According to a report by UBS retail analyst Michael Lasser, over 2,000 retail stores have closed across all sectors in the last 12 months.
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"As of 3Q'22 (latest available data), retailers shed -1,500 net stores. As of the latest available data, retailers have lost -1.500 net stores. The UBS economists noted that this number has already increased significantly since '23, with Bed Bath & Beyond and Foot Locker closing their stores.
As underperforming retail stores are closed, it should help the store productivity of surviving locations. The report's authors stated that the closure of underperforming retail locations should boost the productivity of the remaining stores.
The US store base currently has 940K stores. Another 50,000 stores are expected to close.
This simply means that there will be less than 5% of stores at the end of 27. We believe that this trend will be a boon to the well-capitalized large retailers (HD, LOW WMT TGT COST and others with unique differentiations FND ASO EYE), who are likely to gain disproportionate market share. The big players, like the US banks, will continue to grow while the smaller ones disappear.
UBS calculated that
If 50k stores were to close in the next five year and the average sale per store was $5.7mm then $285b worth of retail sales would be 'up for grabs.'
If 26% of sales are made online, (the bank's estimate for penetration '27), then retailers such as WMT HD and COST could attract $210b worth of sales. This is equivalent to an annual household spend of $1,600.
The bad news is that the big retailers are a good thing for small businesses.
We believe that smaller chains, mom and pops, are the most vulnerable to closures. This is because they have less capital to invest into developing an omni-channel strategy. By 2020, 68% of retail stores will be operated by chains of less than 500 workers and 57% by companies with fewer than 20 employees.
In the last 10 years, smaller chains have lost -40K outlets while chains with more than 500 employees have added 17K.
The worst case scenario is that retail sales continue to grow at 4% per year, which is the trend over the past few decades. In a worst-case scenario, a protracted US recession could put downward pressure on UBS's store closure forecast. If retail sales grow only 3.0-3.5%, it would lead to 70K-90K store closures.
UBS identified several factors driving the closure of retail stores. These include increased costs that make it harder to keep stores open, a decrease in the number of units per store across most retail sectors and the likelihood of smaller chains being disproportionately affected by store closures.
Retailers with over 500 employees have added 17,000 new stores between 2007 and 2019. In the past 12 months, costs of doing business have increased significantly. This is due to a combination of higher wages and a more competitive market. Retail hourly wages - which are usually the biggest cost component in running a shop - have increased by about 5% during the past few years, according to analysts.
Retail rents per square feet for community and neighborhood centers are increasing, so retailers must increase their store productivity by 4.5% each year. UBS stated that 'these costs will continue to rise, increasing the barrier rate to keep shops open'.
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Note that 14,000 of these estimated closures will occur in the softlines industry. UBS predicts that department and specialty stores will continue to close net store closures. While retailers with heavy mall presences will continue to close stores, there's a slight silver lining: off-price retailers should see a growth in units.
Consumer electronics and home furnishings are also identified as sectors in which there is a need to reduce their retail footprint. Home furniture retailers and consumer electronics retailers both need to shrink their store footprints by approximately 4,000 stores.
A shift in the retail industry is a greater embrace of digital investments, such as buy online and pay in-store, ship from store, same-day delivery, or buy online and return in-store. UBS estimates that online retail spending will reach $9,900 per household in 2022. This is up from $8.900 last year and $4,000 in 2015. Nike and Levi's are two companies that have a high level of brand loyalty combined with a DTC focus.
Here are nine key takeaways from the report.
Takeaway #1: If online penetration reaches 26% and retail sales increase by 4%, we estimate that 50K+ stores could close in '27.
Takeaway #2: The closures of stores will vary depending on the sub-sector
Takeaway #3: There were net store closures in 2022. This is a reverse of the strong store openings that occurred in 2021.
Takeaway #4: Retail sales are expected to grow by 4% until 2027. This is in line with the long-term average.
Takeaway #5 : An increase in the willingness of banks to lend is a good indicator that store closures are on the rise.
Takeaway #6: High costs increase the barrier rate for keeping stores open
Takeaway #7 - Smaller chains will be disproportionately affected by store closures
Takeaway #8 - Several sectors have reached or are nearing peak store productivity
Takeaway #9 - Units per shop will decline for the majority of sub-sectors by 2022 (trends may vary depending on sub-sector).
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