this situation. I speculate that that these forces are called Walmart/Costco/etc. It is generally argued that the success of these enterprises is due to their business acumen. However, an alternate explanation is that they have unwittingly figured out how to exploit the excessive number of feet^2/capita and reduce that number by driving other businesses into bankruptcy. The implication is that once the feet^2/capita is reduced to what it was in say the 60's/70's then the business advantages of Walmart/Costco will vanish. There will be a resurgence of smaller retailers. Peak oil might also hasten this day.

The above is all speculation, so treat it as such.

 

[Marquette]

Well, just looking at one successful retailer...

At least when I worked there (4 years ago) 60% of yearly revenue came in between Thanksgiving and Christmas. That was one of the reason they were trying to roll out more services to supplement product sales.

Now, I can't confirm this in my brief digging online, but it's part of the corporate folklore so I'm passing it on with that in mind. They were on the verge of needing to declare bankruptcy in the mid '90's due to buying a ton of PCs that the buyer didn't realize were end of life. They made a gamble with flat screen TVs a Christmas or two ago as well. On the plus side, they had every TV in stock if you wanted it. On the downside, they were so overstocked that they would have been in serious trouble if they mis-bought.

And, this is for a Fortune 100 that's been highly successful and correctly stirred through a myriad of "x or y" (e.g. DVD or DivX) battles. I'd hate to think about how bad it could be for a smaller retailer where mis-guessing one Christmas means you're BK.

 

[Milton]

An article I read perhaps 10 years ago basically said that there was about 2 to 3 times as many feet^2 per capita as in the 1960's/1970's. If you assume that the amount of retail floor space was sufficient to serve the needs of the populace in the 60's/70's, then these numbers would suggest that everyone was buying 2 to 3 times as much as they were in in 60's/70's.

I believe it. Cheap credit and Asian imports have combined to make it much easier to load up on [-]junk[/-] 'stuff' [cf. reportonbusiness.com: A nation of debtors].

There have been a lot of people buying things they don't need with money they don't have to impress people they don't know (paraphrasing Will Rogers). Of course, that's all soon to be a thing of the past [cf. TIME: America's Coming Garage Sale].