In the latest in-depth overview of the troubles facing the US retail sector, which also serves as a recap of several previous articles posted on Zero Hedge, the FT's Robin Wigglesworth asks "Will the death of US retail be the next big short", something covered here back in March in "Why Some Think This Is The Next "Big Short" and subsequently in "The Retail Bubble Has Now Burst": A Record 8,640 Stores Are Closing In 2017."
That said, there are several notable incremental data points, including dramatic soundbites by what appear to be new shorts in the space such as Stephen Kethcum of Sound Point...
The reshaping of how Americans shop by the internet is accelerating. The US retail industry faces a growing headache, with 10 companies pushed into bankruptcy already in 2017, according to Standard & Poor’s. Even Sears, a once mighty department store chain founded in 1886, is now tottering.
“We think the magnitude of this short could be bigger than subprime,” says Stephen Ketchum, the head of Sound Point Capital, a hedge fund that manages more than $13bn in assets. “Go to the Amazon website and type in ‘batteries’. What you see is just the tip of the future iceberg. And retail is the Titanic.”
“Because it is such a slow bleed, it is important to get both the direction and the timing right,” Mr Ketchum says. “We are focused on shorting the companies that have reached a tipping point for one reason or another.”
... as well as some familiar faces:
Victor Khosla, founder and senior managing partner of Strategic Value Partners, a $6bn distressed debt hedge fund, says the list of troubled retailers his firm now monitors is “extraordinarily long”, but he is staying well away.
“Trying to figure out the bottom is hard. We have spent a lot of energy understanding these businesses, and have concluded that the vast majority of them are uninvestable,” he says. “Many of these were great businesses at some point in time, but the internet and changing consumer habits have destroyed them.”
... and some skeptics:
David Tawil, president of Maglan Capital, says: “Although it is a good short, I don’t think that, at this point, it is the short, nor is it a big short.”
The balance represents several charts familiar to regular readers such as the collapse of traditional retail offset by the surge of online stores:
... the relentless capture by Amazon of not only market share but also market cap:
... both underscoring the so-called Amazon effect:
Shuttered shopping malls and struggling department stores are the most visible example of what analysts have termed “the Amazon effect”, as spending migrates from bricks-and-mortar shops to the online realm dominated by the likes of Jeff Bezos’s internet retailing giant. But it is also likely just the first stage, with some investors predicting that every corner of commerce is about to experience a painful burst of creative destruction as shoppers migrate online.
“There’s a big shakeout in how people consume goods,” says another big hedge fund manager. “It will have a massive economic impact . . . It is already a bad year, and it feels like it has the momentum to become something bigger.”
Wigglesworth also points out the familiar CS chart of upcoming store closures by square footage...
...and by total units:
The FT also provides a debatable defense of why brick-and-mortar is better than online:
... retail is not going away, and as some chains go out of business the survivors will pick up some of their customers. Most economists expect wage growth in the US labour market to pick up in the coming years, helping to support consumer spending.
“Websites cannot give you goosebumps, and that is where physical stores still have an advantage,” says Byron Carlock, head of PwC’s US real estate practice. “I don’t see consumers shying away from consuming. Good retailers will figure it out.”
But what we found most interesting was two-fold: first the realistic assessment of what happens once the next recession strikes, due any minute according to the near negative print in C&I loan growth:
... what looks like a slow-moving train wreck could speed up should American consumers — who at the moment are enjoying low interest rates and subdued unemployment — suffer another shock. For example, in the unlikely event that the Federal Reserve embarks on aggressive rate rises and pushes the economy into a recession, retailers could be hit both by higher borrowing costs and consumers tightening their belts.
And the second was the FT's catch of a data point first observed by Goldman, namely the dramatic difference in labor intensity between online and conventional retail companies. Here's the punchline:
The impact of the retail sector’s problems on the fabric of the US labour market is likely to be severe. Goldman Sachs estimates that ecommerce companies only require 0.9 employees per $1m of sales compared with 3.5 for a bricks-and-mortar store, and the sector is on course to lose about 100,000 jobs this year.
As WIgglesworth points out, while initially modest, this transition is "only the beginning of a broad, accelerating trend as even more shopping migrates online."
He is correct, because it is this labor transformation that is the biggest threat from the quasi-robotic, mostly part-time labor Amazon, and its upcoming monopoly: the bigger Amazon, and other online retailers become, the fewer workers will be needed to operate with the same revenue efficiency in what has traditionally been one of the largest employment sectors in the US. Here it is charted:
For the concluding soundbite we go to, Nadeem Meghji, head of North American real estate at Blackstone, the world’s biggest investor in property, who says that “it’s a slower bleed than the housing crash, but that was a cyclical story. Retail is different because it’s slower, but secular."
“The social and economic consequences are going to be huge,” warns Mr Meghji. “It’s a massive secular change to how our economy and society operates.”
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For our take on this disturbing social and economic transformation, we urged readers to skim "The Retail Bubble Has Now Burst": A Record 8,640 Stores Are Closing In 2017