Monday, October 1, 2018

Is It the 900 lb. Gorilla?

When a major retailer goes belly up, we hear a wealth of opinions about which other retailers are in the best position to capture market share left behind in the aftermath.

We heard it most recently with Toys R Us: Target, Walmart, Costco and others will likely absorb a piece of the action in the toy category. We heard it when Sports Authority liquidated: Dick’s Sporting Goods was the obvious choice to pick up the slack in that category. And over the years, it was Best Buy reaping the “rewards” left behind by Circuit City, Bed Bath & Beyond doing the same when Linens ‘N Things went out, and don’t forget the bump Barnes & Noble experienced when Borders closed its doors.

Although Sears hasn’t filed yet, its ongoing initiative to eliminate stores operating at a loss has freed up substantial sales dollars. Sears reduced its store count by 241 units between 2012 and 2017 - and saw its US revenue drop from $21.0 billion to $11.1 billion during that time frame, a decline of nearly $10 billion (yes, that’s BILLION with a B - a staggering TEN BILLION). When $10 billion gets tossed back into the expenditure pot, someone must be benefitting. Where have those revenue dollars gone?

Other Department Stores: Department stores have been impacted by online retailing as much as any retail sector. Sales at Sears’ most prevalent co-anchors, Macy’s and JCPenney, were examined during the same five-year period. Both companies have been consolidating as well, often closing stores at the same mall locations as Sears. Macy’s closed 141 stores between 2012 and 2017 while JCPenney vacated 230 units. At the same time, their sales dropped $2.8 billion and $0.5 billion, respectively. So it doesn’t appear that either has been a significant beneficiary of the Sears decline.
Discount Department Stores: How about Target or Kohl’s? Nope. Both reported sales trends during the period that were flat. Target, while increasing store count from 1,778 units to 1,822 units resulting largely from its small store program, experienced a nominal decline in sales from $72.0 billion to $71.9 billion. Kohl’s had a nominal gain in store count from 1,146 to 1,158 stores, although the company has been downsizing selected stores as well. In the meantime, sales ticked lower, from $19.3 billion to $19.1 billion.

Home, Appliance, Electronics Stores: Sears has always been a hugely heavy hardlines retailer, generating 72% of its merchandise sales on this side of the business just last year. So have Home Depot, Lowe’s, or Best Buy gained market share? Well, it wasn’t Best Buy. Sales for this electronics chain were marginally lower at $42.2 billion last year compared to its fiscal 2012 level of $43.4 billion, while its store count dropped from 1,103 units to 1,008 units. Home Depot and Lowe’s have shown significant sales growth since 2012. Home Depot sales jumped from $74.8 billion to $100.9 billion during the five years, a 35% gain in volume; Lowe’s increased sales from $50.5 billion to $68.6 billion, gaining 36%, similar to that of Home Depot.

A reasonable argument might be made that these two home improvement chains have captured some portion of the sales cast aside by Sears. At the same time, it should not go unnoticed that both chains have been riding a very strong housing market in recent years.

Furthermore, both chains opened stores in that period. Home Depot increased its store count by 21 stores for a total of 2,284 units. Lowe’s store count at year end 2017 was 2,152 units, up from 1,754 stores in 2012 (most of that gain came from its 245 store acquisition of Canadian-based ROMA). It’s likely that these two factors had much more to do with top line gains than the absorption of Sears dollars.

Without strong evidence that any particular brick-and-mortar retailer gained from the Sears store contraction, it may be that Sears’ departmentalized sales are too fragmented to have the dispersion of these expenditures end up conspicuously with any particular retailer.

Or there could be another, simpler, more obvious explanation…the 900 lb. online gorilla! (Hint: it begins with an “A”).

Bob Sheehan, Vice President of Research

Read the 2018 KeyPoint Report on Eastern Massachusetts/Greater Boston, including the special section on malls, and the 2018 KeyPoint Report on Southern New Hampshire, available now. AND Watch for the 
The 2018 KeyPoint Report on Greater Hartford, CT coming soon.

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