Ten Reasons for the Current Retail Outlet Closings

Despite the current wave of retail and dining establishments closing some or all their stores, it's important to note the industry's resilience. With 25 years of retail experience and a keen eye on the stats, I foresaw this shift as a sign of the industry's adaptability, not a reason to panic. It's time for some adjustments to be made.

The retail real estate landscape has significantly changed over the past 20 years. Here are some key statistics and trends comparing retail space today to 20 years ago:

U.S. retail sales have shown steady growth, from around $3.58 trillion in 2004 to approximately $8.67 trillion projected for 2024. This growth, driven by increased online venues and brick-and-mortar replication, presents a promising outlook for the industry's future.

E-commerce Expansion: E-commerce's share of total retail sales has grown significantly, from less than 5% in 2004 to over 15% in 2022. This is expected to reach 22.6% by 2027, driven by increasing consumer preference for online shopping.

Retail Rent: The average monthly asking rent for shopping center space in the U.S. has substantially changed. For example, in 2024, the average rent is approximately $24.92 per square foot, with higher rates in prime locations like malls, which can reach around $33.82 per square foot. This reflects a significant increase compared to 2004 rents. (Statista)​​ (Fit Small Business)​

Vacancy Rates: The current retail real estate vacancy rate in the U.S. is at a 10-year low of 4.1%. This contrasts with the higher vacancy rates experienced during the economic downturns over the past two decades. For instance, the vacancy rate for shopping malls is notably higher at 8.8%, influenced by changing consumer behaviors and the rise of e-commerce​ (Fit Small Business)​​ (Website Builder Expert)​.

Space Net Absorption: The demand for retail space has fluctuated significantly. In 2023, net absorption was recorded at 230.6 million square feet, which, although higher than pre-pandemic levels, represents a decrease from the peak absorption rates seen in the early 2020s. This indicates a trend towards more cautious expansion and consolidation in the retail sector​ (Fit Small Business)​

Shift to Omni-channel and E-commerce: Over the past 20 years, there has been a marked shift towards integrating online and offline retail. E-commerce accounts for a substantial portion of retail sales, with projections indicating continued growth. As of 2022, e-commerce comprised 15% of total retail sales in the U.S., a significant increase from less than 5% in 2004​ (Website Builder Expert)​.

Economic Pressures: Inflation, rising operational costs, and economic uncertainties have pressured retailers to optimize their physical presence. Many have reduced their number of brick-and-mortar stores to focus on more profitable locations and invest in digital infrastructure.​ (Fit Small Business)​​ (Website Builder Expert)​

Consumer Preferences: A notable shift in consumer preferences towards experiences over goods has impacted foot traffic in traditional retail stores. This change has driven retailers to innovate and offer more experiential and interactive shopping environments​ (Website Builder Expert)​.

Several factors contribute to the closing trend, reflecting the evolving landscape of consumer behavior, economic shifts, and technological advancements. Here are ten key reasons behind the current wave of retail outlet closings:

1. The E-commerce Boom

The e-commerce boom has fundamentally transformed the retail industry. Consumers now favor the convenience, variety, and often lower prices online shopping platforms offer. Industry giants like Amazon have set high standards for swift delivery and hassle-free returns, making traditional brick-and-mortar stores less appealing.

2. Changing Consumer Preferences

Today's consumers prioritize experiences over possessions. Millennials and Gen Z allocate more of their budget to travel, dining, and entertainment than physical goods. This shift in spending habits has led to a noticeable decrease in foot traffic in traditional retail stores. However, Gen Z seems to be shifting the dining part of the segment toward less dining out.

3. Economic Uncertainty

Economic factors such as inflation, wage stagnation, and job insecurity have tightened consumer spending. When disposable income is limited, non-essential retail purchases are often the first to be cut from budgets, leading to declining sales and eventual store closures. Any retailer who feels that they will continue to have double-digit growth forever has been delusional, and that attitude is now showing up strong.

4. High Operational Costs

Running a physical store involves significant overhead costs, including rent, utilities, staffing, and inventory management. Adding the rise in retail theft to the equation becomes even more of a burden. As these costs rise, especially in prime urban locations, many retailers find it financially unsustainable to keep their outlets open.

Retail theft incidents have been on the rise. For example, in 2023, shoplifting incidents increased by 16% compared to 2019.​ (Fit Small Business)​ Organized retail crime (ORC) has become a significant concern, with major cities like Los Angeles, New York, and San Francisco reporting substantial increases in shoplifting and retail crime incidents.​ (DealAid)​​ (Tech.co)​

Retail theft cost the industry over $112 billion in 2022, up from $93.9 billion in 2021​ (DealAid)​. The average loss per shoplifting incident was $514.71 in 2022, and retail shrink (loss of inventory due to theft, fraud, and errors) continues to be a major issue for retailers. (Fit Small Business)​​ (DealAid)​

5. Shift to Omni-channel Retailing

Retailers increasingly adopt an omnichannel approach, integrating their online and offline operations. This strategy often involves reducing the number of physical stores while enhancing digital capabilities to provide a seamless shopping experience across multiple platforms. However, not all have succeeded due to the lack of e-commerce knowledge and commitment.

6. Supply Chain Disruptions

Recent global events, including the COVID-19 pandemic, have caused severe disruptions in supply chains. Delays, shortages, and increased shipping costs have impacted inventory levels and profitability, prompting some retailers to close underperforming stores. Yes, the pandemic highlighted the disruption, but it has been brewing for 20 years. Transportation and import technologies have been slow to improve and streamline. Retailers have been slow to partner with manufacturers to streamline assortments and deliveries.

7. Rise of Direct-to-Consumer Brands

Direct-to-consumer (DTC) brands bypass traditional retail channels, selling directly to consumers via their websites. This model allows for better branding, customer experience, and pricing control. As DTC brands gain popularity, traditional retailers face increased competition. Some of this movement has been due to unfavorable pressure from companies like Amazon or Walmart. Both continue to press for lower prices and concessions with no performance guarantees.

Another disruption is in eyeglasses, with the expansion of online services like Zenni, glassesusa, eyebuydirect, etc.

8. Technological Advancements

Technological innovations, such as augmented reality (AR), virtual reality (VR), and artificial intelligence (AI), have enhanced the online shopping experience. These technologies enable consumers to try products virtually, receive personalized recommendations, and enjoy interactive shopping, reducing the need for physical store visits. While some of this technology is still in growth mode, it is having an impact.

Brick-and-mortar outlets have been slow to adopt experience enhancements using technology. They primarily focused on cutting costs instead.

9. Real Estate Market Dynamics

The commercial real estate market has been volatile, with property values and rental rates fluctuations. Some retail locations have become too expensive to maintain, especially in high-demand areas. The other area often overlooked is the cost of business in high-crime neighborhoods. These have led to strategic decisions to close no longer economically viable outlets.

10. Environmental and Social Responsibility

There is a growing awareness of the environmental and social impacts of retail operations. Consumers and companies are increasingly prioritizing sustainability and ethical practices. This shift has led some retailers to re-evaluate their physical presence, opting for fewer stores and more sustainable practices. I don't believe we have seen the full impact of this yet. Packaging disposal is an area we have not seen stressed yet, but it is coming.

While the retail industry is continually being transformed by technological advancements, changing consumer behaviors, and economic pressures, we must remember that retail has always been dynamic. While closing retail outlets presents challenges, it also opens opportunities for innovation and adaptation in the evolving marketplace. Retailers that can effectively integrate digital and physical channels, respond to consumer demands, and operate sustainably are likelier to thrive in this new era.