A Tale of Two of Two Retails...

Charles Dickens' novel "A Tale of Two Cities" is famous for its opening paragraph, which at the time described the events of the French Revolution, but is quite applicable during this crisis as we look at the retail sector and the recovery.

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

According to the Census Bureau's recent report, U.S. retail sales have returned to pre-pandemic levels and are back on their long-term growth trajectory.

However, this is not the detailed picture that is needed to understand what is actually going on....

When you look a little deeper you will find a different picture. A picture that has a far greater impact on the overall recovery and future of the small business sector in the U.S. and other mature economies.

So while there has been exponential growth in online retail, the traditional bricks-and-mortar retail stores, most of which are SMBs (small and medium-sized businesses) are being decimated, with a low likelihood of any near term return. Where big chains have easy access to capital and can consolidate and ride out the storm, most of the SMB retailers closing stores are not only out of business but also bankrupt out of the capital needed to restart once the storm has passed.

A substantial portion of the damage caused by the great loss of jobs in April due to the pandemic will be permanent. Data on the loss of retail stores in the country shows how that industry may have first-hand knowledge and experience that this is true. 

Based on data compiled by the Wall Street Journal from Coresight Research (https://www.wsj.com/articles/how-coronavirus-changed-the-retail-landscape-11601976600), retail stores continue to disappear in droves each month. After mass layoffs in April, 1,330 stores closed permanently the following month. While the number of closings trended toward recovery for June and July, another huge wave of 2,163 closings was observed in August – highlighting how many retail stores in the U.S. continue to struggle even as city and state governments reopen their doors for business. 

No retail business has been spared from the COVID-19 economic crisis, with small businesses closing their doors at similar rates to big corporations declaring for bankruptcy. Still, in terms of total store closures, small businesses may be suffering the most.

And the data gets pretty ugly when one looks in key metro areas and especially in Leisure and Hospitality...

163,735 Business Closed in the U.S. Since March 1, 2020

According to Christian Kreznar's coverage in Forbes (https://www.forbes.com/sites/christiankreznar/2020/09/16/small-businesses-are-closing-at-a-rapid-pace-with-restaurants-and-retailers-on-the-west-coast-among-the-hardest-hit/#83b235550330), 163,735 mostly small business closed in the U.S. since March 1, 2020, of which a large number will never return.

The Yelp Economic Impact report, which tracks business closures through Yelp customer review listings, found that an estimated 163,735 businesses have closed in the U.S. since March 1. The numbers represent an increase of 23% since July 10, when the count of closures sat at 132,580.

Retailers, bars and restaurants continue to be among the hardest-hit businesses. Some 32,000 restaurants have shuttered since the start of the pandemic, with 61% expecting closures to be permanent. Nightclubs and bars, a smaller market, have lost about 6,451 businesses, over half permanently, while retailers have seen 30,374 closures

These closures and the resulting permanent loss of jobs and economic activity will make the economic recovery from the pandemic a much longer and bumpier journey than many expect.

While some of these businesses have been able to pivot and become digital businesses, many will just disappear – never to return.

So what we clearly see is not a huge drop in demand, but rather a shift in demand and the beginning of a long-term drop in economic activity as commerce moves online, obviating the need for much of the economic activity required for brick-and-mortar retail.

The impact is not just job losses and the resulting loss of economic activity. It extends further down the economic value chain to the owners of the retail locations where these small businesses were located, who now find themselves unable to make loan payments on because they are not collecting sufficient rental income to pay their loans. In the near future, banks will have to begin foreclosure/eviction procedures resulting in further economic losses as the retail asset owners relinquish properties to their lenders. This then causes a glut of commercial properties hitting the market with few buyers given the uncertain outlook of the near and long-term economic outlook and return of brick-and-mortar retail. This shift in economic activity has further impacts on communities, municipalities, tax revenues for state and local, and much more...

Meanwhile, the e-commerce companies that enable us all to shop in the new stay-at-home world have taken up the shift in demand. Amazon, Etsy, Shopify, and others provide small businesses with ways to reach customers through their smartphones and the Internet.

Some small businesses have been able to pivot to digital. For example, yoga instructors who lost their jobs as studios closed to the public started online offering online classes using YouTube and Facebook live - in some cases dramatically increasing their incomes with no need for infrastructure other than a good internet connection and live streaming setup.

However, it is much harder for clothing retailers, local family restaurants, and entertainment venues to pivot and replace their revenue streams online, which means that many of these changes will be long-term and maybe even permanent in some cases.

In conclusion, we are experiencing the end of an era and the acceleration of the transition to an increasingly online retail experience. In this tale of two retails, just like in Dickens' Tale of Two Cities, some will experience this new world as the "best of times" and for others, it will be "the worst of times". I for one will mourn the loss of my local favorite dining spots and eclectic retailers. Let's hope they will someday return.

#pandemic #retail #economy