Brick-and-mortar meltdown

Posted By Darren Winters on Feb 20, 2019

Brick-and-mortar meltdown

The brick-and-mortar meltdown is spilling into 2019 with Payless, the largest US casualty retailer going into liquidation.

Payless, a once-popular seller of inexpensive women’s footwear and a staple in many suburban shopping malls, is closing all of its American stores.

The retailer announced in February 2019 that it would start liquidating all its 2,100 of its stores. Moreover, payless will also be winding down its online business.

The brick-and-mortar meltdown was a theme in 2018 with many dubbing the sector’s woes as the retail apocalypse.

Indeed, the list of retailers that were unable to turn a profit last year and eventually scummed to bankruptcy is lengthy. Sear, Mattress Firm and more than twenty other high profile retailers filed for bankruptcy in 2018.

The brick-and-mortar meltdown could be due to a number of factors

Brick-and-mortar meltdown

Disruptive technologies, the Amazon effect described as the relentless ongoing evolution and disruption of the retail market, both online and in physical outlets continues to chip away market share from traditional retailers.

The Amazon effect is accelerating the retail market shift to e-commerce. I believe this trend is likely to grow exponentially within the next few years. Digital currency, mobile platforms, a tech-savvy consumer and AI data mining could all rocket propel Amazon sales going forward.

Amazon with its maturing online platform is a factor in the brick-and-mortar meltdown

As Amazon takes even more retail market share the retail online giant will be able to exploit economies of scale to the optimum. We could even see more vertical integration as Amazon takes over the distribution, logistics side of the business. Logistic companies, the likes of FedEx has already become the talk of an acquisitions target by the online giant

Previously I referred to Amazon as a black thoroughbred stock, all the stars are aligned for this online giant to dominate the entire global retail market.

The only obstacle in Amazon’s way is that its own huge success could make it complacent then it could get toppled by a leaner, fitter younger rival. The Government could also decide that Amazon is too powerful and that as a monopoly it would need to be broken up.

Other factors contributing to the brick-and-mortar meltdown could be due to structural changes

The latest wealth and income distribution data show no respite in the hollowing out of the middle class. Moreover, a rise of multi-generation homes ultimately means less consumption. Millennials are struggling to find affordable accommodation, secure well-paying jobs, purchase their own home, marry and eventually start their household.

What is the likely route for retailers which get liquidated in the brick-and-mortar meltdown?

Typically the landscape becomes littered with buyouts. But this doesn’t appear to be the case with Payless. The specialty shoe retailer has been trying to find a buyer for months, with the help of financial advisory firm PJ Solomon. But there have been no takers (at the time of writing this piece). The company is currently working on a bankruptcy filing in the US and liquidation.

The brick-and-mortar meltdown means that unprofitable retailers end up gutted and stripped of assets

Vulture capitalism is what the end of the road looks like for retailers caught up in the brick-and-mortar meltdown.

Private equity firms smell blood and are circle distressed retailers. The end game is often leveraged retail buyout at a bargain then the movable feast on the assets begins. What is then left of distressed retailers is a debt-burdened dyeing business. Credit lines are frozen leaving the disabled retailer with no means to invest in and build a vibrant online business. So paradoxically the traditional retailers could be missing the transition to e-commerce as Amazon dominates the digital online space.

Commercial landlords are being hit hard by the brick-and-mortar meltdown

In many cases for this group of investors means either vacant space or significant rent reductions.

For example, when pay-less emerged from bankruptcy in August 2017 that resulted in about 700 of its US stores closed. Overcapacity in shop floor space meant that landlords of the remaining stores ended up reducing their rents by an average of 30% to 50%.

Mr. Simon, founder of Simon Property Group, a major investor in US commercial real estate said that the Group’s portfolio was “big and diversified and can handle it.”

“48% of our business in the mall business,” down from 95% early on,” said Simon.

The next on the hit list of investors in the brick-and-mortar meltdown is the retail creditors

Senior creditor often receives the most equity in the reorganized company. Then lower down the ladder, junior lenders receive the least equity.

But when the brick-and-mortar meltdown results in a retailer going bankrupt it is stockholders that are left carrying the can. Put another way, stock investors are often the first to scramble for the exit doors during signs of trouble.

So how will the brick-and-mortar meltdown play out going forward?

“I do think on the retail front, the strong are getting stronger. But as you’ve seen by the numbers throughout the retail community, a rising tide doesn’t lift all retail boats,” Simon Property Group CEO David Simon.

“Retailers that are investing in their product, in their store experience, in their branding were having decent results,” added Simons.

But here is the caveat “2019 could ultimately end up being similar to 2017 and 2018,” said Simons and if a drop in Q1 earnings growth is anything to go then he could be bang on the money

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