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Retail Apocalypse: Is Recession What Comes Next?

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By Pam Danziger

The Commerce Department just released its report on the economy for the second quarter. The news was mixed. The economy grew at a faster pace from April-June than it did from January-March 2017. GDP expanded at a 2.6% annual rate, while it revised estimates for first quarter down to 1.2%. Overall for the first six months of the year the economy averaged 1.9% growth. This makes the ninth year of economic expansion since emerging from the recession in 2009, the third longest since World War II.

Yet the past nine-year recovery has also been the weakest in history, averaging only 2.1% growth over the nine-year period. The news was met on Wall Street with relief. “The outlook in that businesses and consumers are becoming more confident in the future,” Christopher Martin, CEO of Provident Financial Services, told the Wall Street Journal in this weekend’s edition. And WSJ financial commentator Justin Lahart wrote, “The economy can absorb a lot, and despite all of the political uncertainties the U.S. faces, the risk of recession — typically the stock market’s biggest danger — remains low. That counts for a lot.”

So we all give a sigh of relief, but one sector of the economy remains weak — Consumer Retail — and since 60-70% of the U.S. economy depends on consumer spending, this trend must have consequences.

In the first half of 2017, retailers are failing in record numbers: 8,640 will close shop this year, according to a recent Credit Suisse report, which is 40% higher than at its 2008 peak when 6,200 were shuttered. Further, it predicts that 275 malls, 25% of the nation’s 1,200 total, will close within the next five short years.

Much has been written about if this is a retail apocalypse and why it is occurring, but I haven’t seen enough about what comes next. Being a market researcher focused on American consumers, it seems clear that the changes we are seeing in consumer behavior and sentiment doesn’t bode well for the economy as a whole, but since I am no economist, I reached out to experts in finance and economics to ask whether this reported “Retail Apocalypse” could cause the next recession?

Too soon to talk about Recession

Nobody wants to say the “R-Word” – Recession – and many economists see continued growth in the economy, as Richard Curtin, chief economist for the University of Michigan’s consumer-sentiment survey, said to the Wall Street Journal, “To be sure, the data do not suggest an impending recession.” This was said while reporting its consumer sentiment gauge dropped in July for the second month in a row.

The experts I spoke to all agree that the retail apocalypse alone won’t do it, as Rick Helfenbein, President and CEO of the American Apparel and Footwear Association says, “A retail slowdown has never been the predictor of a pending recession.” Rather reduced retail spending is a lagging indicator caused by recession.

However, Peter Muoio, chief economist at Ten-X Research, a firm that specializes in commercial real estate, notes, “Retail bankruptcies are already running at a recessionary pace despite the supportive macroeconomic environment, so any cyclical downshift will surely exacerbate the problem for brick-and-mortar stores and produce a large fall out of failed centers and malls. Yet we do not believe that retail will be the cause of the next downturn.” But other collateral factors, specifically job losses and bursting of the commercial real estate bubble, may bring it on.

Numerous experts that I talked with described the current retail disruption as the “canary in the coal mine” forewarning of greater economic disruptions ahead. “The chaotic disruption in the retail sector and massive store closings represents the proverbial ‘canary in the coal mine’ for a recession in the broader economy,” Robin Lewis, founder and CEO of The Robin Report, Forbes contributor and co-author of the book, The New Rules of Retail.

“Contrary to the common belief that Amazon and e-commerce alone are causing the so-called retail apocalypse, the shift to online will not offset the losses in the brick-and-mortar world of retailing. Boomers are downscaling and not spending on stuff, and the emerging core of millennial consumers are spending more on travel, leisure, entertainment, and experiences and building whole new industries for swapping, sharing and renting vs. owning,” Lewis says.

Retail shifts as the “Canary in the Coal Mine”

For years financial expert and author Harry Dent, who studies business and consumer demographic cycles, has warned about shifts in consumer spending caused by the aging of the baby boomers, the largest generation in history. Boomers are now retreating in the generation’s predictable lifecycle spending wave, and the millennials, the next big generational wave, is only beginning to start its climb. “The baby boom generation peaked in their spending cycle in 2007,” Dent explains, noting that between age 46-51 years consumer spending achieves its lifelong high, but declines rapidly after that.

“The largest generation in history will spend less money as they age,” Dent says. “They spend most of their money raising kids and when the kids leave the nest, they don’t have to buy so much stuff in malls and at retail. The next big generation of millennials will be spending more money as they age, but they haven’t even fully entered the work force yet and about half of the millennials are still in school. Until the millennials get large enough to start driving the economy back up again, which we predict will start in about 2023, the boomers will have a downward impact on the economy.” This downward trend, Dent notes, takes into account the impact of immigration.

There is no question that the shift from traditional brick-and-mortar retail to online is a complicating factor, driving retail spending up all the while pulling dollars out of brick-and-mortar. But none of the experts believe that e-commerce is going to replace traditional retail anytime soon, if ever. “Online shopping alone will not replace the revenue lost from the brick-and-mortar stores that are closing,” says Edward Hertzman, founder of Hertzman Media Group, serving the apparel and textile industry. “Online still only represents less than 10% of overall retail sales.”

Where will displaced retail workers find their next job?

Retail is a huge source of jobs in the country. Some 16 million Americans are employed by the retail trade, according to the Bureau of Labor Statistics, with consumer-facing retail salespersons accounting for about 28% of total employment and cashiers making up another 18%. Fellow Robin Report author Kate Newlin reported on the retail jobs crisis recently in “Not All Retail Jobs Created Equal, Thinking Outside the Bot.

The experts are concerned about where the retail workers put out of a job by the retail apocalypse and/or the shift from in-store to online retailing will find their next job, even with the current low unemployment rates. “Job displacement is a very real issue,” says Evan Tarver, Investment and Retail Analyst, FitSmallBusiness.com. “So even though retail sales might not decline due to closing brick-and-mortar stores, the unemployed workforce might very well hurt the economy.” The job-suppressing effects of the rising investment in automation in both front-end and back-end retail operations can’t be overlooked either.

While some of those workers can be absorbed by the growing e-commerce needs for online customer support and picking-and-packing jobs, a question remains whether they are suited to such work. “An important issue as a result of the retail shift, is the skill set required for the future of retail,” Shelley Kohan, Vice President Retail Consulting, RetailNext. She sees the skills needed in the new retail economy “evolving to include analytics, technological agility, innovative thinking, flexibility in terms of job scope and problem-solving.”

Kohan calls the tipping point in retail to be “the technological-empowered customer who is calling all the shots,” and that will increasingly require more technologically-proficient people to answer their call.

Will the commercial real estate bubble burst?

Across the panel of experts I spoke to, the commercial real estate market may take the biggest hit from the retail apocalypse. Noting the accelerating growth of e-retail as a major factor stunting retail fundamentals, Peter Muoio says retailers closing or reducing their geographical footprint due to reduced demand is creating a perfect storm that will crash onto the commercial real estate market. “The problem is beginning to creep into prized retail corridors, such as Fifth Avenue and Bleecker Street in New York City. The country remains massively over-retailed,” Muoio states.

As a result, some property owners are shifting from traditional retail to gyms and medical facilities, while others use vacated retail space to support e-tailers in last-mile distribution and return/pickup centers. But the pace of that shift maybe too slow. “The retail sector still has a multi-year transition process in front of it to respond to all these changes, as many retail properties will need to be repurposed to other uses,” Muoio cautions.

Financial services director at Strategic Business Insights, Larry Cohen states very simply, “The commercial real estate market could crater. These are taxable for many small municipalities so their budgets would be decimated increasing the burden on homeowners.”

The retail overbuilding that dates back three decades, according to Suzanne Kapner, Wall Street Journal, has created a commercial real estate bubble, not unlike the housing bubble that caused the most recent recession.

When bubbles burst, recessions happen

From his vantage point studying business cycles, Harry Dent says recessions naturally follow when overheated market bubbles burst. Further, he believes the government’s reaction to pull the economy out of the last recession may well be contributing to the next one. “Back in 2007 we were going into a great depression with banks and major companies melting down,” he says. “So governments around the world printed trillions of dollars to offset the decline. They filled the demographic hole with quantitative easing. That free money distorts the economy. Stocks become overvalued. It pushes up real estate prices and you end up fighting deflation, not inflation. Those bubbles will burst at some point. You can’t play this game forever.”

That’s why Harry Dent for one predicts the next “adjustment,” will occur in 2018-2020. “You can’t fight the demographic trends and these other cycles,” he says. Too many economists, Dent believes, are missing the key demographic and business cycle indicators – the canary in the coal mine — that the retail apocalypse is pointing to, which is a radical adjustment on the horizon. “People drive the economy, not governments,” he cautions. “Consumers drive the train and businesses and governments react to it.”

To fight the next economic downturn will all depend upon how quickly displaced retail workers can find new jobs and how fast existing commercial real estate owners can repurpose empty spaces to replace lost retail tenants. But perhaps the overriding question is whether retail can attract enough new customers to spend enough to fill the gap left by down-scaling baby boomers. As Vice President Pence said recently at the NRF Retail Advocacy Summit, “As retail goes, so goes America.”



More about Pam Danziger: Pamela N. Danziger is an internationally recognized expert specializing in consumer insights for marketers targeting the affluent consumer segment. She is president of Unity Marketing, a boutique marketing consulting firm she founded in 1992. 

As founder of Unity Marketing, Pam leads with research to provide brands with actionable insights into the minds of their most profitable customers. She is the author of five books including a recent mini-book, What Do HENRY’s Want?, explores the changing face of America’s consumer marketplace. Pam is frequently called on to share new insights with audiences and business leaders all over the world. Contact her at pam@unitymarketingonline.com.

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