The Domino Theory in Retailing

Circuit City Store Closing


by Bonnie McEwan  

The Progression of Retail Store Closings

Cold Warriors loved an idea called the Domino Theory, which held that once a country “fell” to communism its neighbors would also fall, like dominoes in a chain reaction. While that didn’t happen in geopolitics, it may be happening in retailing. One retail store closing can trigger a series of events that serve as the tipping point for a host of related financial problems.

At the macro level, the first groups to feel negative effects are real estate investors and commercial property owners. For example, Morningstar estimates that there are 262 unpaid commercial mortgage-backed security (CMBS) loans that are secured by mall properties where JC Penney is an anchor tenant. Ninety-eight of those mall properties are already on Morningstar’s watch list.

Nine of those malls are on the list for a JCP store closing. All are located in small markets where replacement retailers will be hard, if not impossible, to find. If the malls go down, then it’s not just Penney employees who are out of work, but the many more people who work in other stores at those malls, some of which also house vulnerable retailers like Sears, Abercrombie & Fitch and American Eagle Outfitters.

The Community Conundrum

Retail store closings make waves throughout a community. Take Compton, California, for instance. When Circuit City closed its store there in 2008, it derailed revitalization efforts throughout the whole area, which was already in dire economic straits. It wasn’t just the direct effects of the store closing, but the message sent by the closing: business is not good here.

Consumers were affected by Circuit City closings too. The chain generated serious revenue by selling long-term product warranties. It assured warranty holders that their coverage would continue, but if a customer had a problem he would have to travel to a Circuit City outside of Compton. For the similar reasons, gift cards were harder to redeem and returns more difficult to negotiate.

In December of last year, Dominick’s, a grocery chain owned by Safeway, announced it was exiting Chicago. This left some low-income neighborhoods without a full-service grocer, where they had access to fresh, healthy food choices. To top it off, when a new food store wanted to move in to an abandoned Dominick’s, community activists learned that the closed property was encumbered by a restrictive covenant that prohibited another grocer from opening in the space.

Far-Reaching Effects

Further along the domino chain, wholesalers and suppliers are hurt when retail stores close, as are other retailers. Orders are cancelled and consumers who are now living on unemployment can’t afford to purchase anything other than necessities. Goods that people bought routinely when they had paychecks suddenly become luxury items that remain on store shelves.

It’s not fair to blame retailers for all of this. After all, it only makes sense to close stores that are under-performing, and those are most often in areas of high unemployment. In early 2012, for example, Sears Holdings closed 17 Sears or K-Mart stores in three states with substantial unemployment. They included Florida, with a 10% unemployment rate at the time, Michigan, with 9.8% unemployment, and Mississippi, with 10.5% unemployment.

A Cyclical Cycle

Worst of all, it turns out that the retail dominoes aren’t really in a chain at all. They’re in a circle, where each one influences the next and where the negative effects of store closings can build into a spiral that takes everyone further down the economic scale. People lose jobs, which communities can’t replace. These communities gradually become what labor economists call intransigent jobless areas, where the hurdles are high for attracting new business because the consumer base is low-income. This reduced purchasing power translates into fewer places to work and shop, as well as a lower tax base for local government.

In December 2013, the US Bureau of Labor Statistics reported the lowest annual retail sector unemployment rate (7.7%) since 2009, when it was a full 10%. Things are getting better and with the current round of store closings the health of the retail sector overall is improving, but it may still leave bodies on the ground, especially in areas of the country that have yet to show signs of economic recovery.

About Gevril Group

Gevril GroupGevril Group, watchmaker and wholesale watch distributor, is the exclusive U.S. agent for exquisitely designed and crafted European luxury and fashion watch brands, distributing and servicing some of the best affordable luxury and Swiss watches and trendy fashion watches. Gevril Group also operates a full-service watch repair, staffed by master Swiss watchmakers. Contact Gevril Group by email or by calling 845-425-9882.

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America’s Changing Shopping Habits

Researching a Car Purchase Online


by John Sealander  

Why People Buy Watches Differently than they Buy Cars

New studies are showing that people around the world are changing the way they buy things. Increasingly, multiple visits to a series of retail stores to comparison shop are out. Consumers are doing their research on the Internet ahead of time these days and many have already made a purchase decision by the time they arrive at the store. This is especially true when people are buying automobiles.

Hans-Werner Kaas, a senior partner at the prestigious McKinsey & Company consulting firm says that average car buyer visits just 1.6 auto dealerships before making a purchase, down from 5 dealerships only 10 years ago. “This is the most dramatic change we’ve seen in the auto industry and how people buy cars in the last 50 years,” says Kaas.

Simon Soaf, General Manager at Mossy Volkswagen in Carlsbad, California, has witnessed this change himself. “Those days of going to six or seven dealerships to shop for a car are over. It is not going to happen again. Customers are more savvy,” he said.

There are many reasons for this change in buying habits. Cars are still a practical necessity. In a difficult economy, people want to arm themselves with as many facts as they can before they make a decision on an expensive but necessary item like a car, a major appliance, or even a healthcare provider. When money is tight, customers don’t trust sales people any more than they trust Congress. They want to make their own decisions.

Watch Retail Industry Continues to Expand

One product category seems to be bucking this trend. At a time when automotive and electronics dealers are consolidating, watch manufacturers are actually expanding, adding brick and mortar stores at a rapid pace. Just a few years ago, about the only place you could buy a fine watch was at a reputable jewelry store. Now, all the major watch manufacturers are opening their own stand-alone physical stores.

Go to any major shopping mall and you will see impressive brick and mortar stores for well-known brands like Omega, TAG Heuer, Swatch Tourbillon, Officine Panerai, Montblanc, Cartier, Audemars Piguet, and many more. Most of these brands sell through online retailers as well.

The Watch Buying Experience

Is there a reason why people are purchasing watches much differently that they purchase cars? Many experts think it is because watches are no longer a necessity. Nobody needs a watch to tell the time any more. They have their cell phones for that. Watches have become a fun discretionary item. Low to mid-priced watches are considered a fashion accessory now. They are often impulse purchases made to match a particular outfit.

High-end luxury watches are a little different, but buyers still seem to like to do their shopping in physical stores. A luxury watch is a status symbol and buyers often consider themselves to be timepiece connoisseurs. They are a lot like collectors of fine art in this regard. Going into a well appointed store and talking with a knowledgeable sales representative is all part of the process for these high-end buyers.

Watch Buyers vs. Car Buyers

A luxury watch and an economy car can cost just about the same these days. However, while frugal car buyers do research in an effort to find reliable transportation at the best possible price, watch aficionados are more like art collectors. And the fashionistas who are buying more affordable watches just want a stylish accessory that matches their new dress. These shoppers are more concerned with whether the watch is cool than they are with the price.

When watches were essential as timekeepers, shoppers bought them for essentially the same reasons as they bought their cars. They needed a watch to tell the time. The irony of the situation is that now that wearing a watch is no longer a necessity, watches have become more popular than ever.

About Gevril Group

Gevril GroupGevril Group, watchmaker and wholesale watch distributor, is the exclusive U.S. agent for exquisitely designed and crafted European luxury and fashion watch brands, distributing and servicing some of the best affordable luxury and Swiss watches and trendy fashion watches. Gevril Group also operates a full-service watch repair, staffed by master Swiss watchmakers. Contact Gevril Group by email or by calling 845-425-9882.

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What’s Behind Retail Store Closings?

Retail Store Closing


by Bonnie McEwan  

Out of the Malls and Onto the Internet

Most of us who follow the retail industry are aware of the wave of store closings that has taken place over the last few years. Since closings occur intermittently, however, you may not realize that roughly 5,759 stores in the US have shuttered since 2012. These include apparel companies like Jones Group and The Gap, restaurants (Wendy’s, Qdoba, Applebee’s), home furnishing stores (Kirkland, Pier One) groceries (Food Lion, Kroger, Stop ‘n Shop), toy and entertainment outfits (Build-A Bear, Game Stop) and tech companies (Cellular One, Apple). You can find an alphabetical list of all US retail store closings through September 25, 2013 here.

Certainly the Great Recession has something to do with this, but that doesn’t account for the fact that many of the same companies closing brick-and-mortar stores are expanding their online operations. These moves to the Internet have dramatic consequences that reach well beyond employees and consumers to affect communities and related industries, and not in good ways.

Shopping Malls

The obvious example is shopping malls. Most real estate professionals acknowledge that vacancy rates are high in many malls across the country and rents are depressed. Green Street Advisors, an analysis firm that tracks commercial real estate funds, predicts that 10% of the 1,000 largest malls in the U.S. will fail within the next 10 years. Some mall CEOs think that’s a conservative figure.

There’s a website called Dead Malls that tracks those shopping centers that are already abandoned or well on their way. Of the 33 JC Penney stores slated for closing, three are on the Dead Malls site: Muscatine Mall in Muscatine, Iowa, Military Circle Mall in Norfolk, Virginia, and Singing River Mall in Gautier, Mississippi. Macy’s plans to close stores in two more: Fiesta Mall in Mesa, Arizona, and Medley Center in Irondequoit, New York. Abercrombie & Fitch is closing a store in yet another mall on the endangered list, Oaks Mall in Gainesville, Florida.

It appears that these particular malls, along with most of the others listed, while not going gentle into that good night, they are slouching toward oblivion, dragging community spirits down with them. Part of their woes are caused by the oversupply of mall real estate. The US has so many malls that when one closes shoppers can easily drive 10 or 20 miles to another. Add to this the ‘smart growth’ and walkable cities emphases in current urban planning theory and you easily see that the curtain is descending on the malls’ last act.

Malls Repurposed

So what happens to these dinosaurs littering the suburban landscape, becoming eyesores in the communities they once served? Sometimes mall owners just call in the demolition equipment. Occasionally, though, more creative solutions are devised. Although not located in a mall, an abandoned Wal-Mart in McAllen, Texas was turned into the largest, single-story library in the country by Minneapolis-based architects Meyer, Scherer & Rockcastle, Ltd. The conversion plan included space to establish a community gathering place, which serves as an updated version of the town square.

Wal-Mart, once roundly criticized for letting its abandoned stores lie empty to prevent competitors from moving in, now has a subsidiary called Wal-Mart Realty. According to its website, “Walmart Realty’s mission is to find businesses to open in our former stores and clubs and to locate in available property around our stores. At Walmart Realty, we believe we have a responsibility to work with communities to find a use that generates economic growth and opportunity.”

Online Rising

While this is a positive development, it assumes that there are companies interested in opening brick-and-mortar stores, a debatable idea. “If I were thinking of starting a new retail brand right now, I would unquestionably start it online,” writes Jeff Jordan, a partner at Andreessen Horowitz and board member for several online retailers. He points out that online retail will continue to steal business from brick-and-mortar stores and that will place even greater pressure on shopping malls.

Even online retailers that do move offline to open physical stores are doing them as Internet showrooms, where customers view samples and then place orders. This is a stark departure from the traditional retailer that stocks inventory in its stores. Jordan cites two, Bonobos and Warby Parker, that began online and are now employing this showroom model.

There’s a joke going around that says Best Buy, which recently closed 10 stores, has become a showroom for amazon.com. Consumers visit Best Buy, check out the product they’re considering, then go home and order* their preferred model online. I’ll admit that I’m guilty of doing this exact thing when shopping for a high-definition television, not because Amazon had a cheaper price, but because the delivery is so much less hassle than dragging a TV home myself. It’s small conveniences like this — and probably others that are less apparent — that are driving consumers online.

All this does not mean that the retail industry is in trouble. Only that the mechanics of selling are changing. As Bette Davis said, “Fasten your seat belts. It’s going to be a bumpy night.”

*Or order then and there from their Smart phone.

About Gevril Group

Gevril GroupWatchmaker and wholesale watch distributor Gevril Group is the exclusive U.S. agent for exquisitely designed and crafted European luxury and fashion watch brands, distributing and servicing some of the best affordable luxury, Swiss and fashion watches. Gevril Group also operates a full-service watch repair, staffed by master Swiss watchmakers. Contact Gevril Group by email or by calling 845-425-9882.

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What’s Killing JC Penney?

What's Killing JC Penney?


by Bonnie McEwan  

Q: What’s Killing JC Penney: Bad Management, E-Commerce or Bad Branding?

A: Yes

JC PenneyFollowing-up on our article last week, we continue to examine implications of the troubles at JC Penney, which is in the news again this week for altering its poison pill plan to better defend itself against an activist investor takeover. The retailer has been on the ropes for some time now, a situation that was exacerbated by former CEO Ron Johnson’s failure to remake JC Penney by creating a series of boutiques within the larger store.

Losses and Fallout from Store Closings

Current CEO Mike Ullman, who also preceded Johnson in that position, is credited with stemming the chain’s losses, if not generating profits at this point. Nevertheless, analysts say that Penney’s average sales per square foot from all stores are too low to make the company profitable.

Store closings and layoffs at the chain will save about $65 million and will affect customers and employees in smaller cities and towns in 20 states. This is likely to present serious difficulties for those who become unemployed in a slow economy that has yet to pick up in many of the country’s rural and suburban areas. Customers too may suffer, as many of the stores targeted for closing are among the few retail options available.

Then there’s the real estate issue. JC Penney is an anchor store in malls throughout the American heartland. Once those stores go, it will be difficult if not impossible to replace them. Hundreds of aging shopping centers are already in decline. For some, Penney’s departure will be the blow that sends them into bankruptcy. At particular risk will be those malls that also face closings of other retailers, such as The Gap and Abercrombie & Fitch.

These negative effects are likely to cause JC Penny’s already shaky image to decline even further.

Competition From E-commerce

E-commerce is often cited as eroding business at traditional brick-and-mortar stores like Penney. However, the company does operate its own website, so loyalists will still have online access to Penney’s merchandise. In fact, Penney’s customers who prefer to buy online could have easily been doing so for years, which casts doubt on the idea that e-commerce is responsible for the difficulties at Penney — or any other old school retailer.

The term “old school” begins to get to the bottom of things. Although Johnson was not able to revitalize Penney, he may have grasped its underlying problem: lack of store traffic. Before customers can make purchases, you must get them in the door, and that begins with branding.

Branding

If you were asked to describe Penney, what would you say? (We pause here for a moment of silence.) Exactly. For most of us, nothing distinctive leaps to mind. If pressed, we might come up with “good value,” or “reliable,” or even “like Sears.” Some Baby Boomers may recall buying a prom dress at Penney or working there part-time during high school. You see, JC Penney isn’t a bad store. It’s just not on the radar screens of today’s GenX and Millennial shoppers.

Now think about, say, Macy’s. Founded in 1858, Macy’s is even older than Penney, but we don’t think of Macy’s as “old school.” It sells vacuum cleaners, hand mixers and steam irons, yet few people would say Macy’s is “like Sears.” Although Macy’s also announced store closings a few weeks ago, it said there would be an equivalent number of new store openings. In 2012, Macy’s sales per square foot were $184 while Penney’s were $116. At the beginning of today (January 30) a share of Macy’s sold for $54.00, a share of Penney’s for $6.33.

So What’s the Matter With JC Penney?

Bad management? Probably. Online competition? Maybe. Bad branding? Definitely.

Even Emmy-winning talk show host Ellen DeGeneres wasn’t able to attract new customer groups to Penney for the long term. When Ron Johnson brought her on as spokesperson, some conservative groups protested. In response, thousands of gays and lesbians vowed to shop at Penney to show support. Social media came alive with questions about Penney, showing just how poorly many people perceived the retailer.

  • “What can I buy at Penney’s?” asked a gay man in New York. The reply: “Just buy anything. You don’t have to wear it. Give it to the Salvation Army.”

  • Columnist Al Lewis in the Wall Street Journal: “Diversity, inclusion, acceptance for all—these are laudable values. The problem is, well, I have never actually met an openly gay person who openly shops at JC Penney.”

Can the Penney’s Brand be Saved?

Unlikely. Brand perceptions are built up over time. It takes many years to change an image, and it seldom works if those changes are dramatic and abrupt. Smart retailers may stick to a successful positioning strategy for years, but they adapt the way they present themselves as their customers and the culture change. Penney’s boxed itself into a corner because it remained relatively the same year after year. When Ron Johnson came along with his changes, loyal customers were repelled while the customers Johnson hoped to attract didn’t have time to become aware of the new Penney.

Meanwhile, CEO Ullman and Penney’s new board — chaired by Arthur Martinez, former Sears CEO (yes, really) — soldier on.

About Gevril Group

Gevril GroupWatchmaker and wholesale watch distributor Gevril Group is the exclusive U.S. agent for exquisitely designed and crafted European luxury and fashion watch brands, distributing and servicing some of the best affordable luxury, Swiss and fashion watches. Gevril Group also operates a full-service watch repair, staffed by master Swiss watchmakers. Contact Gevril Group by email or by calling 845-425-9882.

Join the conversation! Follow Gevril Group on Facebook, Twitter and LinkedIn.

Please subscribe to the Gevril Group newsletter and blog digest.