Retail Sector Is The “Soft Underbelly” Of The Economy

Authored by Bruce Wilds via Advancing Time blog,

Prepare for Retail Apocalypse Part II. While this could be considered a continuation of a trend that started years ago the number of closures about to occur will take things to a whole new level. “Soft underbelly” is a phrase that refers to the most vulnerable part of something, whether it be an organization, a system, or a physical object. This phrase was famously used by Winston Churchill to describe his idea of attacking Germany through Italy during World War II.

Today retailers closing locations across America are about to show retailing is a sector of the economy that has been given far less attention than it merits. Once these locations go empty, many may never again be occupied. This is a continuation of what started prior to the pandemic in response to Amazon and online commerce. The reality of this, for me, comes front and center when I think about the mall across the street from my office losing its last two anchor stores, Macy’s and JCPenny. Without them, the mall will be in dire straits.

While the news is focused on Artificial Intelligence, the drums of war, raising the debt ceiling, and speculation on who might run for President in 2024 few people are talking about the coming wave of retail closures. This round of forecloses will be far more devastating than what we saw in the first wave. Analysts estimate that by the end of 2023, the national brick-and-mortar footprint may be reduced by up to 20%. This is due to many retailers leveraging up when interest rates were low. This is exacerbated by the idea a recession is just around the corner.

Where money flows and who it enriches is a key component of economics, the failure to consider this is a blind spot many people have. Already many big box retailers, grocery stores, apparel chains, home goods companies, and big-name businesses like Burger King, GameStop, and Sephora have announced mass store closings in 2023. These companies are rushing to close under-preforming locations in an effort to limit the bleeding on their balance sheets.

Even while they may deny it, consumers are notorious for wasting much of the money they spend on frivolous unnecessary purchases. This means many consumers could cut their spending in a big way without drastically reducing their standard of living. When looking at the policies flowing out of Washington it is clear many politicians seem to have no idea that all consumer spending and purchases are not created equal. The fact is, consumers should take a long look at how their purchases will impact the economy over time.

Empty Buildings Harm Communities

This environment is where the predatory monster known as Amazon comes back to haunt communities. Online purchases in illiquid hard to find specialty items have a lot of merits. It expands our options, however, when used as a way to avoid visiting and buying from local merchants many negative ramifications come home to roost. While touting Amazon as a model of efficiency what people often forget is that its overall business model is far from efficient. Simply put, it is only after many local stores are gone that people will realize the hidden cost of buying online.  

Fans of Keynesian economics that encourage government spending to stabilize the economy during a downturn tend to discount the importance that where and how money is spent matters a great deal. While many readers may already be telling themselves, I don’t go or shop there anyway, retail closings will result in lots of other small businesses closing their doors. Not only will the retail employees lose their jobs but these stores support many local businesses. The ugly reality is that store retail store closures have a huge impact on communities. This is a cancer that will soon become apparent as rents fall, mortgages go unpaid, commercial real estate values fall, and the local tax base shrinks away. Defaults on loans and bonds in conjunction with the reduced local property taxes will also add to the pain. 

Two recent videos warn we are likely to surpass the number of closures seen during the pandemic when thousands of businesses collapsed. In the first, Clayton Morris delves into some of the chains shuttering locations. He focuses on 20 big retailers in the process of closing down:

In the other video is from City Prepping, it comes with the warning this will be big. The fella does an excellent job of putting into focus the many issues about to descend upon much of the retailing sector. 

Expect To See Less New construction

To make matters worse, this comes at a time when the boom in new restaurant construction based on easy cheap money is coming to an end. High labor cost, sluggish sales, shoplifting, and higher interest rates are all taking their toll on retailers. These factors have many retailers on their heels. Adding to the problem is the Fed’s high-interest rates have put pressure on small, or should we say most, banks in a position where they are cutting back on loaning out money to marshal their funds. These challenges also extend deep into the small business environment and communities. 

When all is said and done, this is an area that is vulnerable as consumer spending continues to weaken. This is not about having enough places to buy goods. It is about the sustainability of real estate prices, jobs, and the overall financial health of our communities. Considering retailing accounts for roughly 10 million jobs this is significant. When coupled with the current glut of office space it is easy to see that this is a harbinger of things to come.