Village Solutions

The Post Recession Marketplace

EXECUTIVE SUMMARY

1. Retail had been rapidly changing over the past several years to respond to new consumer attitudes and changes in technology. Prior to 2008 retail successes were found in the luxury goods, electronics, the tween and teen apparel, home furnishings, gourmet foods and the restaurant sectors. The current economic recession will reset the retail and real estate development industries.
2. With post recession credit restraints, forever changed consumer attitudes, and a changed retail landscape many quality retail developments will no longer be viable.
3. Many leading retail chains experienced sales decreases of 20% or more in late 2008 and early 2009. Mall traffic is down by approximately 10% and purchases are lower on reduced priced goods resulting in major reductions in profitability, often in the 50% range.
4. As many as 150,000 retail stores will close in 2009. This may result in as much as 187 million square feet of new retail vacancies. The impact of these closures on US shopping center owners and governments which rely on retail related tax revenue will be huge.
5. Retail commodity goods, like water, will eventually find their most efficient means of distribution to the consumer which may not be in shopping centers as we know them today.
6. In the coming post recession era new forms of the retailing will evolve to take a greater share of sales away from shopping centers.
7. Change in retail and the retail goods distribution channel after the recession will be greater than the ability of the shopping center development process to accommodate such changes.
8. Village Solutions believes that we are on the cusp of a major disconnect between fixed brick and mortar retail locations and other points of purchase. One may be quick to point out the this more prophecy than calculation, given previous predictions of the pending impact of internet shopping, but we believe that the changes will be more profound and involve many more levels and channels than on-line shopping, which will change traditional shopping center. All parties connected to any feasible new real estate development of significance will therefore, require a complete comprehension of these coming changes in the consumer goods distribution channels in order to properly structure future developments.
9. Retail developers in the next economy will need to learn new skills in a radically changed retail landscape. The traditional shopping developer was primarily in the business of securing land in order to add containers of long term income generation. In the post recession era, land encumbered with long term leases, a restrained consumer with new values, and retail distributions channels no longer tied to fixed locations will require new development model.
10. How will the business of space making and the consumer’s desire for affordable entertainment and places of socialization outside of the home fit into a post recession economy? We see the development of creative, cost efficient smaller projects, integrated into existing densely developed neighborhoods; a new centering of suburban sprawl into true community centers, re-use and redevelopment of poorly conceived projects; district development as opposed to mix-use development; and
11. We believe that traditional retail leases of fixed spaces over annual periods of time are going to evolve from their current structure.
12. Fashion Designers in recent years have developed an entitled attitude which was seldom justified by the quality and variety of their collections. The market downturn has caught a whole generation of young designers unprepared to respond to the rapid change in consumer attitudes and the ability to innovate for the new economy. Designers in their 20s and early 30s have only the free spending-consumer as a frame of reference and not the wife of an unemployed fund manager who now sees her monthly appointment with her stylist as a luxury.
13. Big international luxury brands in recent years have expanded to such an extent that they have lost much of their cachet with their leading luxury consumers which has fueled a demand for high quality clothes and labels which are new, offer a compelling with great cuts, fits, quality craftsmanship and color.

RETAIL NEWS
Sales

January 2009 same store sales figures when compared to the December, 2008 same store sales, indicate the same winners and losers. In December, the Buckle, Aeropostale, BJ’s Wholesale Club, Hot Topic, and Wal-Mart all showed strong same store increases. In January 2009, these same retail chains showed strong sales growth for comparable stores.

The leading failures in same store sales include Saks, Gap, American Eagle Outfitters, Abercrombie & Fitch, and Neiman Marcus. These same stores had double digit same store decreases in December over 2007.

A combination of reduced pricing, lower traffic and lower purchases all contributed to the most significant decreases but one consistent trend is a reduction of sales in the 20% range for many well known established chains.

January 2009 Retail Sales Increases

• 14.7% The Buckle Inc.
• 11.0% Aeropostale
• 7.6% BJ’s Wholesale Club, Inc.
• 7.1% McDonald’s
• 6.0% Hot Topic
• 4.0% Costco Wholesale Corp.
• 3.5% Chipotle Mexican Grill
• 2.1% Wal-Mart

January 2009 Retail Sales Decreases

• 16.4% JCPenney
• 18.0% Nordstrom
• 18.3% Neiman Marcus
• 20.0% Abercrombie & Fitch
• 22.0% American Eagle Outfitters
• 23.0% Gap
• 24.0% Saks
• 24.6% Talbots

JCPenney

The Dallas based department store with 1093 units announced in early February projected a sales decrease of 12-15% for their 2009 fiscal year. Sales fell 16.4% in January to conclude their 2008 year where total sales fell 8.5% for the full year.

The nation’s second largest department chain has 17 new and relocated units slated for 2009. During 2008, JCP had completed 35 new store openings as well as 21 major renovations, three expansions, 90 store refurbishments and updates, and significant re-fixturing in more than 600 stores across the country — all of which have already been completed.

GameStop

Retailer GameStop with 6,100 stores worldwide reported in early 2009 higher sales than anticipated in their most recent quarter and projected continued strong sales throughout 2009 despite the overall retail slowdown. Videogames have historically have been relatively resistant to recession because consumers see video games as a form of cheap at-home value entertainment. One unique characteristic of GameStop’s business model is that they accept trade-ins of old games. Cash strapped consumers are bringing in old games at record levels to offset the cost of the purchase of new games, while bottom feeders sweep up the old games at fantastic bargains. In January 2009 GameStop reported a 32% increased in the trade of used games and consoles over the recent holiday

However, as cash becomes even more constricted new retail formats will respond. A host of new options have evolved ranging from web site game-trading brokers and new digital distribution channels.

Auto Parts

While GM, Ford and Chrysler have questionable futures the big national do-it-yourself auto parts retailers, O’Reilly Automotive, Advance Auto Parts and AutoZone, are all thriving with a counter-cyclical boost. The reasons are very simple. People are keeping their cars longer an opting to make repairs on their own to avoid high labor rates and big mark-ups on parts by the dealerships who are surviving through their repair business.

But a continued economic downturn may result in more job losses and fewer miles driven which will eventually catch up with the auto parts retailers.

Wal-Mart

Wal-Mart, the world largest retailer, exceeded gross sales of $400 billion for the first time and generated profits $13.4 billion in 2008. Its US stores accounted for 50% of all retail growth in the entire nation in 2008. The 2008 performance underlines the ability of the retailer to generate cash in a recession to allow reinvest in the business while competitors are cutting back. The result will be a larger share of the retail market.

2009 Store Closings

As many as 150,000 retail stores will close in 2009. This may result in as much as 187 million square feet of new retail vacancies. The impact of these closures on US shopping center owners and governments which rely on retail related tax revenue will be huge.
The reasons for the store closures are fairly simple. A contracted US economy requires consumer pull back which results in a contraction of retail stores. The losers have too much debt, redundant merchandise and fail to offer a compelling reason to shop their stores.
Outlined below is a selective list of national chain stores.

• 567 Circuit City
• 461 KB Toys
• 300 Starbucks
• 287 Goody’s
• 175 Van Heusen
• 125 Pier One
• 118 Office Depot
• 117 Ann Taylor (by 2010)
• 98 Club Libby Lu (Saks)
• 60 American Greetings
• 50 Supervalu
• 50 New York & Co. (over five years)
• 48 Home Depot (Expo)
• 40 Ruby Tuesday
• 30 S&K Famous Brands Inc.
• 35 Famous Footwear (Brown Shoe)
• 28 Yankee Candle
• 26 Cost Plus
• 25 Chico’s FAS
• 22 Sears
• 15 Gap, Inc.
• 15 Tim Horton’s
• 13 OfficeMax
• 12 Beall’s
• 12 Stein Mart
• 11 Macy’s
• 11 Filene’s
• 10 P.F. Chang’s Pei Wei Restaurants
• 2009 New Store Openings
• 450 Dollar General
• 200 Family Dollar
• 80 Panera Bread
• 75 Aldi Supermarkets

LUXURY BRANDS
Luxury brands are not faring much better than run of the suburbs retailers with a projected 15% decrease in sales for 2009 reflecting the extent of global wealth destruction. This is a dramatic downturn from the post 2001-2002 recession where sales of luxury goods increased on average by 7% a year to reach $170 billion. Sales of luxury goods were primarily driven by what was once seen as an every expanding market of ultra-wealthy individuals in emerging markets and the beneficiaries of professionals in the capital and credit markets. Once the economy stabilizes, growth in luxury good sales will largely occur in emerging markets.

WHICH WAY IS UP?

Consumers at all levels are trading down. Those at the middle and lower level have cut out all unnecessary expenses. What remains to be seen is how much of the current slump in retail sales are cyclical or a permanent change in consumer behavior. The uncertainty of the direction of the consumer creates a dilemma for international luxury brands that have tried to attract a larger market with lower priced add-on goods and mainstream retailer who have tried to move more upscale to attract the affluent customer. Branded goods must now decide to maintain their premium pricing for the sake of their name’s cache at the risk of losing market share or reposition the brand to represent quality and value for a larger market. We predict an evolutions of austerity chic and the retail winners will be those that capture the mood of a new era.

FASHION NEWS

Fashion Designers in recent years have developed an entitled attitude which was seldom justified by the quality and variety of their collections. The market downturn has consequently, caught a whole generation of young designers unprepared to respond to the rapid change in consumer attitudes and the ability to innovate for the new economy. Designers in their 20s and early 30s have only the free spending-consumer as a frame of reference and not the wife of an unemployed former fund manager who now sees her monthly appointment with her hair stylist as a luxury.
Likewise, big international luxury brands in recent years have expanded to such an extent that they have lost much of their cachet with their leading luxury consumers which has fueled a demand for high quality clothes and labels which are new, offer a compelling with great cuts, fits, quality craftsmanship and color.

US designers which seem better equipped to handle the new market include Prozena Schouler, Peter Som, Zac Posen, Rodarte, and Phillip Lim, Tuleh, and Derek Lam. A number of factors other than the current recession have distinguished these designers from others. Each of these designers have something new to say and present a cool urban look which appeals to fashion buyers who no longer dress head-to-toe in a single designer, Consumers mix and match a variety of looks and labels in order to create their own individual styles that are forward and directional.
CONCLUSIONS

1. Consumers are currently focused on declining housing values, volatility in the stock market, their jobs, and the lack of credit which will all contributing to a paradigm shift in retailing, distribution channels and shopping center formats.
2. Shopping Centers will require a new approach to their planning, development, and operations. As an example, owners must rethink the leasing of space in annual increments of fixed floor areas. Space will be valued in smaller increments of time and by volume and surface.
3. Tenant areas in shopping centers will need to be designed and constructed in manner that allows them to morph into more economical units of time, volume and space and use..
4. Design of shopping centers must accommodate new forms of income production.
5. We believe that successful retail will no longer be tied to a fixed assets location. Consequently, retailing will become more mobile and new shopping center formats will be created to accommodate this new mobility.
6. New retail marketplaces are going to evolve that are revolutionary and industry changing.
7. Consumers at all levels are trading down. Those at the middle and lower level have cut out all unnecessary expenses. What remains to be seen is how much of the current slump in retail sales are cyclical or a permanent change in consumer behavior. The uncertainty of the direction of the consumer creates a dilemma for international luxury brands that have tried to attract a larger market with lower priced add-on goods and mainstream retailer who have tried to move more upscale to attract the affluent customer. Branded goods must decide to maintain their premium pricing for the sake of their name’s cache at the risk of losing market share or reposition the brand to represent quality and value for a larger market. We predict an evolutions of austerity chic and the retail winners will be those that capture the mood of a new era.

Tags: Retail

This entry was posted on Saturday, February 21st, 2009 at 9:16 am and is filed under Retail. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.