Having worked for a big box retailer for 14 years, I understand the dynamics of a high growth rollout of stores as a key to increasing market share and profits. Some of the best retail names in the US have practiced the identical strategy of concentrating many stores in each market to drive the small competitors out of business. This strategy worked wonders for Lowes, Wal-Mart, Target and Kohl’s during the early part of this decade. The combination of solid same store sales and opening new stores is a fantastic combination during good times. The results actually make the CEOs of these companies think they are brilliant. Their store expansion models based on rosy assumptions are followed like they can’t go wrong.
What these CEOs didn’t realize was that their expansion plans were based on lies and frauds. If they had advisors who could give them a reality check, they could have avoided the massive downsizing that awaits them. Their hubris didn’t leave room for a reality check. The population of the US has grown from 281 million in 2000 to approximately 308 million today. We’ve had a 10% population increase in 10 years. Consumer expenditures have grown from $6.7 trillion in 2000 to $10.3 trillion today. This is a 54% increase over the course of the decade. Amazingly, real average weekly earnings have only gone up by 6% in the last decade.
The chart below tells the story that retail CEOs have been ignoring for a decade. Consumer credit has advanced from $1.5 trillion in 2000 to $2.4 trillion today. This 60% increase in consumer debt has allowed workers who have barely increased their earnings to spend like they made a lot more money. This debt fueled consumption binge led major retailers to expand in order to keep up with the delusional consumers.
Retail America has run directly into a brick wall. Below are charts detailing the expansion history of four of the most admired retailers in America. Lowes grew their store count from 600 to 1,700 over the course of the decade, a 183% increase. Wal-Mart grew their store count from 4,000 to 8,500, a 113% increase. Target grew their store count from 1,000 to 1,750, a 75% increase. Kohl’s grew their store count from 300 to 1,050, a 250% increase. Same store sales are the true measure of a retailer’s health. When comp store sales are +5% or better, retailers make substantial profits and confidently build new stores. As the charts below clearly show, comp store sales have been in a substantial downtrend since 2006. The new stores that have been built in existing markets are over cannibalizing their existing stores.
Lowes has 500 more stores today than it had in 2005, $4 billion more sales, and $1 billion less profits. Target has 340 more stores today than it had in 2005, $12 billion more sales, and the same profit. Kohl’s has 240 more stores than it had in 2006, $1.6 billion more sales, and $100 million less profit. Only Wal-Mart has kept the profits flowing, mostly due to its international expansion. The tough times have only just begun for these retailers.
The American consumer is still heavily indebted. Much of the retail spending in the last decade came from mortgage equity withdrawals. Using your home as an ATM is history. Home equity is at an all-time low and 25% of homeowners are underwater. Home prices are destined to fall another 20%. There are 15 million people unemployed. Consumer expenditures still account for 70% of GDP. In order for the US economy to achieve equilibrium, consumer spending will need to regress back to 65% of GDP. This will require an annual reduction in consumer spending of $800 billion. The CEOs of these retailers have not grasped the implications of this coming adjustment in our consumer society.
There are three major errors that have been committed by every retailer in America. They failed to recognize that the spending per household was 30% over inflated due to debt financed demand. They then extrapolated the spending per household using a 5% to 10% growth rate. Lastly, they ignored the fact that their competitors had the same strategy. There are 1.5 million retail establishments in the US. Thousands of these stores are going out of business every year.
Lowes, Wal-Mart, Target, and Kohl’s have yet to recognize their predicament. They are still blinded by their hubris. The point of recognition will occur within the next year. Each of these retailers will be closing hundreds of underperforming stores in the next two years. Time for a reality check.
hugh betcha says:
this is great! the closeout sales will interesting to watch. i might go and see what’s left when the signs say 70-90% off (last sticker price)
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8th September 2010 at 11:25 pm
StuckInNJ says:
Going from Somerville, NJ to Secaucus, NJ on Route 22 is about 40 miles.
Those 40 miles … on just ONE road … is one gigantic strip mall from end to end. No breaks whatsoever. None. Malls, malls, malls, malls, and more malls. Endless chain store franchises for forty fucking miles.
I have always wondered, “How in the hell do they do it????”
Now I know. They don’t.
And, oh, by the way … I’m seeing more closed stores than ever before. But … there are a helluva lot of incredible deals. Ms Freud and I replaced all our kitchen appliances last month; stove, fridge, dishwasher, and microwave. All name brand stuff Maytag and GE. Total cost including delivery, installaion, and removal? $1,725!
I asked Ms. Freud, “How in the hell can they do that?” She didn’t know.
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8th September 2010 at 1:43 am
LLPOH says:
Stuck – Maytag is owned by Whirlpool now. I used to be a snr manager at the biggest dishwasher manufacturing plant in the world approx. 20 years ago. Prices have dropped substantially since then in real terms.
The cost containment we pursued then was largely based on utilizing plastics instead of steel. For instance, we moved from vitreous enamel to plastic tubs, which generated a huge savings. I suspect that even if the machines are US “made” that the major components would be imported (motors/pumps) from (where else) China. The assembly lines we used were huge, and had a couple of hundred people on each line, and we made a dishwasher in approx. 3 man hours total assy time, plus the vitreous tub. Sale price for a high end dishwasher was around $400 – $500 back then, by memory, so there was approx. $150 in labor plus OH, and $300 in purchased parts and margin.
I believe the base answer would be that the outsourcing of components overseas has driven down parts costs, and that they have picked up ,say, an hour in manufacturing. So the equation would look like 2 hrs assy at $80 an hour lab + oh = $160, leaving probably the same $300 for parts plus margin.
The US is becoming more and more an assembler as opposed to a manufacturer. The US does not make cars anymore, it assembles them from (largely) imported components.
This is just a pretense to appease the public and the unions. I expect the pretense to be dropped shortly, and industry on the whole will vanish from the face of the US. The US will be left a service and agricultural nation. A Banana Republic, as it were.
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8th September 2010 at 2:15 am
Robmu1 says:
Jim – you should have told those guys at IKEA that they were headed for a brick wall.
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8th September 2010 at 8:20 am
Administrator says:
Robmu1
You know me. I always try to be politically correct and never contradict my superiors. I told them that their idea of 10 stores in NYC was brilliant, and exited stage left.
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8th September 2010 at 9:47 am
matt says:
And they keep building them as we speak.Will these big box store retailers default on their CRE loans when they have to close thousands of stores collectively? Will the taxpayers be adding Lowes and Kohls stores to their list of “we own what”? I smell a bailout by taxpayers again.
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8th September 2010 at 10:24 am
Kill Bill says:
GWB said everyone should buy a house
Mozilo said everyone needs a loan
Banksters said everyone needs mortgage backed securities
Greenspan said they are surpluses as far as the eye can see
Bush said go shopping
Wolfowitz said this war will pay for itself
The people said borrow it or charge it.
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8th September 2010 at 11:54 am
friar92 says:
Highlight from earlier Casey Post that i think captures alot of the propsects for retail:
TGR: Is it both residential and commercial or is it worse in one sector?
DC: That’s tough. Is emphysema worse than Parkinson’s? I suspect, however, that commercial is going to be worse than residential.
People’s shopping habits are one of the things that the Internet has changed and will continue to change. It makes more sense to buy things online and have them delivered to you, than to take the time and expense of going shopping, and the merchant having to deal with retail space, inventory, a geographically limited clientele and so forth. I wouldn’t be surprised to see prices on a lot of commercial property come down 80% or 90%. You’ll see a lot of properties permanently shuttered. That’s a disaster for owners, who will still have to pay taxes. There will be no money for maintenance.
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8th September 2010 at 12:01 pm
Administrator says:
I love when someone calls me excessively optimistic – Comment from Naked Capitalism:
charcad says:
September 9, 2010 at 12:24 pm
Quinn is excessively optimistic. In SW Florida the Venice – North Port – Port Charlotte area is a classic example. Two (2) Home Depots sufficed throughout the peak r.e. boom years until 2006. Admittedly these stores were quite crowded. One was in Venice and another in Port Charlotte.
Since high tide in 2006 two more HDs and three Lowes opened in the same market area. This was a 350% increase in stores in an area that was experiencing a small population decline.
I ascribe part of this to the absence of alternate productive investment opportunities in the USA. Both money and physical plant exists to throw up and outfit these big boxes. Meanwhile other forms of productive activities (i.e. making many of the products that are sold inside) are hindered or outright prohibited by government dictat.
On the plus side they’re all relaxing low stress shopping experiences now. The employee:customer ratio in all of them is often larger than 1 and sometimes greater than 2.
I hope one or two are left standing after the dust settles.
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8th September 2010 at 4:12 pm
Administrator says:
From Zero Hedge:
by Every Third Word
on Thu, 09/09/2010 – 01:53
#571180
The analysis that inflated consumer debt has driven retail spending is not news. It’s a corollary of the consumer debt bubble. But thanks for the fancy charts.
The problem with today’s shit economists (e.g. The Man-Whore formerly known as Dr Doom and his nemesis, Lil Paulie K) is that they don’t realize that each economic cycle is not comparable to prior situations as each cycle has it’s own set of inputs, leverage rates, political considerations, demographic situations, and future opportunites… For example, our economist friends always miss the explanation for the 80s – that time was THE perfect storm for value creation:
1. Massive population bulge of producing citizens (more worker bees, more savings, more pension funds to play with, etc)
2. Lowered tax rates
3. Advent of private equity to spur corporate value creation (different than #5 as this focuses on increasing value for the shareholder not the manager, which we all take for granted now)
4. Massive govt debt spending to help add some kick
5. Advent of creative capital structure (LBOs, HY) create value/money out of thin air
Laffer curve, lower tax rates equals higher tax receipts, ha! Those frameworks and tools mean ZERO without an applicable population base. The 80s was the perfect storm for Laffer’s laugh…
Going forward the U.S. government, realizing that seniors have zero savings, will buy excess commercial and residential properties, put all the broke seniors in such “grey housing” and impute rent to these gov’t housed seniors and voila! Your cash imbalance in social security can be cut in half or 3/4 as the gov’t can claim that the $2k social security check your grannie should have received is now only $300 – reduced by approx. $1k for “rent”, $300 for “utilities”, and $500 for health care. Cash problem of social security solved. Sure, it will require some cash outlay now… Or maybe Bernanke and BofA take all their REO property on their books now and sell it to Uncle Sam at a “fair” discount….
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8th September 2010 at 4:17 pm
Administrator says:
Another good comment from Zero Hedge:
by A Man without Q…
on Thu, 09/09/2010 – 02:06
#571222
We’re not that far from Obama mailing store cards to every household in the country with a thousand Dollars credit on it. I remember they did something similar in Japan a few years back, but it didn’t help much.
The problem for the US consumer is the mountain of debt that has built up in order to buy crap. The Fed seems incapable of understanding the difference between credit used for investment (by which I mean something that returns a yield and therefore excludes housing) and credit for consumption that can only be repaid from income earned through other means. When consumer credit rises much faster than income levels, the end result is inevitable – not only is future consumption going to decline, but the existing debts will be subject to a very high rate of default. The “solution” of the Fed is to buy the debts from the private sector and then simply pretend those defaults are not occurring.
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8th September 2010 at 4:18 pm
Administrator says:
Retail Insider:
by Sudden Debt
on Thu, 09/09/2010 – 05:57
#571320
I’m into hardware retail myself and I remember those 2006 and 2007 days all to well where we had to open a store every 2 weeks to keep the investors happy.
Finding locations that work in a then overcrowded real estate market with renting money for the stores going through the roof was simply impossible. We always settled for the 3rd best thing.
Now those stores are bleeding like hell. And this is the same for the compitition. All we looked at was: How many stores are they opening and how many we did. We alway had to beat them.
And that’s why we have stores sometimes 4 to 5 miles from each other and where you also have 5 to 6 competitors.
None of them is making money and one by one they are closing down.
We are just to big to act on this. The notion of a crisis just entered our company… The only thing we did was a 25% price increase to cover the loses and to be honest: It works.
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8th September 2010 at 4:19 pm
Thinker says:
Lowe’s has 166,000 employees. Walmart: 2,100,000. Target: 351,000. Kohl’s: 29,000. Home Depot: 193,370. Costco: 79,000. Best Buy: 180,000.
If only 10% were to lose their jobs…
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8th September 2010 at 5:14 pm
matt says:
Thinker,
I was thinking the same thing, a rash of store closings is going to raise unemployment rates even higher.
Jim,
I was hoping to get a discussion going today about how the MSM is having a party because the unemployment claims were lower than expected, yet some states like California didn’t even get their numbers in on time because of the Labor Day holiday. How fucking stupid does this government think we are?
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8th September 2010 at 5:24 pm
Administrator says:
Matt
Why interrupt a good party with facts?
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8th September 2010 at 7:41 pm
aetius romulous says:
I spent my entire working life building retail chains. The entire strategy is built on the principle of scalability and economies of scale. It worked like a charm.
What I, and those like me failed to recognize is that we were indeed assuming that growth would never end. There was never any plan for the concept of retrenchment. Not in our operations, our development, or our finance.
I was one of Wal Marts largest licensees here in Canada. Not a single person in our company nor Wal Marts paid any attention at all to the larger macroeconomic picture. Ours was a microeconomic model: Find a locality, establish a retail trade zone, dominate it, and move on. It truly never occurred to any of us that our revenue was based on borrowed money from a system that was unsustainable.
In hindsight now of course, these things are obvious. But every retail chain developer was guilty of drinking the cool aid. Now, as Jim correctly asserts, the party is over and almost without exception retail chains are overbuilt and starving from the cash flow that their constant development model depended on.
I was not aware you had a retail background Jim, some day we will have to compare notes. There is a best selling book in there for sure.
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8th September 2010 at 7:31 am
Administrator says:
aetius romulous
14 years for IKEA. I was responsible for figuring out how many stores per market and where they should go. We used drivetime regression models based upon zip code collection at the POS. We knew what demographics were beneficial for an IKEA store. Our models were very accurate on sales predictions, BASED UPON PAST EXPERIENCE.
I attempted to analyze what our competitors planned and the impact of the housing boom and looming bust. When the models were not spitting out the desired results and my projections showed losses from opening too many stores, I was told to change the assumptions so the models would spit out the desired result. I told them I would not change the assumptions because they were valid. My IKEA career ended shortly thereafter.
Ultimately, I was proven right. Losses mounted and the expansion plan was called off by the morons in Sweden. The US CEO was shown the door.
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8th September 2010 at 8:24 am
aetius romulous says:
Too funny. We used a similar system which I developed in the early days of the spreadsheet. By the end it was a monster.
I never built where the data suggested we shouldn’t – but that didn’t stop everyone around us. The solution? Create another brand and operate it across the street from our established brand. There were places in Florida where we had stores on all four corners, all with different brand plates!
Just the same, our focus was local and not on the macro. Big mistake, eh?
There is a best seller in that stuff I tell ya.
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8th September 2010 at 8:33 am
Administrator says:
romulous
We were also responsible for the IKEA expansion in Canada. I tried mightily to stop a store from being built in Vaughn. It cannibalized the shit out of the other 3 stores and destroyed the profitability of the entire Toronto market. A concentration strategy does not work when your stores draw from 40 miles away. Fools and their money are soon parted.
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8th September 2010 at 9:22 am
dr. thorpe says:
gd reporting.
see ” its the (too big) debt stupid.”
re. retail stores:
will be hurt by
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8th September 2010 at 2:17 pm
dr. thorpe says:
continued. oil price rise/peak oil, or web online shopping.
but helped briefly if US$ drops (helpingn some us exports thus increasing
briefly wages in those us exports, e.g. agriculture.
. box stores: often metal walls on a concrete slab, cheap construction.
search: shuttered K – m * r t stores.
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8th September 2010 at 2:21 pm