Retail closings are on a downward trend, hitting their lowest level in five years. However, it's not all sunshine and rainbows for the retail sector
The cause of this downturn is the industry's struggle with the shift towards online shopping. Last year, store closure rates may have reached an all-time high, surpassing the trend seen in 2016. CoStar Group, a commercial real estate data and analytics firm, has forecasted that U.S. retailers will announce about 3,700 store closures this year - the lowest annual rate since 2016.[CSGP] Publicly announced plans by major retail chains add to this number. The estimated number of square feet affected by these closures is the lowest since the start of CoStar's data collection in 2008.
According to CoStar, a record-breaking 12,200 stores closed in 2020 as the pandemic compelled consumers to limit their store visits. However, the pace of closures is slowing down now. One reason for this is that several large retail chains under financial stress, such as Sears, Payless, and Ascena Retail Group, filed for bankruptcy in the past two years. Filing for bankruptcy usually leads to premature store closures. Moody's predicted in a report dated August 13 that only ten retail companies would file for bankruptcy in 2021, compared to nearly 70 in 2020 and about 25-35 four years ago.
The economic recovery has started to show progress as consumers revert to in-store shopping after Federal stimulus packages and the introduction of vaccines boosted their purchasing power. This relief is much-needed for struggling retail stores, enabling them to negotiate better lease terms with landlords eager for tenants.
"The pressure to close is lessening," said Ken Fenyo, President of Coresight Research, a retail research and consulting firm. "People are spending again, and stores are seeing a return of customers. That's a signal to retailers that they will close fewer stores than before and that they should take advantage of this opportunity."
"Now would be a good time to sign a lease agreement," Fenyo added, noting that some landlords and tenants have agreed to more flexible terms to avoid store closures.
However, there's a "wildcard" in the form of the Delta variant, which could potentially change store closure trends in 2021 and 2022. If consumers continue to avoid physical stores and opt for online shopping, or if non-essential businesses are forced to close again due to health restrictions, the rate of closures could accelerate.
"It's undoubtedly a wildcard if we get into the autumn and holiday seasons, and we can't really explain it right now," Fenyo said. "If things actually get bad and we see real variants affecting sales, we'll likely see more closures."
According to the latest data from the U.S. Census Bureau, retail sales grew by 15.8% year-over-year in July, with sales in apparel stores increasing by 43.4% and sales in department stores growing by 24.3%. Both sectors have seen a rebound in 2021 as many consumers have upgraded their wardrobes after spending long periods at home.
However, retail sales (excluding automobiles) declined by 0.4% in July compared to the previous month, raising questions about whether a resurgence of the virus might prompt consumers to cut back on their spending.
In the long term, the sustained growth in online shopping could also lead to retail chains needing fewer physical stores than before. UBS estimates that about 80,000 stores will close in the U.S. over the next five years if the online sales share of retail sales grows from its current 15% to 27% by 2026.[1] If online sales reach 30% of retail sales by 2026, UBS estimates that almost 150,000 stores could close.
Additional Reading:
Despite the decline in store closings, the retail industry has still faced challenges such as the closure of major chains like Sears, Payless, and Ascena Retail. These store closures often result in immediate store closures due to bankruptcy filings. Additionally, the lingering impact of the pandemic has prompted consumers to shop online more frequently, potentially leading to a long-term shift in retail business.
However, analysts like Ken Fenyo of Coresight Research estimate that there will be fewer store closures in the future as consumer spending resumes and several stores can negotiate better lease terms with landlords struggling for tenants. However, the ongoing Delta variant could potentially disrupt this trend, leading to increased store closures if shoppers continue to avoid physical stores or if non-essential businesses are forced to close again due to health restrictions.
Source:
Enrichment Insights:
The current retail store closing trend and forecast are influenced by multiple factors, including the shift to online shopping, consumer spending, and the impact of economic conditions. Here are the key points:
- Stores closing forecast (2025): Coresight Research predicts that 15,000 stores in the U.S. might close in 2025, representing a significant increase from the 7,325 closures in 2024[1][2].
- Store closures (Jan. 2025): As of January 2025, over 2,000 announced store closures have already been made, including those from major retailers like Party City, Big Lots, Kohl's, and Macy's[1][2].
- Online shopping impact: Consumers prefer shopping online due to best prices and convenience, putting pressure on brick-and-mortar retailers. New entrants like Shein and Temu are also capturing market share, threatening traditional retailers[1][2].
- Consumer spending and inflation: Consumers are seeking savings amid inflationary pressures, leading to online purchases. Higher borrowing costs, rising wages, and inflationary pressures are further contributing to the decline of brick-and-mortar stores[2].
- Retail sector dynamics: Coresight Research categorizes the expected closures in 2025 into liquidations (e.g., Party City), distressed retailers (e.g., Big Lots), and legacy retailers reshaping their store footprints (e.g., Kohl’s and Macy’s)[2]. The net loss of stores is expected to be approximately 9,200 in 2025 with fewer store openings compared to 2024[1][2].
- Long-term outlook: UBS retail analyst Michael Lasser predicts that about 45,000 stores will close in the U.S. over the next five years as online retail penetration increases[2].
