Massive debts due to private equity takeovers are what caused many retailers to tank in recent years - and more to tank in the next few months. For some reason, the media ignores this in favor of an "Amazon" narrative. Why is this? It sells eyeballs!
A recent article in Money Magazine argues that the biggest toy store left standing after the bankruptcy of Toys R Us is the obscure Build-A-Bear franchise which allows people to assemble teddy bears in their stores. Technically, this may be correct, as the Build-a-Bear people may be the largest dedicated toy chain, albeit not one that carries a full line of toys as Toy R Us did.
The article goes on to repeat the mythology that Amazon is destroying retail as we know it. And while Amazon a certainly a big factor, it is not entirely the whole picture. The largest toy retailer left in the United States is not Build-A-Bear, it is Walmart. Visit any Walmart and you'll see how big their toys selection is, not just during the Christmas season when it goes really berserk.
The real factor in the retail apocalypse is debt. The Money Magazine article mentions, almost in passing, that the Build-A-Bear company has no debt on its books. With no staggering debt load to service, the company has earned consistent profits for four years in a row. I know this sounds really stupid but in order to make money in the business your income has to be greater than your expenses - it's really that simple.
A company like Build-A-Bear can make money because it has no staggering debt to service. And perhaps also they don't have enormous overhead in terms of leasing space. A lot of ink is also been spilled about the "Mall apocalypse." In a recent deal involving two the largest mall owners in America, many Wall Street analysts were surprised that one of the company sold off a huge portion of its portfolio for far less than what Wall Street analysts felt it was worth. People are just now waking up to the idea that retail space maybe isn't worth its weight in gold. Someone should tell that to the Sears guy!
Malls are not dead, they are just overpriced. We see the same effect here in our small town. During the last decade, local real estate entrepreneurs build more and more retail space in the form of shitty little strip malls. Most of them are empty or have only one tenant.
The landlords here are "good old boys" who play an odious game with retailers. If you start a restaurant or store or something and start to make money, they jack up the rent as soon as the lease expires, thus forcing you out of business. We have seen more than one store or restaurant go out of business even though there were lines out the door. Sometimes the landlord then tries to lease the property to friend of theirs to open a similar business which usually fails. I guess they figured that they could piggyback off the success of their own tenants, but it's a plan that rarely works out.
Brick-and-mortar retail isn't dead - and it could still thrive, provided it is economical. A retail company can make money with a physical store provided it is not saddled with debt and the lease costs are reasonable. What we will see in the coming months and years is a shake out in the industry, as the severe over-building and overcapacity in retail space causes one company after another to go bankrupt and new companies snap up these properties for pennies on the dollar. They then can lease them out for far less than was charged in the past, which may create opportunities for retailers to build successful business models with low overhead.
Just as the bankruptcies of the "dot com" era provided low-cost office space, servers, and fiber optic bandwidth for a new generation of internet entrepreneurs, the meltdown of traditional retail will provide opportunities to re-use and re-purpose all this retail space. Some malls are already experimenting with mixed-use commerical and residential applications. Why not? It would be like living in an apartment building with the world's biggest lobby. Or how about a retirement community? Elderly mall-walkers are usually the only ones left in malls, anyway.
The model of the previous generation was just simply flawed. Private Equity firms bought major retailers and took them private, saddling them with huge amounts of debt to pay off the shareholders. As one reader said to me, "I don't understand how that works. You buy a company and then have the company borrow the money so you can buy it?" It does seem a bit odd. Sort of like buying a car, and asking GM to co-sign the note!
These Private Equity firms felt they could "turnaround" these retailers and then spin off the companies in IPOs. But they failed to realize that the retail Market has been changing and people no longer flock to retail stores the way they once did. Shopping, as an activity, has fallen from favor, particularly after number of economic setbacks and shocks.
Moreover, the popularity of enclosed malls has faded, as people are more inclined to go to strip malls or big box stores like Walmart where they can find the same products or similar products for far less. Walmart has become the de-facto department store of our era.
And Walmart succeeds where others fail because it tends to build its own structures, usually in low-cost areas at the edge of town, and this is not saddled with heavy overhead costs or lease payments. Also since the company is successful, it isn't saddled with a staggering amount of debt that has interest payments due every month.
This is not to say that Amazon and other online retailers haven't changed the game. They have, but the game has been changing since I was born. When I was a young kid, my Mom and Dad would take me down to the toy store and we would look at toys and then decide which one to buy. The toy store was sometimes upstairs at the hardware store, and was almost sort of an afterthought. They would have shelves with toys on them and we looked at the toys and decide which ones we desired. This is how I ended up with a pink Jeep. It was on the shelf at the toy store and I decided I wanted it.
But by the mid-sixties a lot had changed in the toy industry. Heavy saturation advertising particularly on Saturday mornings exhorted kids to desire particular toys. And we dutifully nagged our parents to get us whatever toy was advertised on television. The toy store started to change. No longer did they have a selection of different toys, but rather pyramidal displays of the same toys stacked up in quantities of 20, 20, or even 100. All the kids wanted the same toy - the toy they saw advertised on television.
And big mega-sellers started to emerge - Mattel, Kenner, Hasbro, among others. Toymaking went the way of the car business, with a "big three" swallowing up almost everyone else. Toys were sold based on advertising - mass-market saturation advertising.
So shopping for toys changed. No longer did you go to the toy store to see what was available and make a selection. Rather, your children selected for you, based on what they saw advertised on television. Then, you sought out where you could buy that product for the lowest possible price. By the 1970s and 1980s this phenomenon became so severe that they were shortages of the "hot" toy every Christmas. And the media was complicit in this by hyping shortages of particular toys so that parents would go out and seek them - because everybody wants to get what they can't have.
The sets up a scenario which is ripe for online sales. If your kid knows exactly what he wants in terms of a toy, then you can go online and find the toy for the lowest possible price and have it shipped to your home. Why bother going to a dedicated toy store to purchase?
And of course, increasingly today, toys are tied into a franchise of movies, cartoons, books, comic books, and whatnot. It's very hard to find a generic toy these days just doesn't have some sort of branding associated with it. We are taught at an early age to seek out brands which have value and status among our peers. We are taught at an early age to judge ourselves and others by what brands they choose and how much they can accumulate. Hence the trailer home with the front lawn littered with toys - it is a status symbol for both parent and child.
Amazon also was recently in the news as president Trump has set out to destroy it. Or at least that seems to be the gist of his comments. Although it has been explained to the president several times now that the postal service is not losing money by shipping things for Amazon, he continues to perpetuate this lie via Twitter. And I think he realizes it is a lie, but he's hoping that it will resonate with his supporters, who all believe their tax dollars are funding the post office. Let me just point out again, for the umpteenth time, the post office is a quasi-independent government corporation that is self-funded through postage. Thus, Amazon is pouring money into the coffers of the post office not taking money away from it. The future of the post office lies in parcel deliveries as ordinary mail has all but died.
What Trump does make a good point about sales tax. Back in the 1980s there was a Supreme Court case involving mail order catalogs in which the Court held that companies that do not have a presence in the state do not have to pay state sales tax. This is been a windfall for the mail order business and today, online sales. Of course, a company like Amazon which has branches and warehouses and offices in almost every state would end up paying sales taxes anyway. But it's possible at the court may revisit this issue in the future, and that sales taxes will be collected.
But don't write the obituary for Amazon and other online retailers just yet. There is more advantage to shopping online than merely not paying sales tax. I live about 10 to 15 miles from the nearest Walmart or other store. Thus it's about a 20 to 30 mile round trip for me to drive into town to buy something. That is not only just taking a lot of time - about a half hour each way - but also costs me a lot of terms of wear and tear on the car, as well as gasoline cost.
If we go by the AAA's average cost of operating an automobile, it's costing anywhere from $20 to $30 just to drive into town to buy a $5 item. This is not really cost-effective. If I can find the same product online from Amazon or other retailers, even if I pay sales tax, it still works out to my advantage to order it rather to drive into town.
Not only that, there's a very finite real chance to what I'm looking for it won't be in my small town. I can find all sorts of products online pretty easily - and competing products as well. If I drive into town, I might have to go to store after store looking in vain for something that's kept in stock. And since many retailers are feeling the pinch from online sales, many are reducing their inventories of products, which are the bootstraps the whole thing.
More than once, I have driven into town to find something, only to be frustrated in not finding it. I end up driving home and ordering it online. Today, I already have an idea of what things to order online - things which I simply don't bother to look for at local stores, because I know they won't have it.
The Money Magazine article argues that retailers have to come up with some new and unique experience to get people to come into the store. And they argue that the Build-A-Bear company is not just selling toys but selling the experience of building your own bear. And perhaps this is true. Maybe retailers will have to come up with something new in order to attract people. But the bottom line is, even if you have the most novel shopping experience to attract buyers, you still won't make money if you have to pay off staggering junk-bond debts and are paying too much for a mall lease.
Those are the two factors more anything else that are driving brick-and-mortar retailers out of business.