The wrenching changes in the retail industry resulting from the shift of consumer spending online shows no signs of slowing. As shoppers flock to e-commerce sites such as Amazon (AMZN), the result has been a record number of store closures and thousands of job cuts.
A recent Cowen & Co. report predicts that mall-based chains such as Macy’s (M), JCPenney (JCP), Abercombie & Fitch (ANF), Gap (GPS) and Ascena (ASNA) (parent of Lane Bryant, Anne Taylor and Loft stores), may have to trim their store counts by 20 percent or more.
The Cowen estimate would equal about 2,000 locations and is more than the closures retailers have announced but haven’t completed yet. And it would mean about 20 percent of U.S. malls, particularly those in weak markets, will have to be “repurposed” or closed, the report said.
“Declines in traffic have been a multi-year issue; however, we believe this problem has accelerated and become more volatile given the rise of mobile phone use as well as share gains at Amazon -- and the battle amongst online stores of traditional retailers,” Cowen said. “The consumer is in the catbird seat -- the consumer wants and demands ease, value, and selection. If you do not offer this, the shopper will get this combination somewhere else.”
Credit Suisse is even more pessimistic about retailers, arguing in a recent note that more than 8,640 stores could close this year. So far, a record 2,880 stores have shuttered so far this year more than double compared with 1,153 during the same period in 2016.
Ten chains have filed for bankruptcy in 2017, including last week’s filing by Payless ShoeSource, and more are expected. On Friday, consumer electronics chain hhgregg -- already in bankruptcy -- announced it’s closing all of its remaining 132 stores, having already shuttered 88 since filing for bankruptcy on March 6.
And the disappointing March jobs report was the result of weak performance in retailers, which shed 30,000 jobs last month, up from a 26,000-job loss in February. And more are coming: According to outplacement firm Challenger, Grey & Christmas, as of March chains announced more than 38,000 job cuts, the most of any sector.
Consumers are showing their preference for Amazon and other online players. The e-commerce giant reported record holiday sales as it gained market share from traditional retailers. Moreover, since operating income at Amazon’s cloud computing business more than doubled in 2016 from $1.5 billion to $3.1 billion a year earlier, the company has even more financial flexibility to compete against legacy rivals.
Macy’s, the largest department store operator, is a case in point. Cowen estimates that the chain should operate between 550 and 600 locations, well under management’s guidance of about 628. That means 153 stores should close versus the 100 Macy’s has already announced.
Penney, which last month announced plans to shutter 14 percent of its 1,000 stores, likely will need to close about another 26 percent of them, according to Cowen. Gap (GPS) will have to shrink its Gap stores footprint from 737 to 600-650 and close more than 30 percent of its 739 Banana Republic stores, the firm projects.
“We have worried that Banana Republic’s brand health, the additional competitive pressure in the contemporary sector, and a consumer preference for strong and deep value could mean that Banana Republic should have a much smaller footprint,” the report said.
To be sure, physical stores are still necessary. A separate Cowen survey found that 75 percent of shoppers still prefer to shop in brick-and-mortar locations. In an accompanying video, analyst Oliver Chen noted that successful companies need to merge the “real world” with their online operations into a “bricks-and-clicks” strategy allowing customers to order online for a later store pickup.
According to Chen, some retailers can resist Amazon. Among them are beauty chain Ulta, discount chains such as Burlington Stores (BURL), warehouse retailers such as Costco (COST), and athletic gear merchant Dicks Sporting Goods (DKS). Big-box retailers Walmart (WMT) and Target (TGT) also have room to grow.
Earlier this year, Macy’s CEO Terry Lundgren noted that the U.S. had a “ridiculous” amount of surplus retail space. The country has about 7.3 square feet of retail space on a per-capita basis, well above the 1.7 square feet in Japan and France, and the U.K.’s 1.3 square feet.