Moody's: All Of Retail Isn't Dying, But Brick-And-Mortar Probably Is

We have continually reported on many of the sure-fire signs that brick-and-mortar retail, as a sector, is still feeling enormous pressure from online retail and is, for the most part, simply disintegrating. On top of a number of bankruptcies over the last year, including stores like Bon-Ton and Toys 'R' Us, retail department store space is also freeing up and landlords are having trouble finding tenants.

A new report out by Moody‘s, however, seeks make the argument that it isn’t all of retail that’s dying, just mainly brick and mortar. It also makes the point that e-commerce is what's primarily holding up "retail" in general. The first point we'll take with a grain of salt, the second we can concede a little easier. 

The article, which calls the decline in brick and mortar retail a "relatively minor change in the economy" noted that many of the employment shifts happening as a result of declining jobs in brick-and-mortar retail have been made up by big players in ecommerce:

In the aggregate, it’s true that employment has flatlined at brick-and-mortar retailers, which we define as NAICS codes 44 and 45 minus nonstore retailers. However, despite the weak recent growth, brick-and-mortar retail employment is still close to a historical high at 15.3 million, falling only 22,000 jobs below the peak reached in 2017.

The historically high number of retail jobs overall does mask one negative trend: The growth of retail has not kept up with the rest of the economy. At the peak in the mid-1980s, retail made up 11.8% of overall employment. By 2017, it had fallen to 10.4%. So is this the much trumpeted death of retail? This is overblown for two reasons.

The report notes that this only brings retail's share of the labor maket to the same levels it was at back in the 1970's. Somehow, the report uses this mined piece of data to come to the conclusion that the sector "isn't entering new territory" and that retail overall may not be in as bad of shape as everyone thinks it is. It continues:

Second, it’s useful to place this into a broader context by comparing it to two other industries that illustrate what a major structural change in the economy actually looks like: the decline of manufacturing and the rise of healthcare. As a share of employment, retail looks relatively flat over the past 50 years compared with these industries, generally fluctuating between 10% and 12%. In contrast, automation and globalization have pushed the manufacturing share of employment from 25% in 1970 to less than 9% today. On the other side of the ledger, the growth of healthcare spending has pushed healthcare employment from 5% of jobs to 13%.

The report also goes on to note that trends compared between sectors, despite not standing out too much regarding retail as a whole, have painted a bleak picture for department stores in general:

The decline in brick-and-mortar retail has been stronger among some segments, like department stores. However, this has not been mostly about a contraction in employment, but a shift to e-commerce. Employment gains in e-commerce are visible in warehousing and nonstore retailers, the latter of which includes e-commerce sellers like Amazon. Over the last decade, nonstore retailers have added 157,000 jobs and warehousing has added almost 369,000, which combined more than offset the job losses of 392,000 in department stores.

Moody's concludes with a much brighter picture than we have pieced together from our own findings, calling this shift a "necessary" one occurring in a "dynamic economy":

While e-commerce is undoubtedly growing and has been a factor in the closing of some retailers, the brick-and-mortar retail sector overall is not undergoing the kind of structural job loss seen, for example, in manufacturing. Instead, retail is undergoing a process of gradual change that is necessary in a dynamic economy, but it is not yet a major disruption or cause for concern.

We're not that quick to agree.

Recall, we recently reported on how mall properties were starting to turn up vacant at a higher clip than ever before. In addition to that, we reported that retail landlords were having difficulty bringing in income because brick and mortar stores were processing online returns, which was eating away at their sales figures that are used to make up a percentage of their rent.

As if the rise of e-commerce on its own was not enough to singlehandedly cripple brick-and-mortar retail, retail property owners are getting hit with collateral damage. Online returns being made in-store, which are then subtracted from a store's sales, are turning out to cost property owners "material" amounts of money. Many retail property owners are paid rent that is correlated to the amount of sales consummated on their property, but the convenience of being able to buy online and return in store has put significant pressure on these figures and - in turn - property owners' earnings. Bloomberg reported:

Mall owners, already squeezed by e-commerce and spending billions on property makeovers to draw shoppers, have a new headache: retailers deducting returns for items bought online from their sales figures.

David Simon, chief executive officer of Simon Property Group Inc., says a “significant number” of tenants are underreporting sales and that the company, the largest U.S. mall owner, is negotiating with them to find a solution.

For America’s beleaguered retail landlords, sales per square foot is a crucial metric, used by investors to gauge their financial health. In addition to the dollars lost themselves, a low number can damage a mall’s reputation on Wall Street.

The time and resources spent to audit these returns, as suggested in the Bloomberg piece, will also come at a cost, though maybe not as material as the returns themselves. Regardless, it is retailers and their landlords both trying to get the better of one another, and both trying to cauterize their respective wounds quicker than the other.

But this solution seems temporary in nature and unlikely to be big enough to replace the steady stream of cash that comes from larger corporate tenants. And the "returning in-store" model makes sense - when people are returning items, they want their credit or their money immediately, so they don’t mind making the trip up to the store.

It was just 2 weeks before that when we noted that the death of retail stores was continuing. We documented that over 77 million square feet of retail real estate has closed this year and that 2018 will easily pass 2017's record of 105 million square feet closed. The silver lining to the industry was supposed to be that property values would hold up. This argument was made by real estate investment trusts as well as activist investors and analysts who tried to put a positive spin on the death of brick and mortar retail. But instead the bid under former retail property is at risk of falling off as supply is starting to get far ahead of demand:

Real estate can put a floor under the value of a retailer and make it easier for the company to borrow. Maybe a particular store concept doesn’t work out as consumers’ tastes change, but in that case, investors can always sell the land and buildings to someone with a better plan. Long-term leases can be similarly valuable. But what if the problem isn’t that a particular store is out of fashion, but that consumers are just shopping less at brick-and-mortar retailers in general? As more storefronts empty, the valuation floor will look wobblier.

While the Moody's report goes on to make a compelling case that retailers aren't dead yet, we believe it’s worth noting that brick and mortar, as a sub-sect of retail, likely is on its way.


Throat-warbler… Sun, 05/27/2018 - 14:03 Permalink

Macy's bought the local brand Meier & Frank, which was in business since the late 1800s.  They promptly changed the name and started selling (more) pure Chinese, Bangladeshi, and Malaysian/Indonesian junk.  Is it any wonder that their business is in trouble?  What used to be a relatively high-end store deteriorated to the equivalent of TJ Maxx.

Erwin643 WhyDoesItHurtW… Sun, 05/27/2018 - 16:15 Permalink

When I buy metal roofing at the Home Depot website, I know there won't be anyone there (at the delivered-to store) who knows where I'm supposed to pick-up my stuff.

Apparently there's a system where the stuff is just left behind the building, unsecured, with your name on it. I learned this after my first encounter.

This last time, I went there and there were no employees to be seen. I just went to the back of the store and loaded my stuff. I didn't even need to bring my receipt with me.

In reply to by WhyDoesItHurtW…

RabbitOne Throat-warbler… Sun, 05/27/2018 - 14:51 Permalink

Through the 1980s my partner and I owned a computer store. We saw many of the retail trends that were happening and heard many other retailers tell us what was going on.

The retailers biggest trend of the last 50 years has been the baby boomers. Most of the shopping center and mall construction has been to service baby boomers in their prime spending years. As boomers grew retailers failed like Kmart, Circuit City, Montgomery ward, A&P super markets, Ames, Spiegel, Linens ‘n Things, Tweeter, Mervyn’s, Heilig-Meyers, Borders, B.Dalton, Fashion Bug Kay-Bee Toys,  Blockbuster and Toys R’Us to name a few.  True many of these retailers had bad management or were put out of business by the internet. But the majority died because they could not service the needs baby boom generation or the needs of generations that came after.

The retailers biggest problem for the last 50 years has been the growth of government.  Government has viewed retail businesses as a tax feast. The average cost per sq ft for retail leases has risen in some communities 10% per year because of government taxing retail space. Next government has forced retail wages higher (i.e. $15 an hour) and demanded benefits for retail employees(i.e. $800 month health care per worker). Many retailers have been driven out of business because their over head cost are so high the business model is no longer profitable.

The internet I will leave to some one else to explain.

In reply to by Throat-warbler…

NemesisteM Sun, 05/27/2018 - 14:07 Permalink

Brick and Mortar will be a thing of the past.  Everyone shops online and it will increase with time.  FedEx stock will continue to rise as people will utilize the online marketplace.  Amazon and Ebay will rule.  I expect drone pizza delivery to expand also.  It will be like the movie Wall-E, where the people's arms will evolve to become shorter and only long enough to pick up a milkshake and open a package. 

zvzzt sun tzu Sun, 05/27/2018 - 16:01 Permalink

Buy three sizes, keep the good ones and return the rest. Free shipping and all.. [edit: just found out that returns must be free of shipping/fees (in Europe), except if you keep part of the initial order]

As a footnote, Returns on certain clothing is extremely high and often not even worth the cost of restocking. I understood that H&M dumps all clothing below EUR 15 rather that restocking because that would be too expensive (goes to dollar stores, I guess?). 

Lots of returns on evening- and party dresses too (well over 60%). People wear them once to a gala and then return them (got that info from a close source).  

Personally I do buy quite a lot online (never amazon), but do prefer shops if I get the chance. Getting some really good deals nowadays, especially on clothing and the like. More importantly, get to see some non-mainstream stuff you won't find online while casually browsing. One of the big disadvantages of algos "I do not want to see things that are similar or match my interest". I want to see stuff that I never imagined myself. Surprise me fucking algo (which they can't...). 

In reply to by sun tzu

besnook Sun, 05/27/2018 - 14:10 Permalink

this is actually a really big deal for marketing more than retail. in the 70s, tv finally covered almost everyone from just a few people in the 50s. so all the tricks of tv marketing were unleashed upon the people for almost 50 years only to end up at the same place they were at the beginning. has tv marketing (and now internet marketing) been as effective as the marketers tout themselves? now that viral grassroots social media is a bigger driver of consumer trends?

Alexander De Large Sun, 05/27/2018 - 14:22 Permalink

Brick and mortar businesses will become public restrooms and needle exchanges for the homeless.

And warehouses that sell bricks and mortar will become gigantic public restrooms and needle exchanges for homeless giants.

Praise God

Bigly homiegot Sun, 05/27/2018 - 14:39 Permalink

Too many.

But, Online will become passe like some kids are starting to reject social media. People will be bored and WANT to keave their house and shop. Online only is ISOLATING.

Stay strong and ride out a few years. A rebound will occur, but it will never be as flush as 20 years ago.

Reject Amazon and Google tyranny.

Cancel prime, netflix. Reject hollywood. Rent old movies FROM YOUR LIBRARY FOR FREE.

In reply to by homiegot

itstippy Sun, 05/27/2018 - 14:57 Permalink

"... many of the employment shifts happening as a result of declining jobs in brick-and-mortar retail have been made up by big players in ecommerce."

Retail store clerk and e-commerce employee require completely different skill sets.  The shelf stockers and loading dock guys  can transition to an Amazon fulfillment center, sure, but most of the "sales associates" are doomed.  Online websites don't require legions of friendly, smiling, well-groomed people who can make small talk but have mediocre intelligence and poor physical ability.  A couple decent-looking models for a photoshoot of the product, someone who can write a sales pitch, and someone to update the website is all that's required to reach millions of online shoppers.

DEMIZEN Sun, 05/27/2018 - 14:58 Permalink

 we only buy perishables  B&M. everything else gets delivered. they all deliver free nowadays, including target and Walmart. Stores can deliver to home address more efficiently than an individual consumer, price discovery is done online anyway.  why would you want to go and drive 3 miles to buy a toothpaste if someone can bring it to you for the same price?

are you peeps retarded?

luddites cry in 1,2,3...

garypaul DEMIZEN Sun, 05/27/2018 - 21:26 Permalink

Was that sarcasm or are you serious?


"they all deliver free nowadays" --> That's why they lose money (but make it up on volume)


"Store can deliver to home address more efficiently than an individual consumer" --> WTF does that even mean?


"price discovery is done online anyway" --> I'm finding higher prices online than in-store


"why would you want to go and drive 3 miles to buy a toothpaste if someone can bring it to you for the same price?" --> But can they really deliver for the same price? Transportation must be free in your alternate-universe. And how many days are you going to wait to brush your teeth?


No, you're only joking. You can't be serious.

In reply to by DEMIZEN

DEMIZEN garypaul Sun, 05/27/2018 - 22:41 Permalink

I don't know maybe your question was sarcasm.


if a Walmart employee loads 15 deliveries on a truck and takes the shortest route from address 1 to 15, that is cheaper than 15 separate individual routes coming to store taking up parking space, retail space, security, add theft write-offs, double logistics additional store personnel whatever you want.



"price discovery is done online anyway" --> I'm finding higher prices online than in-store

prices are exactly the same up to the last penny. check it yourself.  whatever is in an inventory of your local store can be delivered to you at no additional costs in 2 days, anything at the same price. why would I not avoid target shitshow and have a fucking 2pack crest mouthwash, apple juice, Lysol whatever and cleaning supplies delivered by people who need a job?

are you ok?

In reply to by garypaul