Explore our thought leaders’ latest insights and ideas.

Pain for the Shopping Mall is Gain for the Consumer

Pain for the Shopping Mall is Gain for the Consumer

Brent Williams, CFA, Research Analyst

We’ve all witnessed the recent deterioration of retail stores in America. For decades, department stores were the lifeblood of shopping in the U.S., but now many Sears, JCPenney, and Macy’s locations sit shuttered and in disrepair. A decline in these large “anchor” department stores has negatively impacted the customer traffic to other mall-centric retailers as well. Toys ‘R’ Us is the latest notable casualty in a string of bankruptcies that has claimed retailers selling sporting goods, teen apparel, electronics, and discount apparel including: Sports Authority, Aeropostale, RadioShack, and Payless ShoeSource. While the ongoing “retail apocalypse” has disrupted the status quo, it is not reflective of a struggling U.S. economy, but rather a shift in consumer spending patterns, as technology and rising competition further align with the consumer’s desire for convenience and value. We expect this trend to continue.

Growth in U.S. consumer spending has continued at a steady pace since the global financial crisis of 2008-2009. The unemployment rate ticked down to 4.1 percent in October and is at the lowest level since 2000, household balance sheets are overall much improved from a decade ago despite increases in student and auto debt, and American workers are beginning to benefit from growth in wages for the first time in a decade. These factors have provided support for the +4.4 percent annual growth in consumer spending reported in September (see Chart 1). But where is this spending going? Thanks to a growing contribution from millennials, the U.S. consumer is allocating more of their budget to experiences including travel and dining out, and significantly more shopping is occurring online.

In October’s retail sales report, “non-store” (i.e. online) retailer sales increased +10 percent compared to October 2016. However, what may be most surprising is that still less than 9 percent of all retail purchases are completed online (see Chart 2). Although online and mobile shopping may feel second nature to some, we are still in the early innings of this digital shift and there is little evidence of the trend slowing. Improvement in internet connectivity, along with innovation in mobile applications, payment systems and logistics has allowed online shopping to become increasingly convenient. Stiff competition from large, rapidly growing companies like Amazon has improved selection and lowered prices for most consumer goods. Recently, this intense retail competition spilled over into the food business following Amazon’s acquisition of Whole Foods, which could challenge established grocers and mean additional savings for the customer.

But for physical retailers that have readily embraced change, it’s not all doom and gloom. Established retail companies have been much more successful in retaining customer sales through offering an improved customer experience like free one or two-day shipping options, curbside pick-up or even discounted prices when customers visit a store. Unlike window-less concrete shopping malls, upscale shopping centers with a blend of desirable stores and restaurants remain a popular destination. University Village, a high-end open air shopping mall in northeast Seattle, continues to significantly add retail and parking square footage to keep pace with customer traffic trends. And Ross Stores, despite nearly zero online presence, reported +4 percent sales growth for established stores in its latest quarterly report, and +8 percent total sales growth when including new store locations. Both of these growth rates are top-tier in the retail industry and prove that, even in 2017, consumers are willing to load up the car if it makes for a good bargain.



Data Sources: U.S. Bureau of Economic Analysis, U.S. Census Bureau

Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original publication of the report. These opinions are subject to change at any time without notice. Investors must bear in mind that inherent in investments are the risks of fluctuating prices and the uncertainties of dividends, rates of return, and yield. Investors should also remember that past performance is not necessarily an indicator of future performance and D.A. Davidson & Co. makes no guarantee, expressed or implied to future performance. Investors should consult their financial and/or tax advisor before implementing any investment plan.