Low Retail Property Prices May Mean Trouble for Big Chains
Although retail sales and sector share prices have rallied back to the all-time highs they hit in 2007, retail property prices remain depressed. As the chart below shows, this unusual divergence has grown significantly since the latter half of 2008.
There are any number of possible reasons for the widening disparity. Among them:
- Better-than-industry-average sales growth at small and nontraditional online retailers, which has bolstered overall sales without creating a concomitant need for additional stores and malls. For the most part, large online retailers like Amazon (AMZN) and well-known bricks-and-mortar chains with significant online presence like Best Buy (BBY) are included in the retailing index.
- Consolidation in the sector. A shrinking number of large firms have garnered a rising share of overall consumer spending without having to add to their existing selling space. The empty facilities of failed competitors, meanwhile, have boosted overall supply, thereby depressing prices.
- Shifting consumption patterns. People are paying more for essentials like food and fuel, and less for myriad goods sold at other outlets, including department stores, big-box retailers and national chains that might otherwise be expanding and soaking up commercial real estate that is on offer.
- The impact of federal government action. Bailouts, stimulus programs and Federal Reserve easy-money policies have bolstered stock prices and boosted high-end consumption via the wealth affect.
One could argue that these developments aren't necessarily bullish for the share prices of the retail firms that have been at the forefront up until recently. For one thing, if online up-and-comers are growing fast, logic suggests they're gaining market share at large firms' expense. With employment and technological trends likely to draw a growing number of competitors into the online marketplace, the largest, least-nimble firms will find it hard to keep pace.
Moreover, while industry rationalization and consolidation will almost certainly continue, several years of essentially flat real (inflation-adjusted) sales growth suggest that the low-hanging fruit has probably been picked. Best Buy, for instance, has benefited from the failure of Circuit City, but how many other large, category-specific competitors does it have now? Walmart (WMT) is probably its primary rival nowadays.
And if essentials like fuel and food are accounting for a larger share of overall consumer spending, can that really be seen as a sign of a retail resurgence? People may be opening their wallets a bit wider, but it's not because they're more confident about the future. It's because they have no real choice.
Finally, while the Federal Reserve's latest round of quantitative easing -- QE2 -- and other such efforts have undoubtedly propped up share prices and afforded the wealthy more spending power, the average American hasn't really benefited as much. At the same time, the political winds are shifting in favor of greater fiscal prudence and a constrained Fed. Retailers at the top of the food chain will invariably suffer as a result.
In sum, the chart above doesn't just help explain how things got to where they are. In my view, it also offers some insights about where they're headed next. Among other things, it suggests that while bigger has been better these past few years as far as retailing is concerned, a reversal of fortunes is likely at hand. Smaller retailers, most of which won't be publicly listed, stand to benefit in a world where the ability to adapt quickly to changing economic, social and technological circumstances offers a critical advantage.
With that in mind, one can only conclude that the share prices of the larger operators will suffer as a result.