Dive Brief:
- About 45,000 retail stores may close in the coming years as retail’s physical footprint increasingly shifts to serve as fulfillment and distribution centers, UBS analysts led by Michael Lasser said in an April 22 report. That forecast is based on the premise that online retail penetration rises to 26% from 21% with retail sales growth of 4% by 2028.
- Banks’ reluctance to lend, higher operational costs and consumers’ sustained inclination to spend on services instead of goods also drive store closing forecasts.
- The U.S. still has too much retail square footage, the UBS analysts said, as third-party players like Temu and Shein are positioned to drive further e-commerce penetration without the overhead of managing and maintaining a physical footprint. The analysts said apparel and accessories, consumer electronics and home furnishing retailers need to shrink their footprints the most.
Dive Insight:
Several major retailers with noteworthy physical footprints recently announced store closures or have gone out of business altogether. They include Foot Locker, Sally Beauty, Tuesday Morning, Shoe City, and furniture retailers Z Gallerie and Mitchell Gold + Bob Williams. Bed Bath & Beyond also closed stores when it filed for Chapter 11, but lives on as an online-only retailer.
Clothing, consumer electronics, sporting goods, hobby, book, music and home furnishing stores have closed the most locations since Q1 of 2019, per the report. If the analyst's estimates come to fruition, UBS says the total number of retail stores in the U.S. will fall to 913,500 from 958,533. A decline in the economic environment could also drive the number of closings up.
Department stores will likely continue to lose share to other channels. UBS said this is reflected in declining comparable sales. UBS’ outlook varies by sector, with off-price representing a bright spot.
“In our view, department stores continue to lose customers to off-price retailers. This dynamic will likely cause department stores sales floor productivity to deteriorate, which should lead to fixed cost deleverage and ongoing operating margin compression,” UBS said.
However, retail is unlikely to reach a post-store era anytime soon, the analysts said in their 100-page report. “Our analysis assumes that stores remain an important part of the overall retail ecosystem for retailers and consumers. In the simplest terms, stores serve as hubs of fulfillment and support distribution logistics,” UBS said. “This is increasingly more important as consumers are becoming more demanding for convenience or immediate deliveries.”
The retailers best positioned to gain are those that are adopting and investing in omnichannel experiences. UBS described it as “a biological evolution, similar to survival of the fittest. Thus, retailers like Walmart, Target, Costco, Home Depot, and other large, leading retailers stand to gain from this natural selection.”
UBS said its outlook is positive for direct-to-consumer focused brands like athletic retailers On and Decker. The outlook is also positive for brands and retailers to continue to increase their omnichannel investments to support digital channel expansion.
Those initiatives have increasingly prioritized omnichannel capabilities to support digital buy online pick-up in-store, ship from store, store-based same-day delivery and buy online, return in-store. In contrast, smaller chains and mom-and-pop stores often lack access to the necessary capital to develop these types of initiatives and services, which puts them at higher risk of needing to close their storefronts, per the report.
