What’s Going on with Retail (and it’s not the weather)

Interesting comments on page 15 from Steven Roth, the Chairman’s letter of real estate investment trust Vornado Realty. Here are his comments:

Disruption in retail is the topic du jour, the eye of the storm so to speak (both retail tenants’ and retail landlords’ stocks have been battered), so it is appropriate that we get into a fulsome discussion of retail this year.

In the be-careful-what-you-wish-for department, we made the prescient call four years ago that retail was in secular decline and acted on that by selling our malls,(17) spinning our strips into Urban Edge Properties, while retaining and even growing our flagship street retail in Manhattan.

So what’s wrong with retail:(18)
·
The U.S. is grossly over-stored. ICSC publishes 24 square feet of shopping center space per capita.(19)
·
The struggles and failure (or near failure) of many household names in the anchor and chain store business.
·
Traffic in shopping centers, while difficult to measure, is clearly declining and has been for years and so that makes a trend.
·
Shopping preferences and how we shop have changed, especially among millennials.
·
Most brands have become ubiquitous and, therefore, less differentiated and important.
·
Price and on sale is the only strategy which seems to work.
·
And then, of course, there is Amazon and the Internet.

I do not believe we can grow our way out of this mess. I believe the only fix for brick and mortar retailing is rightsizing by the closing and evaporation of, you pick the number, 10%, 20%, 30% of the weakest space.  This very painful process will surely take more than five years.  It will also create enormous opportunity for those with the capital and management platforms to feed on the carnage.

So if we were so prescient as to predict the secular decline in retail, and sell our malls, and spin our strips, why did we keep our Manhattan flagship street retail?  We believe Upper Fifth Avenue is enduring (read forever).  We believe Times Square is enduring and unique. We believe in the handful of world cities.  And, we believe the quality and scale of our Manhattan flagship portfolio is unique, irreplaceable and commands a premium.

Of course, even we are not immune.  It’s only to be expected when a tenant’s basic business model is being threatened that they hunker down rather than step up. For flagship retail (and for A+ malls), this is a pause, a cyclical bump. For everybody else, it is secular disruption.  Interestingly, several fast fashion retailers have told me that their 10-year plan is for smaller fleets (fewer stores), but with more and larger flagships.  That strategy makes eminent sense to me.

_______________
17
We sold the malls (into a very strong market) and spun off the strips in half measure anticipating secular decline (note the current softness in retail) and recognizing that with only a handful of malls, we were in no man’s land, and in half measure to de-conglomerate i.e., there is no real benefit in having $50 million shopping centers in New Jersey, no matter how great they may be, together with million square foot office towers in Manhattan.  I believe the decision to exit the mall business will look better and better as each year goes by.
18
Retailing stinks, right? Well, maybe not… note that the richest people in Europe are all retailers, the founders of: Zara, H&M, Ikea, LVMH and that the richest in the US is a retailer, if you aggregate the wealth of Sam Walton’s heirs.
19
The next highest country is Canada with 17 square feet per capita, Norway is next with 10 square feet, all the mature European countries are in single digits.
Further, the 24 per square foot number is not credible. There are 17.7 billion square feet of total retail establishments (both in and out of shopping centers) versus a population of 323 million or a startling 54.9 square feet per capita.  Granted this larger number now includes car dealerships and the like, but it also includes all the freestanding Walmarts, Costcos, etc.

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