Blighted Retail Sector Contradicts ‘Recovery’

54 comments

With last week’s rally, the broad averages turned in their best first-quarter performance ever. Supposedly, it was upbeat data on consumer spending that helped push the rally into the record books. But if consumers are actually starting to loosen up – using credit, of course, since household incomes have been stagnant —  the evidence is nowhere to be seen. The nation’s retail landscape in fact remains blighted with boarded up stores and gangrenous malls. Last week, Best Buy became a candidate for the death-watch list with the announcement that it plans to close 50 stores and lay off 400 workers as part of a plan to save $800 million in recurring costs. The consumer electronics giant also plans to move away from the big-box format that helped put so many competitors out of business. Now Best Buy is itself the victim of an even bigger player, Amazon, which, with free shipping and no sales tax, can meet or beat any price Best Buy can offer.  How are you going to compete with that?  Answer: You can’t. And that means that the closing of 50 of Best Buy’s 1100 stores could be the beginning of the end, just as it was for Borders and Blockbuster when they began to shrink to compete more efficiently with, respectively, Amazon and Netflix.

Best Buy’s retrenchment will not be welcome news for commercial real estate developers, who have yet to recover from an unending stream of big-box closures, including Comp USA, Borders, The Great Indoors, Circuit City and Linens ‘n Things, to name some of the more recent ones. Their bankruptcies have glutted the market with more space than could be absorbed in a decade — and that’s assuming there are new businesses ready to move in that can pay the rent on showrooms the size of football fields. That’s not to say there are no new tenants to be found, only that there’s a limit to the number of physical fitness centers, grocery stores and discount retailers that can step into the void. In the meantime, there are reasons to think that the growth in commercial vacancies will quicken rather than slow. One retailer alone, Sears, which has been in a death spiral for more than a decade, is going to blow a huge hole in the rental picture when the company finally goes down, probably within the next two years. And on Main Street, there will be yet more vacancies when independent movie theatres that have somehow survived until now close because they can’t afford the $65,000-per-screen digital conversion needed to stay in business after Hollywood stops shipping celluloid prints at the end of 2013.

Considering that America’s GDP is 70% consumption-based, we are mystified by all of this talk recently about a supposed recovery in household spending. Yes, we’re aware that each new 10-cent increase in the price of gasoline is trumpeted by the government’s sleazy, mendacious spinmeisters as an increase in sales. And the restaurant business, at least here in Boulder CO, is booming so strongly that one might think no one eats at home any more. But it beggars belief to suggest that such factors are leading the nation back to prosperity. Not that America’s middle class is likely buying any of it. With retirement dreams fading fast, home prices still falling, health care costs soaring beyond affordability and grocery prices inflating at a scandalous rate, probably few outside of Wall Street and the newsrooms believe there is any recovery at all. Do you?

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  • laurent April 7, 2012, 5:29 pm

    There is another factor contributing to expanding mall vacancy that didn’t exist thirty years ago. Those flea markets, estate sales, auctions marts have had to deal with much more traffic. Why buy a $400. pair of RedWing work boots when you have the chance to pick up three pair of excellent military issues (steel toe and all) for $90.?
    A beautiful denim work parka for ten bucks. WorkWear World????….maybe next time…….in ten years?
    As disposable income shrinks, the ego-dressing in clothing, food, auto, jewelry et al….finds new meaning.

    My humble two-cents to a magnificent site run by a dedicated man…thanks Rick and contributors.
    laurent

  • Jill April 4, 2012, 2:39 am

    Whether one wants to be a bull or a bear, it’s easy to justify either way. Seems like people seldom change anyone else’s mind.

  • gary leibowitz April 4, 2012, 1:21 am

    Rick, The May 2010 flash crash did occur and so has others in a bull run. When have we experienced a sharp, out of nowhere drop that started a protractred bear run?

    I don’t question there can be big swings. It has never lasted for longer than 2 or so months and the moves almost always happen after a big long run up.

    If you are worried about markte moves than never invest. If you want to know when a protracted bear market occurs than I suggest you use your own criteria an stick to it. Not some strange notion that we are living with aliens that plan on eating us if you dare to come too close.

    Lets see, you ignore or invalidate all economic data except the ones that prove your point. You ignore technical charts and fundamental ones too. Earnings out, P/E ratios out, retail sales out, spending and borrowing out, employment out. Now to technical data. All are invalidated or ignored when trying to decide whether to invest becuase you believe a flash crash bear trend will develop and sucker you in.

    BTW, a flash crash is exactly that. Short term. Which bear market started out with a flash crash and never let you get out of the market becuase it kept going down?

    In fact one of my criteria for investing in this market is volitility. If we have only one day fom opening bell to close where we close over 1.5 percent lower I get out. If the market only has a flash crash leading directly into a full blown steep drop than I lose big time. I am willing to take my chances. It is all about evaluating risk/reward and odds.

    Could YOU have been invested right before the last election and gotten out before the big drop? Was it really so hard to do? In 1929 there were many warnings both technical and fundamental. Sorry I don’t buy into the notion that its best to stay in fear of a one day devastation, than ride a 100 percent 3 year move up. Wish I had taken my own advice.

  • Steve April 4, 2012, 1:01 am

    Rick, isn’t real debt more like 210T, the 16T is just online?

  • Bradley April 4, 2012, 12:22 am

    Fantastic.
    It is the only word I can come up with to describe what is being described. A stock market crash, an extended bank holiday, worthless credit cards, hyperinflation, locusts.
    Of course, this scenario would have to be world wide as well, because how could banks in, say, New Zealand be able to function if those in the US were shuttered?

    So, something that has NEVER HAPPENED is being predicted here, because there is no other way for things to develop. It is impossible to allow Gary to think that he can sell before the crash, because no one will know that it is coming, except those who know it is coming.

    What I find fantastic, is that there is constant derision and blame aimed at TPTB (the Powers that Be!) as they manipulate markets, governments, currencies, anything and everything, yet somehow, TPTB will not be able to forstall what amounts to the end of our civilization.

    Fantastic!

    • Rick Ackerman April 4, 2012, 12:52 am

      I don’t recall seeing a reference to locusts, Bradley.

  • gary leibowitz April 3, 2012, 5:34 pm

    I keep reading the posts here and my responses yet no one seems to understand or care to acknowledge that we have had 3 years of super earnings growth and there is no sign of it stopping anytime soon.

    It’s as if the eanings should be ignored when the stock market’s primary health is related directly to it. Most here are in a time warp where earnings should be ignored for a variety of reasons. Is there really an imminent collision with a comet where no one except a select few know it is going to happen?

    Should I debate the reasons why we are all living a delusion that will be revealed in a flash, or should I use what all investors use to determine when to enter and exit the market? Clearly you must acknowledge that waiting these 3 years you lost out on a great run. I know I have.

    Me, I am a realist. When the markets prove me wrong I listen. I don’t make excuses for my mistakes. I also expect a bad ending to this mess and will not let my emotional bull frenzy stop me from selling when neeed. In fact I suspect because of my inclination I will be prematurely exiting. Until that time I buy.

    &&&&

    Speaking of super earnings growth, you have yet to address my point that the U.S. economy’s main engine of alleged growth, the vaporous and actuarially bankrupt banking sector, has managed to “grow” its earnings only because $2Tr+ of their bad paper is being warehoused by the Federal Reserve. Do you think we might perhaps be kidding ourselves by keeping two sets of books — one for a central bank with purportedly infinite financial resources, the other for the banking system it serves?

    Most presumptuous and dangerous of all the things you evidently believe is that you will know when to exit. RA

    • Mark Uzick April 3, 2012, 5:51 pm

      Gary, you’re known to have statist views, so many here are jumping to wrong conclusions about your message; they’re just skimming your comments without actually reading them. No matter what you say, they’ll hear what they expect. I’m surprised that this has continued so long.

    • gary leibowitz April 3, 2012, 6:26 pm

      Mark,

      I suspect you are right. I guess I am really questioning, in retrospect, why I too ignored the huge run up over 3 years without changing my mindset. We are a strange creature, with conflicting attributes combining logic/reason with emotions and animalistic fear responses. I don’t even know what triggered my own switch.

      I could be totally wrong and this year turns out to be a bust, but I can’t get over the lost 3 year opportunity.

    • Rich April 3, 2012, 7:41 pm

      Some of us bought outstanding values with income Nov 2008 and March 2009…

    • Steve April 3, 2012, 7:53 pm

      Gary, there is no 3 year opportunity until you sell and exit with your gains. Unless you have sold and banked, the risk of a flash crash still exists. Right now the 3 year gains are electronic and unrealized. That is if you are full in. If you have taken profits and invested them in substance. Okay, that was good trading. Now, hold onto the substance and one might get the hambone. Anything valued in federal reserve notes is “one” not owned by you, and “two” valueless because federal reserve notes have “zero” value. All there is friend is the hope that the Fed and Congress doesn’t screw you in a few years.

    • Mark Uzick April 3, 2012, 8:04 pm

      Since you’re a deflationist, would I be correct to believe that you advocate keeping a large percentage of assets in physical cash?

      If so, then wouldn’t it be presumptuous and dangerous to bet that for the first time in history an unbacked paper currency will be managed with some responsibility in order to keep it from devaluing in the market to its true and official intrinsic worth of exactly zero? The only person who might pull this off ( at least temporarily) is Ron Paul.

      There is no 100% safe place to turn; no matter what course of action we take, we are all speculators, whether we want to be or not. Harry Brown’s permanent portfolio: 25% cash, 25% long term treasuries, 25% stocks and 25% gold – rebalanced annually – is probably the safest course for the conservative investor.

      &&&&&&&

      “Managed with some responsibility”?? What kind of responsible management brought about a quadrillion-dollar financial market in a world that produces a mere $65 trillion in goods and services? And what sort of “management” has ballooned U.S. debt to nearly $16 trillion?

      Concerning deflationists and keeping some cash around, yes, you will need it — desperately — someday when the banks close for an extended period. The paradox of a fundamentally worthless dollar will be that, on that day, it will be good as gold. Why? Because credit cards will have ceased to function, and because its scarcity alone will make actual physical money seem valuable. Visit your local branch and try to withdraw a five-figure sum if you think there’ll be enough to go around.

      Regarding no safe place to turn, I absolutely agree. And that’s why I said that Soros and Buffett are going down this time, not just us and our neighbors. RA

    • gary leibowitz April 3, 2012, 9:26 pm

      The assumptions you all make about a flash crash causing, I assume a 15 percent drop or more, is not likely. In fact every single bear market that was a result of a crash had a long early warnings placed in the market.

      Name me ONE such crash that didn’t? Even the recent mortgage derivitive crash reported on the problem well before the actual crash. The markets reacted as expected. If you don’ t believe me look at the news breaks and the markets reaction times. Is there ever a crash where the markets didn’t telegraph there was a problem?

      If people choose to ignore the news than that is another issue. It’s like an early warning system for a possible tornado. It might not hit in your spot, but knowing and taking precautions would be warranted.

      I don’t have to be psychic to guess when to get out. I will when the market and news warrants it. In the most likely scenario I get out prematurely. Right now there is nothing on the horizon.

      Are you saying that without warning, no news, no rumors on the street, no market warning we crash?

      Does the market ever react that fast? Most likely fear drives individuals out faster than mutual funds. A dramatic attack scenario is the only cause for a flash crash, and even than the market doesn’t drop on a dime. I have never seen a market react and crash after the news is already out for at least 4 trading days. Losing 5 to 10 percent after a large multi-year run up is certainly acceptable.

      &&&&&

      Were you maybe on Mars when the May 2010 Flash Crash hit? RA

    • gary leibowitz April 3, 2012, 9:44 pm

      The “only because” is a scenario to stay away from everyhing that can go wrong. You state we are where we are because of government intervention and the changing of rules. Well that is certainly true. The real question should be asked is when or why would those rules change now?

      Just because you don’t like the change or think it is going to cure anything down the line, doesn’t mean you avoid investing in a system that does these things.

      The road we are on started some 30 years ago. Does that mean you should have avoided investing all that time? The run on banks in the 30’s should mean that banks will never be trusted again. The hyper inflation period of the 70’s means that inflation would forever be out of control. Clearly these situations didn’t remain static. It is also clear the governments changes the rules to help “fix” the problem. Sometimes rule changes don’t work. I totally agree. Rule changes very rarely “cause” a crash. It can help build one. yes I do blieve there is no fix to the debt saturation problem. To suggest that I should ignore the economic data that shows improvement is self defeating. Isn’t the majority of investors using these parameters to stay invested? Why would I go against the “rules of the game” and assume a new set of rules will develop without me knowing?

    • Mark Uzick April 4, 2012, 4:23 am

      Rick: “Managed with some responsibility”?? What kind of responsible management brought about a quadrillion-dollar financial market in a world that produces a mere $65 trillion in goods and services? And what sort of “management” has ballooned U.S. debt to nearly $16 trillion?

      You’re repeating my point: Unless you’re convinced that Ron Paul is a shoe in to become president, then how can you be a deflationist?
      But I won’t be dogmatic; I’m open to the possibility that for the first time in history the state will act the part of a responsible manager, allowing the desperately needed deflation to happen; but as “management” is synonymous with “government” and seeing how the state is the essence of anarchy (no government), I’m not holding my breath while waiting for deflation.

  • gary April 3, 2012, 5:31 pm

    Being bullish on the market now is like picking up shells on the beach before a tsunami. Sure, there are lots of pretty shell(maybe more then usual as the water sometimes goes out and exposes more of them just before the big wave comes in) but its a risky game. As the saying goes, they don’t ring bells at the top, but when
    permabears like leibowitz capitulate were getting close.

  • gary leibowitz April 3, 2012, 5:10 pm

    Where is the disconnect? The last 3 years of great earnings growth or the notion that it has to fall immediately. Obviously we are in a 3 plus year recovery yet you refuse to acknowledge this.

    I never said the end result will be an ever increased debt load. I in fact stated we should experience deflation becuse of the inability to print our way out.

    I am talking about missed opportunity. Clearly staying out of the market these last 3 years was a mistake. As for timing the crash that too is a fallacy. No need to time when the crash will occur. The market almost always telegraphs such events. It did so in 1929 and every one after except perhaps the 1987 one. Even the mortgage derivitive mess had a delayed reaction where you could have easily gotten out. The problem is not that the market gives you opportunity to enter and exit easily it’s the fact that most refuse or ignore the warning signs. Emotions get in the way of pulling the trigger. That problem works both ways. Expectations should never be involved in making business decisions. Real home grown markers should. Using earnings, inside trading, number of high/lows, the dollar, commodity inflation, P/E ratio etc., should be the deciding factor. Place your criteria for entering and exiting the market and when they get hit pull the trigger. Simple solution that works well most never do this.

    With your logic these last 3 years was an illusion and we will wake up one morning, all of us, and realize this. I have never seen a market crash without some warning signs that last well over one month. The market’s always give the individual a huge advantage in getting out before the mutual funds react. Have you looked at the crash of 2008/9? How fast was it? Could you have gotten out with perhaps a 5 percent haircut before the crash? The news was already out well before the market reacted.

  • Mark Uzick April 3, 2012, 5:01 pm

    Benjamin April 3, 2012 at 3:52 pm

    I’m going to cut this short and say to just trust me… Cheap shipping is going to go the way of the mega-mall. I say this as one with no small amount of experience and knowledge in commercial transport. Long story short, it doesn’t matter what a company name is and what it primarliy handles. It all comes down to the same logistics. And I’m telling you, even assuming I’m half wrong wouldn’t allow delivery companies to spend less on energy than a big retail store or mall. Or any other cost, for that matter.

    I think you may have missed my point: You have to add to the cost of the purchase the cost of travel to the mega-store. The fuel savings of truck delivering along a daily route compared with cars each driving to the store is analogous to the fuel savings of commuters taking the bus to work compared to each driving his own car. Think of it as “mass transit for goods” except, unlike mass transit, deliveries save time and are more convenient, where mass transit wastes time and is inconvenient.

    Online advantage is riding on the thin ice of zero sales tax.

    Didn’t I say that I didn’t know how long that advantage would last?

    As for the revival of mom and pop retail, that is the crux of the article: How will that happen? Even if banks/realtors were to just give the vacant property away to new, smaller start-ups…

    It’s the on-line competition that represents the revival of the Mom & Pop and mid-sized retailers.

    What happens to the property? I’ll leave for the entrepreneurs, exploring, experimenting and exploiting the incentives of the market, to figure out.

    I realize that with the problems of an economy regulated into stagnation and burdened by insurmountable debts the future prospects of retail are gloomy or worse, but I won’t blame the creative destruction of the market for these prospects. In fact, I see them as a glimmer of hope in an otherwise depressing scenario.

    • Mark Uzick April 3, 2012, 8:10 pm

      Thanks for the correction, but the 4th paragraph from the bottom is Benjamin’s and should have been left italicized.

    • Benjamin April 3, 2012, 11:45 pm

      “I think you may have missed my point: You have to add to the cost of the purchase the cost of travel to the mega-store.”

      Hard as this might be for you to believe (I said might; I’m not calling you a dim-wit), I didn’t miss your point. Yes, I realize that the big boys often do bring it in for the smaller trucks to deliver on the local level. But I also realize that the bigger trucks do no small amount in direct delivery. How many small UPS vans (or additional trips) would you need to make up for, say, 20 tons of stuff that is no longer brought to a central location via a 48′ trailer? On top of that, how many more trucks/trips would you need to meet a +20% increase in demand?

      But on the chance that you’re talking about people in cars (and not the whole logsitical set-up of freight and parcel delivery), I say… Gimme a break, man! Seriously. I’ve been all over the roads of the 48. And both reason and population data agree with what I’ve seen. The majority of people are not located so far away from shopping centers that their weekly gasoline costs would compare to the increases that delivery companies are and will continue to pay (until they die). Less so if they shop by the month. Let me put it like this… At current fuel prices, most people aren’t be paying more than $25/week to do their weekly shopping. Of course, do it monthly and it’s even less. In contrast, transport operations of all kind are paying $60+ extra a week, per truck, to keep their business going. Throw increasing demand and gas price that are sure to rise and WHAM-O!

      I just don’t know how make it any clearer. Consumption is not going to be our future. As Rick pointed out in another post, we need more means of production. So is that Aussie lady on the right track, of whom it is said in the near future will be the richest person in the world. She’s really heavy into mining, I hear. Anyway, I only brought up the thinning advantage of zero sales tax again because I thought I had made it clear why the enegry-cost advantage was kaput as well. And if neither one of those is going to exist for very long…if they ever existed at all… Well, what silver lining have you to see?

      And with that said, I mean, yeah, it may be less depressing to think otherwise, but hey… Don’t, and get over it, and I promise you that not even an Alice in Chains marathon will be able to bring you down a single notch. In fact, I’m gonna go jam out to some AIC right now, to lighten my day! 🙂

    • Mark Uzick April 4, 2012, 4:48 am

      Benjamin: The majority of people are not located so far away from shopping centers that their weekly gasoline costs would compare to the increases that delivery companies are and will continue to pay (until they die). Less so if they shop by the month.

      You’re comparing the cost of a car’s fuel to the total cost of delivery, of which fuel is only a fraction.

      On the basis of fuel alone, I explained why delivery service is more efficient. As to the other costs of overhead, big box stores have costs that dwarf direct delivery, not to mention the non-fuel costs to the consumer of operating his car and the waste of his time traveling and waiting on long lines.

      The variety of choices on-line and the ability to search for the best price is far superior to what the big box store can offer. This is not to say that brick and mortar stores don’t have their own advantages; they will not be going the way of the dinosaur very soon, but they are no longer the undisputed king of the retail world.

  • Rick Ackerman April 3, 2012, 4:29 pm

    Gary, you need to go back to the basics: Ricardo, Bastiat, Smith. Surely you do not believe that a global credit blowout can cure a credit bust? In any event, virtually all of the signs of improvement you’ve cited are hollow. There is only ONE path back to prosperity for the U.S.: massive saving, leading to massive capital investment in new manufacturing capacity — i.e., factories (and not economically negligible businesses like Facebook) that employ workers whose wages are competitive with those of Chinese, Brazilian and Korean workers.

    Bottom line, we will need to sell huge amounts of stuff to the rest of the world to become prosperous again. In the interim, the dramatic plunge in America’s standard of living that is everywhere about you but which you refuse to see, will continue to run its course for perhaps the next 20-30 years. In the meantime, your notion that the creative destruction of a quadrillion dollar edifice of financial leverage can occur without even triggering a recession won’t stand up to scrutiny, let alone economic logic.

    • Steve April 3, 2012, 4:38 pm

      Nice and very good reply Rick. You pulled the trigger before I could.

    • Jim N April 3, 2012, 5:13 pm

      Gary, do you really believe what you posted? Why don’t you look at the other statistics of what really is happening. If i was headed for a waterfall, indeed i would want toknow about it. If my kids were headed for one, i would certainly do what i could to help them if i could.

  • gary leibowitz April 3, 2012, 3:55 pm

    The data is supportinve of a rally. In fact the evidence is mounting that the consumer is once again going back to old habits. I don’t understansd where the conspiracy is. From monthly retail sales, auto sales, employment, etc. the evidence is one sided. A nice recovery. Why recite the fact that e trade is taking over brick and mortar stores? Changing environment has nothing to do with the health of the country. Spending is spending. Who wins and loses is not of concern.

    Can’t figure out the obsession on the notion that becuase we could be heading over a waterfall everyone must be aware of this and deal with it accordingly. Thats not how human nature works. My notion that we should be in a perfect environment for earnings has just been repeated by in an article on Bloomberg’s.
    =====================================
    “The U.S. once again may be emerging as a main engine for global growth — and at an opportune time, as Europe slides into recession and China’s economy decelerates.

    An improving job market, rising stock prices and easier credit are combining to lift U.S. consumer confidence and spending, with optimism measured by the Bloomberg Comfort Index near a four-year high. Personal-consumption expenditures increased by the most in seven months in February, rising 0 U.S. Economy Enters Sweet Spot as China Slows .8 percent, the Commerce Department said last week.
    “We’re entering a sweet spot for the economy,” said Allen Sinai, president of Decision Economics Inc. in New York. “We’re in a self-reinforcing cycle,” where faster employment growth leads to higher household income and increased consumer spending.”

    • Steve April 3, 2012, 4:37 pm

      Nice application of more DEBT and more DEBT, Gary. Once again “sub-prime loans”, liar loans, and people spending their future, that they cannot pay back. The debt keeps getting deeper and deeper and it accumlates faster than 2% inflation. 210T National Debt. I’d bet that less than 1/2 of 1 percent of the People actually plan on being out of debt. Your answer, everyone’s answer MORE DEBT – More LIARS, More CORRUPTION in money theory.

    • Rich April 3, 2012, 7:30 pm

      Re “The data is supportinve of a rally.”

      Except for the grammar, inclined to agree with Gary and Martin Armstrong here for three years.

      As previously posted:

      http://www.martinarmstrong.org/files/A-Forecast-For-Real-Estate.pdf

    • Rich April 3, 2012, 7:38 pm

      Tripling the monetary base may eventually have reflex rally repercussions, despite debt derivative defaults and reduced money multiplier and velocity.

      After all, gold septupled and silver increased ten-fold.

      After three years of a RE rally many may consider “The Bottom,” then all bets are off at least until 2033…

    • Steve April 3, 2012, 7:45 pm

      Rich, a Dollar is still a Dollar, and a federal reserve note has gone from quid pro quo to 35 in the hole indicating a loss for everything discharged. Fed note is now 1/35th of what it was – how is that for loss?

  • Mercurious April 3, 2012, 5:37 am

    Interesting reflection, Rick…it’s no small thing, and I don’t mean in retail space. It’s a paradigm shift, as ken horn above correctly observes. I’m old enough to actually remember the time enclosed malls first came to Texas–when dinosaurs roamed the earth. It was all the rage, walking from store to store and not having to take the weather into account. But the generation that grew up with that norm wanted to enjoy the fresh air, and so the revitalization of Main Street preoccupied the urban planners for a generation or more.

    Now, young consumers look at a “store” as a colorful app on your phone that you open, pick goods from and pay for with credit…that’s the norm. Going to a big box store and mixing it up with the oldsters just doesn’t make it. Plus, here in Texas, I pay $79 a year for two-day delivery on most of my Amazon purchases and get an immediate 8.25% break due to no sales tax. Oh, and Amazon Prime movies for free for the year.

    So while there are those who see the creative destruction as an opportunity, I see the glass as half full: it will be destructive. And I happen to agree with Rick that a commercial market, like the publications business, that is increasingly split into specialties, will have zero need for facilities that resemble historic aircraft museums in size and ongoing maintenance and employee costs.

    As the “anchor stores” take on more and more of their namesake’s weighty character and sink without a trace, you will see the malls metastasize into motley indoor flea markets of small scale stores, kiosks and itinerant entrepreneurs trying out a business idea for three quarters before breaking the lease.

    Will it happen all at once? Not likely. But what’s the counterweight to stop the slow spread of the rot? With the young consumer identifying the “mall experience” as the place where kids with no social media connection hang out, it will be left to people my age who are still frightened by technology to keep the stores open.

    If I were in a commercial property REIT with large mall holdings, I’d go long Metamucil.

  • Mario cavolo April 3, 2012, 1:23 am

    In south Scottsdale, Arizona two full city blocks of retail space next to our restaurant along McDowell road are being razed and replaced with a massive rental apartment community. Well, if that doesn’t speak to many layers of the story…

  • Robert April 3, 2012, 12:58 am

    I fully agree that the big box concept (especially for higher priced consumer goods) is waning…

    Another unmentioned factor that I think is contributing to this demise is sale tax.

    I see several of the Big Box chains now offering many of their products for the exact same price that the manufacturer offers the item online, and augmented by their “free ship to store” feature- meaning that you can order the item online and then go pick it up in a couple days at the location down the street from your house. The rub, however, is that you are still on the hook for the local sales tax when you go to pick it up.

    Many online merchants have sniffed this out; and are now also offering manufacturers’ list prices, along with free ground shipping direct to your door. The kicker is that the pure online retailer charges you NO sales tax if you are ordering from a state outside the one that their company is incorporated in- which they are legally entitled to do….

    For the consumer, the result is an additional 5-7% savings; and who in their right mind would balk at that?

  • Mark Uzick April 2, 2012, 10:41 pm

    Rick, where you see blight I see creative destruction and increased, open ended opportunity.

    • Rick Ackerman April 3, 2012, 4:17 pm

      Yes, of course, the vacant spaces will become something, and this could happen more quickly under the Second Great Depression’s version of the WPA. But I’ll stick with my prediction of expanding urban and suburban blight over the next fifty or so years.

  • Mark Uzick April 2, 2012, 5:29 pm

    Is this a story about a weak retail sector or is it about changing trends in the way that retail is done? Weren’t there similar doom and gloom predictions about the proliferation of “evil” big box stores; why are we supposed to mourn their passing?

    • Benjamin April 2, 2012, 7:07 pm

      a) Door-to-door delivery is the most inefficient way to meet the bulk of our retail needs (energy, trucks, drivers, vehicle insurance, etc…).

      b) With oil and fuel prices strongly trending the way they have been, one must wonder for how long Amazon can continue to get away with “free” shipping.

      And that’s why this isn’t some new Great Thing. Once upon a time, not very long ago in fact, retail and parcel service were not a threat to each other. One was for one purpose (meeting needs of the masses) and the other for another purpose (individual needs).
      The two were only meant to be complementary, not in opposition.

      So one failing means the other is going to as well. The retailers bit off more than they could chew in building too many big stores/malls. They did that because politics used the stick-and-carrot to create a bunch of construction and retail jobs. Now that retail is sinking because of that, Amazon/online are going learn, the hard way, that they weren’t supposed to be competing with the other half of the ship.

    • Rick Ackerman April 2, 2012, 9:01 pm

      No doom and gloom, Mark, just the facts: It’s over for big-box retailers; moreover, the vacancies this will create during the next 10-20 years will go unfilled…forever. I don’t know about “mourning” the passing of big-box stores, but they’re going to be a blight on the landscape for the rest of our, and our children’s, lives.

    • Mark Uzick April 2, 2012, 10:36 pm

      Benjamin April 2, 2012 at 7:07 pm

      a) Door-to-door delivery is the most inefficient way to meet the bulk of our retail needs (energy, trucks, drivers, vehicle insurance, etc…).

      I wonder whether that’s really true: The fuel used by a truck making one more stop along its daily route has got to be less than trip to the big box store; it’s a question of how many trips are saved versus how many extra stops.

      b) With oil and fuel prices strongly trending the way they have been, one must wonder for how long Amazon can continue to get away with “free” shipping.

      Big box stores need to be heated and lighted; they have huge overhead, including property taxes and rents or capital outlay and expenses if they own the own the real estate.

      Also: Big box stores are sales tax disadvantaged. I don’t know how long that will last, but I love the idea that bloated local governments will have to scale back and offer more competitive tax rates and reduced regulations to attract businesses and that real estate expenses should be less of a burden for businesses and families. The “problem” of excess space should lend itself to greater flexibility in zoning regulations and open opportunities for both retail and manufacturing business startups that we haven’t even thought of yet.

      And that’s why this isn’t some new Great Thing. Once upon a time, not very long ago in fact, retail and parcel service were not a threat to each other. One was for one purpose (meeting needs of the masses) and the other for another purpose (individual needs).
      The two were only meant to be complementary, not in opposition.

      And they still are complementary; only a new balance will have to be reached.

      It’s a victory for the mid-sized and “mom and pop” retailers over the mega-sized corporations. I don’t think of Amazon as a a megalithic retailer so much as I think of it as one of many platforms available for small entrepreneurs.

    • Benjamin April 3, 2012, 3:52 pm

      Mark,

      I’m going to cut this short and say to just trust me… Cheap shipping is going to go the way of the mega-mall. I say this as one with no small amount of experience and knowledge in commercial transport. Long story short, it doesn’t matter what a company name is and what it primarliy handles. It all comes down to the same logistics. And I’m telling you, even assuming I’m half wrong wouldn’t allow delivery companies to spend less on energy than a big retail store or mall. Or any other cost, for that matter.

      Online advantage is riding on the thin ice of zero sales tax. It doesn’t need to absorb 100% of consumer activity when 20 will do. Couple that with a doubling of the fuel prices in the U.S., and online retail can kiss it goodbye (and then some). Don’t think that can and will happen? I’ll tell you what I tell every doubter…

      It’s been that high in Europe for some time now. In the past decade, it’s gone up by about 40 nickels.

      (And I hear Canada has recetly done away with its penny. Naturally, the Canadian wannabes here in the U.S. think we should follow them. Last poll I looked at, nearly 2/3rds agreed with them).

      As for the revival of mom and pop retail, that is the crux of the article: How will that happen? Even if banks/realtors were to just give the vacant property away to new, smaller start-ups, that would only further tighten the credit needed to pay the rest of the start-up costs. So personal savings would have to be relied on in order to take get this party going. But on the whole, those are as shot-to-shaving-cream as employment and pay have been.

  • C.C. April 2, 2012, 5:19 pm

    So with all this latest bad news of phony recovery firmly ensconced…

    Did anybody join me last week in picking up a few more pieces of (Real) money – i.e., Au & Ag…? With everything around us becoming more surreal by the day, it’s always nice to hold something in your hand that IS real. Know what I mean?

  • ken horn April 2, 2012, 4:49 pm

    good read, Rick. obviously, the bricks & mortar mentality from the 60’s has long since passed. the combo of stagnant wages, destruction of the dollar & high unemployment as the new normal will weigh heavily on the big boxers & other retailers. the new consumer (age 15 thru 40) has grown up looking at icons on a screen & not patio furniture in a store. this trend will accelerate & will put further pressure on the real estate component of these companies. we are going thru a seminal change in our society & the result will be a huge shift in how we do business & where our investment $$$$ are allocated.

  • Benjamin April 2, 2012, 4:26 pm

    “Last week, Best Buy became a candidate for the death-watch list with the announcement that it plans to close 50 stores and lay off 400 workers as part of a plan to save $800 million in recurring costs.”

    In a crazy world, those closings actually make a lot of sense. Don’t forget, the big-boxers went all wild with the new store constuction. Unfortunately, they’ll still bleed to the extent that they still owe on all that property. That, or the bank(s) will. Whatever the case, it ain’t a recovery in progress!

  • fallingman April 2, 2012, 4:14 pm

    Well presented piece.

  • DanX April 2, 2012, 3:31 pm

    Rick. The government lies. Simple. End of story.

    • Rick Ackerman April 2, 2012, 5:17 pm

      …but not a very interesting essay, Dan.

  • Henry April 2, 2012, 2:33 pm

    My prediction for all the hollowed out shopping malls is that they will be converted into ‘for profit’ debtors prisons. Yes I am predicting a return to debtors prison that were so prevalent in the early history of this country. Wall Street & the big banks will decide enough is enough – pay it back or in you go. Should be a great investment opportunity.

    • Tiburon April 2, 2012, 2:58 pm

      Isn’t that already in place, sort of, in regards the un-Forgivable (is that a word?) Student Loan structure, in the US of A? The Debt that indentures the student for life (or settlement, of course).

      I defaulted on a $3400 Student Loan in Canada (today’s dollars probably more like $20K) back in the way-back, but a brief 20 years passed by then and even the Reciever General and the RCMP had no recourse.
      Reprehensible, I know, and it’s no excuse to point out that a good percentage of my contemporaries were also far more concerned with ‘finding themselves’ than mundane matters like debt to Mother Government.
      {I have since employed a few people, built a few things to ‘improve’ the world best-I-can, paid taxes to ‘the Commons’ steadily enough, so I guess the unwilling ‘investment’ made by society in my case, is at least ‘a push’ in terms of balance}
      I also cannot lay claim, btw, to any prescient understanding of what would and was being done to fiat, {as a further ‘excuse’ for ripping-off the taxpayers}. I was peripherally aware of Gold through the 70’s, knew it to be money instinctively, but had no wherewithall to participate – and only years later did I begin to understand the fuller implications of currency destruction and its societal consequences.

  • VegasBob April 2, 2012, 8:20 am

    Yes, Sears/K-Mart is on the short-list of retailers reaching the end of its death spiral down the toilet bowl, and Best Buy is just starting to circle the bowl. The one that will really surprise everybody when it gets flushed will be JCPenney. That’s because there really is no need for a mid-priced retailer in an economy stratified between low-income WalMart shoppers (80%) and upscale Macy’s shoppers (20%). We’re not quite at that 80-20 split yet, but we will be in a few short years. Middle class job destruction continues unabated, though the numbers are smaller than they were a few years ago.

    I think even AAPL is going to be a great short candidate in a couple of years. Eventually AAPL will saturate the market with its gadgets and they will run out of new premium-priced gadgets with which to dazzle the suckers. One bad quarter will cause that stock to drop 75% in a matter of days.

    The long and the short of it is that this phony “economic recovery” has been engineered on a sea of counterfeit electronic dollars printed by Mr. Bernanke to cover Mr. Obama’s annual $1.5 trillion Federal deficits. But the money-printing can’t be sustained forever. Eventually, Mr. Bernanke or his successor will have no choice but to normalize the money supply or watch the resultant inflation destroy both the currency and what’s left of the US economy.

    • John Jay April 2, 2012, 3:31 pm

      Vegas Bob,
      Here is a short video of a B-52 crash when a reckless pilot stood the thing on its wing at low altitude.
      http://www.youtube.com/watch?v=FUEhNKBi4DY
      The US Dollar has lost over 95% of its altitude since the Fed took over, and BB has stood the thing on its wing with ZIRP and infinity Dollar creation. That B-52 flight path is a good analogy. The last words from that doomed B-52 flight deck? “You’ve killed us.” Pretty much what Ron Paul keeps saying to BB.

  • John Jay April 2, 2012, 4:32 am

    A 25 pound bag of horse carrots just went from $5.99 to $6.49, that’s about a 8.5% increase. Every time pasta goes on sale the following “normal” price is higher. I think we all know who is going to eat it when all that commercial REIT paper goes bad. That’s right, Uncle Sam gets generous with our money once more. Profits are theirs, losses are ours. I see more and more new cars on the road, courtesy of sub prime loans and leases no doubt. There is a recovery of sorts, just in time for the election! And it is all thanks to ZIRP and banks keeping all the non performing mortgages off the books and off the market. I think we we should actually be happy about it, because if ZIRP stops working what follows will not be pretty, not even a little bit.

  • Jill April 2, 2012, 4:09 am

    Thanks for the info on what’s going on in China, Mario. I always enjoy hearing about that.

    Interesting point, Rick, about the commercial real estate’s woes. Could everyone who will get rich off of Amazon and AAPL stock, decide to spend the money on some as-yet-unforseen product or service– so that the companies selling it can fill up all this empty commercial RE space?

    If the Fed can keep fulfilling its self-defined mission of making stock prices rise, a lot of upper class folks will have more income to spend. Of course the folks who don’t have enough money to invest heavily in stocks still won’t be able to buy much.

    I think, Mario, you had estimated a few days ago, that the folks doing well in the U.S. are 40% or so of the population. If so, that would be plenty enough people to make overall spending rise, and company earnings rise. It would be enough to make the economy look prosperous, despite obvious large problems. The best hope would be that the money would “trickle down” and solve the large problems, although it seems unlikely.

    • mario cavolo April 2, 2012, 7:48 am

      Hi Jill, right, your last paragraph describes the idea well. Those who are doing well are doing better than ever…more than covering the lost spending of the bottom segment. Again, I favor the approach which identifies this as a societal schism. Let me be quick to say that my 40% number is just an eyeball’d number for conversation,I have not researched the demographics to come up with a more true and real range…nor do I think published govt stats tell the story well enough….Cheers, Mario

  • Mario cavolo April 2, 2012, 1:01 am

    A compelling collage of points describing that particular aspect of the landscape Rick. It is a transforming societal and economic landscape. Unlimited purchase access on the internet is akin to govt socialism which of course eliminates the need for such services to be provided by the community, less and less need for local community. It’s really quite incredible to watch Chinese society becoming more entrepreneurial while developed countries like the US become less…this generation in historynis going to be a biggie in the history books…

    Cheers, Mario

  • SD1 April 2, 2012, 12:23 am

    May the money your corporations ruthlessly invested into China on “trickle down” tax savings make its way back into the good ol’ USA.


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