As the US faces an “apocalyptic” level of retail store closures, investors are left nervously wondering what retail brands are going to go down next.
The “retail apocalypse,” or the closing of multiple American retail stores since 2016, has hit the country’s financial market hard, and stores like Toys R Us were forced to file for bankruptcy.
Multiple factors, from the rise of e-shopping to the squeeze on the middle class to the fallout from long standing company debt, have driven this trend, and some worry that it’s on track to get worse in 2018.
Moody’s Corporation, a company that tracks corporations’ credit ratings, said recently that almost 19% of the retail companies it rates are considered high-risk investments. Their lead retail analyst, Charlie O’Shea, recently told CNBC, “I think the early part of next year will be pretty bad … I think it will be tough,” Moody’s lead retail analyst. He worries that “highly leveraged” retailers won’t be able to compete with Walmart and Amazon’s low pricing.
How bad is it?
While some businesses have complained that talk of an “apocalypse” is overblown, the US is believed to have had approximately 8,600 stores close this year. The previous record was 6,163 store closures in 2008, in the depths of the recession, when consumers had put a complete freeze on buying. And, according to Business Insider, another 3,600 store closures are already slated for 2018.
Why it’s happening
In an analysis of the trend, O’Shea remarked that it’s an unusual environment for retail companies to be failing in, as “it’s happening in a macro environment that’s pretty good for retailers,” where consumers are spending. For many of these large-scale retailers, the biggest problems are competition from online shopping and high long-term debt. Many bricks-and-mortar retail outlets carry heavy borrowing debt, making it difficult for them to make the shift to focussing on their online shopping experience.
The “overstored” suburbs
The crisis has hit department stores particularly hard, because of the decades-long “overstoring” of America’s suburbs. As investors put money into commercial suburban real estate, companies filled them with huge category-based stores. These corporations have reaped the whirlwind in 2017, with declining in-store sales making these stores unprofitable liabilities.