Why big retailers are shuttering stores
Growth in online shopping, high energy costs, and overcapacity are among the factors being blamed for a recent spate of store closures.
By Parija Bhatnagar, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - It's only three weeks into the New Year but retailers have already gotten their hands dirty with an early bout of in-house spring cleaning.

Instead of talking about their growth plans for 2006, many big-name retailers instead are announcing store closings.

It's a "bit unusual," said retail analyst Howard Davidowitz, chairman of Davidowitz & Associates, who attributed the trend to a "unique confluence of events."

Among those retailers closing locations are jeweler Zale Corp. (Research), which is set to turn off the lights at more than 30 of its high-end Bailey Banks & Biddle stores.

Office supplies seller OfficeMax (Research) announced it will close 110 of its 950 U.S. outlets this year as part of its ongoing restructuring efforts. Department store chain Mervyn's plans to close a third of its stores in 2006.

Toy seller Toys R Us is closing 75 of its namesake stores, most of them by springtime, and converting 12 others to Babies R Us locations.

Music retailer Musicland Holding Corp., which filed for Chapter 11 bankruptcy this month, is considering a "significant number of closings of unprofitable stores" under the Sam Goody and Suncoast names, company spokeswoman Laurie Bauer told CNNMoney.com Monday.

Meanwhile, at least one retail bellwether, home improvement leader Home Depot (Research), indicated it would scale back its new store openings over the next five years in favor of exploiting growth opportunities in services and professional markets, outside of its core "do-it-yourself" market.

Why the rash of closings and cutbacks? Davidowitz argued that the U.S. retail market was "too overstored" and therefore a victim of its own overcapacity.

"There's nineteen-and-a-half square foot of retail space for every shopper in this country. That's a lot," Davidowitz said. "Is it natural for companies to keep expanding when the market is already overcrowded with stores, especially when there are numerous projections calling for a slowdown in consumer spending?"

He also blamed online retail sales, which he said are growing about 20 percent a year. "That's a huge increase," said Davidowitz. "Don't you think it's going to eventually have some negative impact on traditional retailing?"

Market research firm ComScore Networks estimates that total online sales, including travel, reached $143.2 billion in 2005, up 22 percent over the previous year.

Jay McIntosh, director of retail and consumer products with Ernst & Young, agreed with Davidowitz.

"Is online retailing stealing market share away from brick-and-mortar stores? Absolutely," said McIntosh. He added, "Online retailing as a group is the second largest retailer after Wal-Mart in terms of annual sales."

To compete, especially on costs, some retailers will need to become leaner, said McIntosh.

Meanwhile, mid-tier department stores are going to shrink, he said, as their customer base migrates to either high-end stores like Saks and Nordstrom (Research), or, at the other end of the spectrum, to value-priced chains like Wal-Mart (Research) or Target (Research).

Wal-Mart, the world's largest retailer, said it expects to open between 270 to 280 of its large format "supercenter" stores in the U.S. in 2006.

"Any time that market share continues to taken by discounters like Wal-Mart, you're going to have to retrench," McIntosh said.

High energy costs are also taking a toll.

"With energy costs escalating, it costs a lot more to run your business, especially if you operate a large fleet of stores," McIntosh said. "I think energy costs will hurt retailers' business in the first quarter."

Strong get stronger

Geoff Wissman, vice president of retail with retail consultancy Retail Forward, pointed to two other competitive issues driving the retail retrenchment.

"We're increasingly seeing the strong getting stronger and the weaker players getting left behind," Wissmann said.

"But 2004 also brought about a large amount of focus in the capital markets on retailers," he said, citing Toys R Us as an example.

A group of investors led by KKR Group, Bain Capital and Vornado Realty Trust bought the specialty toy retailer last March in a multibillion-dollar deal.

"These new institutional owners are looking more closely at the company's balance sheet because they want to make their investments profitable," he said. "So that's one driver for shedding a company's dead weight."

However, Wissman disagreed with both Davidowitz and McIntosh that online retailing has spurred the recent spate of store closings.

"Online retailing still represents just two percent of total industry sales. I see the channel as more synergistic than destructive to traditional retailing," he said.


Retail executives are a little uneasy about '06. Click here for more.

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