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What is the cause for record retail space closing?

90 million square feet. That is the amount of retail space that has already closed in 2018 and we are not even half way through the year. To put that number in perspective 2017 was the record setting year for retail closure and the total number of square footage closed for the whole year was 105 million square feet. What is worst is that CoStar is estimating more retail closures on the way. A large part of this is attributed to the bankruptcies and financial troubles of large retail chains like Bon-Ton, Sears, and Toys R Us.

Source: CoStar

Experts and insiders in the retail industry attributes this phenomenal to the rise of internet retailing specifically to the success of Amazon. While the rise of e-commerce is part of the reason why big chain retailers are struggling, it is not the only reason nor is it the most important reason. Currently e-commerce only make up around 9.1% of the total retail market in the US and 10.1% of total retail market in the world. This means that all of the senior management who complain to shareholders that Amazon is destroying their companies are simply looking for excuses rather than trying to coming up with way to improve performance. One example of the company that has adapted to the retail trend is Best Buy. It has introduced its own channel of online retail while at the same time improved customer interaction during store visits.

A much more logical reason for the retail failures might be that this is a correction of retail space because there are simply way too much retail space per capita in the US.  According to a Cowen and Company, the U.S. has 40 percent more shopping space per capita than Canada, five times more the the U.K., and 10 times more than Germany. This high level of retail space is not sustainable in the long run and with consumers more careful with their spending habit coming out of a recession, it should not be a surprise that all of these large retailers are going out of business.

Another possible reason for retailers closing shop might be the financial structure of these chains. Both Toys R Us and Sears are both high profile LBOs that have struggled financially to pay of debt. These LBOs are typically highly leveraged by borrowing senior and subordinated debts that have high interest rates. These interest rates cut into the profitability of the stores and the private equity firms who initiated these LBOs have very little retail experience.

In the near future, the outlook for brick and mortar is very grim. However there are opportunities that exist for smart and sophisticated retailers as they can pick up the slacks left behind by the big chains who have closed up shop.