Can Retail Stocks Survive the Death of the Shopping Mall?

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As consumers do less shopping in physical stores and more shopping on the Internet, retail stocks will need to evolve or face extinction.

And if tech entrepreneur Marc Andreessen is right, they don't have much time. In an interview with PandoDaily's Sarah Lacy, the co-founder of Netscape and renowned Silicon Valley venture capitalist unabashedly predicted the demise of brick-and-mortar stores by the end of the decade.

"Retail guys are going to go out of business and ecommerce will become the place everyone buys. You are not going to have a choice," Andreessen said. "Malls are going under, and there's more to come. These chains are much closer to going under than you think."

He reasons that the superior business model of online retailing will undermine brick-and-mortar rivals.

"Retail chains are a fundamentally implausible economic structure if there's a viable alternative," he says. "You combine the fixed cost of real estate with inventory, and it puts every retailer in a highly leveraged position. Few can survive a decline of 20% to 30% in revenues. It just doesn't make any sense for all this stuff to sit on shelves. There is fundamentally a better model."

As extreme as it sounds, the transition is already well under way in some retail categories.

Online retailer Amazon.com (Nasdaq: AMZN) played a major role in undermining the business of two of the country's largest bookstore chains, Borders, which went out of business in 2011, and Barnes and Noble Inc. (NYSE: BKS), which recently announced plans to close a third of its stores over the next decade.

And the popularity of online video streaming such as that offered by Netflix Inc. (Nasdaq: NFLX) torpedoed video rental giant Blockbuster, which filed for bankruptcy in 2010 and was eventually bought by Dish Network Corp. (Nasdaq: DISH).

Why Retail Stocks Are Under Pressure

Many retailer stocks are already feeling the pinch from online competition, even though ecommerce only makes up about 5% of sales.

But the trend is clearly moving in the direction of online sales. Ecommerce sales in November and December of 2012 increased 13.7% from the year before, while U.S. chain stores saw just a 3.1% increase in the same period.

Retail stocks ignore the trend at their peril. Amid all its other problems, J.C. Penney (NYSE: JCP) in its third quarter last year saw online sales decline 37%, compared with a total sales decline of 26.6%. JCP is down more than 50% over the past year.

In addition to the convenience of ecommerce, retail stocks like Best Buy (NYSE: BBY) are getting slammed by the practice known as "showrooming," where customers check out products in a physical store before going home to order them online for a lower price. BBY is down more than 32% over the past year.

Last week Credit Suisse predicted in a research report on retail stocks that companies would close more physical locations in 2013 as sales there migrate online.

Retailers Must Embrace Ecommerce to Survive

While ecommerce is surely where retail is headed, Andreessen's vision of a world utterly devoid of physical stores seems a bit much.

Instead, they're likely to adapt to customers' changing habits.

A survey last summer by CapGemini of 16,000 online shoppers in 16 countries found that 51% expect that by 2020, physical retail locations will evolve into "showrooms" where they will select and order products.

And not all retail stocks will go under, either. Some have already started their transition from brick-and-mortar retailing to ecommerce.

TJX Companies Inc. (NYSE: TJX), which owns the brands T.J. Maxx and Marshalls, shut down its A.J. Wright chain in 2011, closing 71 of the physical stores.

On the ecommerce front, TJX announced in December that it had bought online retailer Sierra Trading Post for $200 million and is preparing to launch online brands for both its HomeGoods and Marmaxx divisions.

Nordstrom, Inc. (NYSE: JWN) bought two online retailers in the past two years, HauteLook in 2011 and Bonobos last year. At the same time, the company has made a concerted effort to make its own Web site competitive with those of successful online retailers.

All retail stocks will need to follow the examples of TJX and Nordstrom if they expect to survive in the long term.

"We've been thinking about where growth is going to come from across all retail over the next 10 years," Jamie F. Nordstrom, the head of Nordstrom.com and the great-grandson of the company's founder, told The New York Times following the Bonobos acquisition last April. "And certainly square-footage growth is not where that growth is coming from."

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Join the conversation. Click here to jump to comments…

  1. don | February 1, 2013

    Well there is a big difference between book stores and many other stores in the mall. Clothes will always be sold in stores as it is important to try them on for size. There are many other products that will be continued to be sold in stores. Now these stores will continue to thrive if they have a online presence for people that prefer that mode of shopping.
    There will be a decline as time goes on but 8-10 years is much too short a time period for all this 'doom and gloom' to happen.
    The problem with predictions based on trends is that trending rarely is consistant and other factors interupt those trends as time goes by. The huge word is IF!

  2. richard | February 1, 2013

    This article is grossly over exaggerated. Sure, online shopping is growing leaps and bounds, however, there are companies that are showing year over year growth time and time again in comp sales – why? Because people are still coming to the brick and mortar stores. More and more research is done online, but the store is still an important place to shop.
    Also, in the US, 2 premium outlet centres were opened in 2012 – these are not small locations, but 100's of stores. Again, we are still seeing a growth out there in the brick and mortar.

  3. H. Craig Bradley | February 3, 2013

    PORTABLE "BUBBLES"

    Increasingly, consumers and the public go about their repective days in a "portable lifestyle Bubble". By this I mean they have an ear bud attached while listening to their favorite I-Tunes or are carrying on a private (while in public) telephone conversation in the car or while walking about town. This "portable bubble" extends to their homes (base camp), as well.

    If affluent enough ( 1%' ers), the person(s) return to their home property after an outing or work day through a gated, private entrence. This secures their privacy and keeps intruders away. So, individuals would be expected to shop more online when possible to reduce the need to go into crowded retail outlets and malls filled with noisy and sometimes smelly (offensive) strangers. Traffic can be avoided at the same time, a definate plus when time is of the essence.

    Sitting in a car for more than 1 hour a day for work and other activities is an opportunity cost for many highly successful individuals. The masses (47%) don't care about such matters and will continue to go to the malls as always. They collect their Federal entitlements and freebies ( Food stamps, 99 weeks of unemployment, SSDI, etc.).

  4. Faith La Riviere | February 9, 2013

    People are social animals and will continue to want to be in physical stores. I suspect that many will do as I do: There are many products or styles which I cannot always find in my favorite stores so I just order them online from the manufacturer. But when it comes to books or just looking to see "what's out there", there is nothing like stores.

    For H. Craig Bradley: I also suspect that we are going to find that these people who are totally alienated from their surroundings and live in a "bubble" will also be social problems. As I stated, we are social animals and regardless of how we alienate ourselves from that aspect, we have a psychological imbalance taking place.

    I would love to know what the age is of the venture capitalist who has made that prediction. I suspect that he is young and doesn't really understand people very much. I know many people in their 40s who are starting to differentiate when they operate digitally and when they don't and many are returning to the "paper" newspaper and magazines when they finally realized that they don't actually "read" the digital version in the same way and that there is something missing.

    When I shop online, it is a done deal and takes no more time out of my life but I sure do enjoy traipsing through stores when I am not out looking for a specific item. And no, once I find something which I could use, I do not check the price online and buy it that way. I am a full supporter of brick-and-mortar stores but also shop online.

  5. Anonymous Caregiver | February 27, 2013

    Guess what people? Women who have always done the lion's share of shopping have a new thing to deal with: massive societal aging. If they're not becoming senior citizens themselves, they are likely taking on the care & maintenance of a senior citizen themselves (assuming they and the senior relative, friend or neighbor is not in the tiny well-off 1% of the population and can buy their way out of this dilemma with money and a personal shopper).

    Shopping malls are not friendly to most senior citizens. I'm not talking about the healthy mall walking crowd retailers want to attract (which are a minority of seniors anyway), I'm talking about those with all the old chronic health issues plus those with bad health consequences from the overweight/obesity epidemic and the increasing number of people with dementing illnesses.

    Younger women who have to manage themselves, their jobs/careers, their spouses, their kids and now increasingly their parents don't have time to either wander the malls themselves or take an increasingly infirm relative, friend, neighbor or loved one shopping, especially those who have issues with either the instrumental activities of daily living (think managing finances and cooking and yes even shopping whether in person or online) or just the plain activities of daily living (bathing, eating, dressing, toileting…these latter ones are the only ones covered by any kind of health insurance and even that coverage is stingy so there goes some of the discretionary money for shopping).

    So I don't see any choice but to buy items for the infirm elderly (or for that matter for anyone Mom traditionally has to shop for) but online and in ever greater numbers. Especially not in a world that is already hostile to women, who apparently after being sent out to work to compensate for stagnant incomes (no rise in them since the 1970s so 2 incomes are needed to stay middle class unless you want to forego all the modern conveniences and live a middle class lifestyle circa 1971 levels of comfort) are supposed to be thankful they have paying jobs outside the home and better not take too much time off to deal with a sick or demented parent or family member because there are so many others ready & eager to take their place.

    Andreeson is right but it's not because it's a happy consumer paradise that awaits us in the future, it's more like how we're going to manage yet one more person and the associated tasks we need to manage.

    Believe me, I'm in my 40s with a widowed father with Alzheimers (who has forgotten how to use the Internet) and shopping is no longer fun. He's getting harder to manage outside the home, he's going to need every penny he has at some point for long term care (assuming he doesn't 'get lucky' and die of some other illness first) in a locked-down 'memory care center' (which will cost $7000-$8000 a month) and well people who don't have dementia and don't yet know anyone who does have it in their circle of loved ones don't appreciate his condition when I do take him out for shopping and a meal. So yeah, it's increasingly 'Amazon here I come' to get a lot of my buying done.

    Sorry to Wal-Mart and my local malls and big-boxes, but you're not equipped to deal with me, with sick or demented old people and with my life's new responsibilities and I am increasingly the future of consumer reality. You better learn from me and my kind now or get ready to fade into the past.

    And to everyone else, I suggest you get comfy with doing a lot less buying overall and what is left to be done online in bits and snatches of time you can wrest from your schedule.

    Of course we could all give up shopping and go back to being citizens first and put being consumers further down the priority list but as that's like 70% of the economy, that's not going to happen. So it's increasingly going to be shopping online or not at all.

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