Does The Shopping Center Economic Model Work?

http://globaleconomicanalysis.blogspot.com ^ | 2008.02.13 | Michael Shedlock

[B-Chan]

I have been talking about the commercial real estate implosion for some time. [...] The CoStar Group is reporting Retailers Taking Their Medicine and Turning Cautious Over Growth. Here are the store closings mentioned in the article.

Store Closings

* Movie Gallery closing another 400 stores
* Charming Shoppes (CHRS) closing 150 stores and cutting expansion plans by 50%
* Starbucks (SBUX) closing 100 stores and slowing expansion plans by 34%
* Ann Taylor (ANN) shuttering 117 stores and slowing store growth
* Boston Market evaluating its real estate opportunities
* Buffet Holdings sorting out its underperformers
* Sprint Nextel (S) closing 125 stores and 4,000 distribution points
* Cost Plus World Market closing 18 stores
* Liz Claiborne (LIZ) closing 54 Sigrid Olsen stores
* New York & Company (NWY) axing the Jasmine Sola brand and its 32 stores
* Ethan Allen (ETH) closing 12 stores
* PacSun (PSUN) closing all of its 173 demo stores
* Talbots (TLB) exiting its kids and men's lines through closure of 78 stores
* Rite Aid (RAD) exiting Nevada by closing 28 stores
* Macy's (M) closing nine stores
* Krispy Kreme (KKD) expecting many franchisees to close stores
* Kirkland's Home (KIRK) likely closing 130 stores
* CompUSA's remaining 103 stores being disposed of
* Rent-A-Center (RCII) closing 280 stores
* Sofa Express closing 44 stores in bankruptcy
* 84 Lumber closing 12 stores
* Home Depot (HD) closings some call centers
* Levitz Furniture disposing of 76 stores in bankruptcy
* Pep Boys (PBY) closing 31 stores
* Lifetime Brands (LCUT) closing 30 stores
* Big A Drugs liquidating its 21 stores

Let's highlight some comments about attitude changes driving these closures.

Nina Kampler, Executive VP of Strategic Retail and Corporate Solutions for Hilco Real Estate: There's a wave of conservatism that's hitting the consumer. There are very few people who 'need' another t-shirt or pair of jeans right now. "Putting aside whatever operational issues they may be addressing -- We're in an economy where people might begin to think twice about spending $5 on a cup of coffee; so suddenly you don't need two coffee shops on a single city block."

Vaughn Miller, President of the retail division for Henry S. Miller Commercial: Retailers closing stores has nothing to do with Wall Street, but their losses. "Retailers are hemorrhaging and are trying to stop the bleeding. The bleeding is the operational cost or the occupancy cost of the stores.

Rob Plaza, Senior Equity Analyst for retail stocks at Zacks Investment Research: Some companies are closing stores to increase profitability, some are doing it just to stay alive. A lot of retailers already had their plans for 2008 laid out, had already invested in signed leases, ground-breakings, pre-opening, etc, so they couldn't just stop those new stores on a dime. Looking back on that, they're going to wish they had just walked away and paid whatever it would have cost them to stop the process. ..... For the next decade, retailers are not going to have to open a brand new store because there's going to be so many empty ones that need to be filled."

Andy Graiser, Co-President of retail real estate advisory and disposition firm, DJM Realty:There certainly is cannibalization with some retailers. I look at what's happened with bank branches and non-traditional retailers, like Sprint, that have opened up on every corner. Wall Street has put so much pressure to grow, grow, grow... now landlords certainly are feeling the pressure from some of their tenants that have been with them for a long time."

Retail Store Domino Effect
Returning to Nina Kampler one last time: "When you have a situation of mass closings in the way that the beginning of 2008 seems to be indicating, it's not something the landlords can easily adapt to, it's not merely a matter of finding a replacement tenant in one spot in a mall. Perhaps stores need to be shuffled around so that more tenants don't fall in a domino effect. If closings are happening in significant numbers, landlords may question whether the existing shopping center economic model works," said Kampler.

Does The Shopping Center Economic Model Work?
This is one hell of a time to be asking that question. ... Rob Plaza at Zacks seems to have the answer: "For the next decade, retailers are not going to have to open a brand new store because there's going to be so many empty ones that need to be filled."

Is there anyone out there now who still does not think commercial real estate is going to implode and take the job market right with it? Can someone explain how we get inflation out of this?

[B-Chan]

"Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance, low volatility, regardless of market direction. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility. You are currently viewing my global economics blog which has commentary 7-10 times a week. I am a "professor" on Minyanville. My Minyanville Profile can be viewed at: http://www.minyanville.com/gazette/bios.htm?bio=87 I do weekly live radio on KFNX the Charles Goyette show every Wednesday. When not writing about stocks or the economy I spends a great deal of time on photography. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at www.michaelshedlock.com."

[riverdawg]

I’m not sure that the stores on the list have much in common, other than retrenchment:

Movie Gallery has a technologically obsolete business model.

Starbucks has grossly overexpanded (this is mentioned specifically in the article)

Talbots moved away from their core customer base (with men’s and children’s clothing)

Kirkland’s Home - I never understood who bought their stuff ...

[neb52]

There has been a big time over expansion in the last 4 years in the Retail Industry. I think this is were most of these companies, on the list, have in common.

There are also issues of leases. Most fast food restaurants lease commercial land for 26 years and then pay to build the building. At the end of the lease they will up and close down. This is due to the fact that that brand has run its course or requires a revamping after 26 years. The only exception being if that location is doing well, then that restaurant will reinvest in that property with renovations and new lease.

What I find the most distressing is the grocery retail business. Grocery Stores require bigger and bigger spheres of marketing area to just exist. I think most of these stores require an area with a population of 250,000 to be profitable. That is just ridicules. With Walmart and Target entering into the grocery business way to many independent and even big national stores have closed. I don’t know, but I have a problem shopping at a discount food store. The quality just seems to fit the price. I always liked Tom Thumb, because while they were always slightly more expensive they kept the quality and facilities in good standing.