Despite a Strong Economy, Retailers Are Being Hit Hard and Trying to Adjust

Even though the U.S. economy is predicted to be on sound footing this year, the stack of retailers closing their stores due to bankruptcies or slipping sales keeps piling up at an alarming rate.

Big department stores such as Macy’s and JCPenney are whittling down their retail locations as consumers alter their shopping habits to e-commerce.

Economically troubled California contemporary brands and retailers such as BCBG Max Azria, which filed for bankruptcy protection in February, and Bebe, which announced it is closing all its stores and laying off 700 people in California, are transitioning to smaller footprints or to online retail.

Most recently, teen retailer Rue21, headquartered in Pennsylvania, announced it would be closing 400 of its 1,100 stores around the country as it tries to cope with a nearly $1 billion debt load.

Economists said the retail industry is going through a metamorphic process that will continue to play out as shifts occur in consumer spending habits, demographic changes and social media.

“This is an evolving industry, and it is going to continue to evolve as retailers modify their business strategy, closing and relocating stores, and acquiring Internet-based companies,” said Jack Kleinhenz, chief economist for the National Retail Federation. “All these things are adjusting to meet consumer demand. Before, the retailer was directing what customers wanted, and now we are seeing that the customers are directing what they want.”

It’s not that people aren’t spending money, but they are allocating it differently. Kleinhenz notes that at the end of 2016, there were 245,000 more people employed in the food and beverage industries than at the end of 2007. In contrast, department stores gave up 280,000 jobs, and clothing stores shed 150,000 positions during the same time period.

Retailers have also been hit with merchandise that is selling for lower prices and ever-shrinking margins. “The problem with retail today is that overhead costs keep rising and the minimum wage keeps rising and profit margins keep falling. That is why you are seeing more and more retailers in trouble,” said Britt Beemer, a retail expert who surveys thousand of shoppers every week for his America’s Research Group. “Ten years ago, if you had 25 percent of the stores in a chain not making money, you could make it. Five years ago that fell to 15 percent and today it is less than 10 percent. Also, it now takes bigger and bigger discounts to get the same number of customers to walk into the front door.”

In the old world of retailing, major shopping-center operators sometimes pressured retailers to sign up for more space than they needed. “In the last 10 years, shopping-center operators have become very heavy-handed saying, ‘If you want to be in this premium mall, you have to also be over here in one of our second-tier shopping centers,’ Beemer said. “The question now is, how much more can you demand from a retailer without putting them out of business?”

With shoppers going to their computers to shop online and baby boomers buying less, retailers have had to change. With that in mind, Macy’s is shutting down 68 stores this year and another 32 scheduled for down the line. That represents 15 percent of Macy’s store stock. JCPenney is on track to eliminate 138 stores from its portfolio.

Despite several Los Angeles retail chains downsizing or going under, there are still some strong retail spots in areas such as West Los Angeles, where asking lease rates are around $11.66 per square foot compared to the average $2.63 a square foot in Los Angeles, according to commercial real estate company CBRE. The higher rent averages have been driven by a number of pricy properties on Beverly Drive, where store rents hover between $18 and $21 a square foot.

Despite the dire headlines, CBRE said retail vacancy rates during the first quarter of 2017 in the greater Los Angeles area dipped to 4.8 percent from a previous 4.9 percent vacancy rate.

Economic winds

While the retail industry is struggling, the U.S. economy is on track to deliver moderate growth this year. The gross domestic product is expected to inch up about 2 percent in 2017 compared to 1.6 percent last year, which was the lowest since 2011. “We are looking at more of the same of what we have seen in the last couple of years,” said Robert Kleinhenz, economist and executive director of research at Beacon Economics in Los Angeles as well as the brother of NRF economist Jack Kleinhenz. “The overall trajectory of the economy, the labor market and wages will continue to increase through 2017.”

Consumer spending, which accounts for two-thirds of the country’s economic activity, continues to move forward, rising 3.8 percent last year.

But with unemployment at all-time lows, it will be more difficult to add robustly to the job market—as seen in March, when only 98,000 jobs were added to payrolls. That is fewer than half the monthly numbers for January and February, the Labor Department reported.

Nationwide, the unemployment rate stands at 4.5 percent, which is the lowest it’s been since 2007, when the unemployment rate dipped to 4.4 percent.

California’s unemployment rate has dropped to 5 percent while Los Angeles County’s unemployment rate is even lower at 4.8 percent.

With a new president, many things were promised that haven’t come about yet. The Affordable Care Act has not been changed, which means that a promised tax cut for corporations and individuals is stalled. No tax cuts mean several government projects will be put on hold.

“The administration was hoping to pay for infrastructure projects with tax credits, but if the tax reform doesn’t come about and if the budget hawks want to keep the deficit from getting worse, I can’t imagine they are going to have much success in rebuilding and expanding the nation’s infrastructure,” Robert Kleinhenz said.

Another question that looms is Trump’s changing views of the trade scene, which have left people guessing about whether he will impose a border adjustment tax and reconfigure several free-trade agreements.

Because of that, World Trade Organization economists are forecasting a 2.4 percent growth in trade this year but added it could vary between 1.8 percent and 3.6 percent due to “deep uncertainty about near-term economic and policy developments.”

Trade is still a major economic engine in the Los Angeles area, home to the largest port complex in the country. During the first quarter of 2017, cargo-container volumes at the Port of Los Angeles were up 10 percent compared to the same period last year. In 2016, cargo-container volume was up 8.5 percent over the previous year.

Next door at the Port of Long Beach, the transportation hub had a modest boost in cargo during the first quarter of the year, with overall throughput increasing 1.5 percent compared to the same period last year.

Both ports are expecting to see a solid year of growth despite concerns about import taxes and a stronger emphasis on domestic manufacturing.