It was just over a decade ago that the retail industry was facing its most difficult period since the Great Depression. Retail stores were closing by the hundreds and vacancy skyrocketed by more than 50% - over a three-year period, although it felt like it overnight.
At the same time, online shopping was gaining momentum, with Amazon leading the way. It was the perfect storm—“hit ‘em when they’re down” as they say. From that point on we have seen online sales growing rapidly at double-digit rates while brick-and-mortar sales struggle to stay above water.
Since that time, however, shopping center landlords have done a respectable job of filling vacancies left behind in the wake of the Great Recession. In large part they did it with Amazon-proof tenants, tapping categories such as restaurants, bars, movie theaters, trampoline parks, bowling venues, adventure parks, escape rooms, and fitness centers. These efforts were enough for many shopping centers to survive another day. But now the industry has been plagued with COVID-19, maybe the most impactful watershed moment that retail veterans have experienced in their lifetimes.
Right now, everyone wants to know when stores will open, how will openings be rolled out, and what operational guidelines will be in place when states give the go-ahead. We were handed the map, Guidelines for Opening Up America Again, a few days before this writing. First, states need to get past a 14-day declining trend in new coronavirus cases, or percentage of positive tests, before they can begin a three-phase approach leading to a “new normal”. If all goes well and there are no setbacks, it’s possible for some states to reach the third phase by June or July. Nevertheless, social distancing and hygiene practices are probably here to stay for a while.
But what will the retail world look like when the dust settles? Well, if the writing wasn’t already on the wall for regional enclosed malls, it sure is now. The best should survive, but the worst won’t. There’s just too much pressure on department stores and mall-based retailers for the weaker centers to continue operating. We’ll likely see a number of bankruptcies coming among the prime suspects such as JCPenney, Neiman Marcus, J Crew, Macy’s, GNC, Lands’ End, and the Signet jewelry stores, as well as the Tapestry group of fashion chains. Even L Brands and Gap were recently downgraded.
Beyond the malls, there should be concern for numerous retail and entertainment operators where face-to-face interaction is part of the business. It’s the restaurants, movie theaters, and other Amazon-proof concepts which played such an important role in filling space in many shopping centers during post-recession era. Will those business models work now if social distancing cuts seating capacities in half? Will consumers patronize these establishments with the same frequency as in the past, if at all? At least until a vaccine is approved, maybe not.
With respect to independent mom-and-pop operators, we can only imagine what the landscape will look like. Even with assistance from the federal government, there’s a strong chance that many will simply run out of cash. Given the fact that retail sales pre-virus had been just plodding along, the impact of the coronavirus may push a significant slice of this retail segment over the edge.
It would be a godsend if strong pent-up demand leads to a sharp recovery and by fourth quarter we are out of the woods. But before we can expect clear sailing, we’ll first have to venture into uncharted waters.
Bob Sheehan
Vice President of Research
BSheehan@KeyPointPartners.com
