Markets

The Retail Apocalypse Isn't What You Think It Is

When well-known retailers close large numbers of stores, we take notice. Parents couldn't miss it when Toys R Us went bankrupt. Whether or not you've shopped at a Sears lately, you certainly know it has shrunk massively, and that J.C. Penney, Barney's, and other stalwart brands have shuttered many of their locations. Some chains are flirting with total closures. Others (farewell, Radio Shack and Bon-Ton) have already disappeared.

It all creates the appearance of what the media has dubbed "the retail apocalypse" -- a narrative that points the finger at the internet for killing brick-and-mortar stores.

The only problem with that story -- and it's a really big problem -- is that it's not actually what's happening. Yes, lots of older brands are getting smaller, or even going away, but a new research report reveals an entirely different saga playing out in the wider marketplace.

A strip mall is under construction.

Brick-and-mortar retail is changing not going away. Image source: Getty Images.

The truth about brick and mortar

For every retailer that's closing stores, 5.2 are opening new locations, according to the Retail's Renaissance —True Story of Store Openings/Closings" report from IHL Group. And that pattern holds true across the board: There are more companies opening stores than closing them in all retail segments -- even department stores.

"The reality is that the wave of store closures seen in recent times is being driven by a handful of companies," wrote National Retail Federation (NRF) Vice President Mark Matthews in a blog post analyzing the report. "Just 16 retailers are responsible for 73% of retail store closings so far this year, according to IHL."

In 2018, the overall number of U.S. retail stores rose by 3,100, according to Census Bureau data cited by Matthews.

Of course, the raw number of stores may not reflect the visual landscape that consumers inhabit. If your mall added a Casper Mattress, Warby Parker, and three other small stores --but lost an anchor department store like Lord & Taylor -- yes, it gained four stores, but those new arrivals occupy much less space overall.

"What's interesting is that the increase appeared to be driven by smaller stores," wrote Matthews. "Stores with fewer than five employees were the big gainer, with a net increase of 4,569 as of the first quarter of 2018 compared with the same time in 2017."

It's a retail shakeout

The trend toward smaller stores makes sense. In some cases, retailers are using their physical locations less for immediate sales and more as a way to offer consumers a chance to get a feel for their products before they order them online.

That does not mean that there's no market for larger-format stores. There are still more department store chains opening new locations (27%) than closing them (19%).

But consumer needs have changed. Retailers have to give shoppers a reason to leave their home. It might be as simple as letting them test an expensive product (like a mattress), or it could be to enjoy the "treasure hunt" experience offered by department stores like the various TJX Companies brands (Marshalls, T.J. Maxx, HomeGoods) or warehouse clubs like Costco.

Poorly run retailers -- especially those that have had to navigate the e-commerce revolution while carrying heavy debt loads -- have struggled, and many of them will eventually fail. Brands with better management that adapted their stores to today's omnichannel reality are not just surviving but thriving.

Those companies will be joined by new, digital-first retailers built to capitalize on emerging technologies and evolving consumer preferences. Shopping may look different than it used to, but stores aren't going anywhere. In the end, the retail apocalypse turns out to be less of a new phenomenon and more of a variation on an old lesson for badly managed businesses: Lead, follow, or get out of the way.

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The author(s) may have a position in any stocks mentioned.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has the following options: short January 2020 $180 calls on Costco Wholesale and long January 2020 $115 calls on Costco Wholesale. The Motley Fool recommends Costco Wholesale and The TJX Companies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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