Is There a Future for the Middle Tier Retailer?

JC Penney store front

Is There a Future for the Middle Tier Retailer?

By Thursday Review staff | published June 30, 2014 |

It’s one of those good news-bad news package deals. The good news is that despite several serious setbacks—a general increase in food prices due to the severe winter, a measurable rise in gas and oil prices as a result of disruptions in the Middle East and the Ukraine, and uncertainty about the long-term outlook for the economy—things are looking better, on the whole.

April saw a surge in the growth of jobs, 288,000 in total, one of the best months in a year, and in keeping with this year’s monthly average growth of 214,000 new jobs. Despite the severity of winter, which put the brakes on home and business construction, transportation, and car sales, employers have been hiring more this year than expected. Many economists now believe that the pace of jobs growth may continue its strength throughout the second half of 2014—as long as oil and gas prices don’t rise to such an extreme that we see another mini-recession similar to winter.

The bad news is that many retailers are still suffering. And for some, the pain may be signs of long-term, potentially fatal conditions and market changes.

One explanation is that a combination of factors put the kibosh of consumer spending starting last fall. First came the Target data breach, a security failure which may have affected more than 70 million credit and debit card users. Within weeks we learned that things were worse when other retailers also revealed similar massive data thefts, including Michael’s and Neiman Marcus. Holiday spending began to slow dramatically, and those consumers who were shopping did so online. Then, even before the dust had started to settle on the full implications of the Target breach, winter arrived with a vengeance, delivering nearly twelve weeks of record-breaking cold—along with ice, snow, sleet, and frozen roads.

The effect of all of this on mid-scale retailers was the most dramatic. Already troubled middle tier chains like JC Penney, Sears, and Kohl’s suffered mightily. Target, which had previously been doing well, saw its worst quarter ever, and watched its profits plummet. Staples announced it planned to shutter at least one eighth of all its stores, and Radio Shack revealed it would be forced to close an astonishing 1000 retail locations and lay off thousands. Spending in the retail sector began to cleave into two groups—high-end consumers, and those in search of bargains.

This wide divide left many of the midmarket stores without customers, and suffering the most were Sears, Kmart, JC Penney and Kohl’s. Stores with lots of market overlap, like Office Depot, Office Max and Staples,  also found themselves under intense pressure. Office Depot and Office Max may have bought themselves some time with their recent merger, an effort—desperate some analysts say—to bring order and balance to their books.

But the problems facing the larger middle tier chains won’t go away with selected store closings, layoffs and a few mergers. Some retail analysts say that a few of these stores may be gone forever, and sooner than we think. Americans have already been making the transition toward online purchasing for a decade or more. The severity of winter may have served as a catalyst to push that process forward even faster. Amazon, for example, saw its best holiday season ever in 2013, and its best first quarter in a decade.  Much of Amazon's gains came at the direct expense of traditional retailers.

Furthermore, the demographic tipping point may have arrived for the big mid-market retailers, as they continue to lose customers. Older customers—in their 70s and 80s—shop less as their incomes diminish or their retirement cash remains constant. Middle-agers, mostly Baby Boomers, are now entering retirement or struggling to work out their last years of full-time work before retirement—and their disposable income is also shrinking, though at a slightly slower rate. Boomers have also developed more careful purchasing patterns. In both cases, these groups represent core customer bases for stores like Sears and JC Penney.

Worse for JC Penney was its failed experiment at redesigning the layout and look of its stores. Thought by some JC Penney insiders to be just the thing to attract new, younger shoppers, the massive makeover only served to drive away what remained of its loyal customer groups, and the remodeling did little to lure Gen X or Gen Y. Traditional brands were altered or dropped altogether, further alienating some shoppers.

Sears, whose roots in troubled soil date back decades, has generally blamed its woes on Wal-Mart. But Sears, like JC Penney, is losing its traditional base of shoppers who have grown older and whose spending patterns have changed. And like JC Penney, Sears has done very little to attract younger consumers. Sears has also faced customer leakage toward the big discount clubs, most prominently Sam’s Club and Costco, where many customers—young and old—can buy some of the same products cheaper.

Kohl’s has seen the worst numbers, with a whopping 15% profit loss just this year. Despite a variety of sales promotions, coupons and discounts, it has failed to jumpstart its cash registers since the start of winter. Kohl’s has also engaged in unproductive tinkering with product lines and brands, and like both Sears and JC Penney, it is largely failing to lure younger shoppers into its stores. Kohl’s, even more than the other middle tier retailers, is also losing business to the internet, where many customers can find the same shirts or pants cheaper, without the complexity of browsing through the store.

More store closures are likely to be announced later this year, and some downsizing may come as early as this summer. JC Penney announced early this year it planned to close 33 stores, but some analysts suggest that it may face the need to close even more before the end of next year. Kmart has already closed scores of locations, and it plans to close more over the next 18 months.

But there is a ripple effect in all of this as well. More store closures are likely to be announced later this year, and some downsizing may come as early as this summer. The multiplier effect suggests that these closures—JC Penney, Sears, Office Depot, Office Max, Staples—will begin to have a measurable effect on shopping centers and malls nationwide. One predictable outcome will be more empty retail space in existing shopping areas, and even a slowdown in construction of new malls and retail areas. As a direct result of having fewer anchor stores, these same shopping centers may see smaller shops and services close or move away. New tenants will be reluctant to occupy space in a half-empty center. And the cost of this will trickle quickly into the budgets of cities, counties, and states whose coffers will suffer as a result of having fewer retailers—large or small—paying taxes and fees.

But optimists say that once U.S. consumers finally get brave enough to begin spending again—and that may depend on how many people enter the workforce this year and into next year—some of this retail shrinkage may stop, and, under the right conditions, new stores may enter empty spaces. If the jobs numbers continue to rise each month, then the middle tier retail sector may get a reprieve, but only if a lot of people stop shopping online and take a drive to the mall.

Related Thursday Review articles:

Kohl’s Facing Profit Decline; Thursday Review; May 28, 2014.

Oil Prices May Hamper Confidence; Thursday Review; June 24, 2014.