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Retailers Keep Going Out Of Business But Here’s Why Investors Shouldn’t Panic

It seems news about the “Retail Apocalypse” never ends. Every day, we hear about major retailers filing for bankruptcies or closing stores. In the past, these kinds of stories would seem like a harbinger of a significant recession, or worse. But not this time.

While the Retail Apocalypse is real, floundering retailers and the shuttering of innumerable brick and mortar stores does not signal a fundamental problem with our economy. Let’s explore why.

Of course, facts don’t lie. Let’s focus for a moment on the facts underlying the Retail Apocalypse. For the past two years, retailers across the country – located in both major metropolises and small town America – have been struggling to keep the lights on. So far this year, we’ve seen nine retail bankruptcies. To give perspective, that’s as many as all of 2016, and we’re still in the first half of the year.

Thousands of stores are closing this year, and these are names we all know. Companies like Macy’s, Sears, and J.C. Penney have each announced they will close more than 100 stores. Game Stop is closing 150 locations globally, but this number only accounts for about 3% of the company’s total locations.

For other retailers, closures carry a more dramatic impact. Footwear outfitter Crocs is closing 150 of its 550 stores, and Wet Seal is closing all 171 of their stores. RadioShack filed for bankruptcy for the second time just last week and is slated to close 552 of its stores, which represents about 36% of the chain’s total storefronts. The company has said it will “continue to evaluate” the fate of its remaining 1,000 stores.

So when we hear news about retailers closing down or going under on this level, it’s only natural that we become fearful of an impending recession, or even depression. But, we have to remember to consider all of the facts – we need a broad view here. And the facts show us that we’re not headed toward the R- or D-word. The reality is quite the opposite: the American consumer is stronger than ever.

Yes, retailers are continuing to go out of business, but it’s really just a winnowing of the herd. Think about the stores that closed – most targeted niche markets, weren’t committed to an online presence or didn’t focus on creating a positive shopping experience. So, for stores like this, these are dark times. But for stores focused on broad appeal, enjoyable shopping experiences, and a strong online presence, business is still booming.  For example, retail giant Costco is slated to open new stores this year.

Here’s what’s really happening, and it’s quite simple. Americans are just spending their money differently than in decades past. There are a few key factors that support this truth.

1. The first underlying factor is the recent rise of e-commerce. Let’s consider the numbers. In January of 2000, national department store sales tallied to $232 billion, while e-commerce sales came in at just $27 billion. Fast-forward to January of 2016, and department store sales totaled just $154 billion, while e-commerce raced ahead to $344 billion. These numbers show an $80 billion fall in department store sales and a $320 billion rise in e-commerce. This is a staggering shift. But these figures show us that consumers aren’t buying less, they’re just buying through different avenues. So while mall shopping has declined, online shopping has exploded.

2. A second crucial fact goes to the issue of malls themselves. According to research analysts, between the years of 1970 and 2015, the number of malls in America grew more than twice as fast as the population. This overbuilding led to an obvious (even if not expected) result –there wasn’t enough demand to meet the supply. A similar scenario happened to the Las Vegas condo market. During 2005-2007, overbuilding led to price declines between 50 and 60%. The decline wasn’t because people didn’t want Vegas condos anymore – it was because developers had created an extraordinary supply/demand imbalance. The same is true for the state of the American mall.

3. The final root factor in the retail shift is that these days, Americans are choosing to invest their money in experiences over material goods. Consumers seem to prefer heading out to have dinner and drinks with friends instead of hitting the mall for a new pair of designer jeans. This is a trend that has been growing since the Great Recession. In the 1990s, retail grew dramatically, but something changed. Since 2008, spending on clothes has gone down, and spending on travel, hotels, flights, and visits to restaurants and bars have soared. Case in point: 2016 marked the first year that Americans spent more money in restaurants and bars than grocery stores. Our choices about how we enjoy our money have shifted, and continue to.

In the above graph, we see sales go from $320B to $650B in 2017. That’s experience shopping!

So, from an economic perspective when looking at the bigger picture we’re in good shape, even if your news feed paints a different picture. Consider all the facts, and you’ll see there’s no need for alarm about the broader economy. Money is still flowing in our nation’s marketplace – it’s just traveling different channels than it has before.

Check Out: Recent Retail Bankruptcy Filings Show That The Way Americans Shop Is Changing

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