Just before the New Year came the first bit of holiday casualty news. Sears revealed it was closing stores after rough holiday sales, quoting “performance” and “the difficult economic environment.” The company intended to implement a series of actions to reduce ongoing expenses, adjust its base, and accelerate the transformation of its business model. One such specific action included closing 100 to 120 Kmart and Sears full-line stores.

The types of retailers that will continue to struggle in this market are the ones that are working from the same “playbook” historically, says Richard Walter, president of Faris Lee Investments in Irvine, CA. Sears is having issues, Walter says, because “they are not focusing on the retail needs of the consumers, and on giving consumers a different and more positive experience. Retailers need to continue to adapt during these economic times.”

Sears’ main problem is that “they’re trying to figure out a way to compete with the Walmarts and other big-box retailers nationally and appear be in the process of restructuring their portfolio,” explains Kyle Matthews, VP of investments at the Encino, CA-office of Marcus & Millichap. In addition to the competition from their big-box brethren, he says, “they are competing more and more with the discount chains as well.”

It isn’t just Sears that has taken the hit. Tesco’s Fresh & Easy Neighborhood Market revealed plans to close seven stores in California along with four stores in Phoenix and one in Las Vegas, but will reopen “when economic and business conditions warrant.” A host of other retailers also reported a decrease in store sales. For example, JC Penney Co. reported in January that total company sales in December decreased 2.3%. Aeropostale Inc.’s total net sales for the nine-week period ended Dec. 31, 2011 decreased 5%.

But according to Steve Yenser, Atlanta-based EVP of Jones Lang LaSalle retail, a decrease in store sales doesn’t necessarily translate to store closures. “It’s normal for retailers to look at culling poor-performing stores from their fleets,” he says. “This can be via closures or, as with a lot of big-box tenants, downsizing footprints to smaller square feet, which creates both opportunity and headache for landlords depending on specific center strengths etc.,” he says. “Landlords need to be thinking proactively about their portfolios moving into 2012 and try to anticipate where their retailer issues might be.”

The Sears closures, Yenser says, will create opportunities for the “better” A centers, and headaches for “tougher” C-center landlords. Although specific locations weren’t revealed as of press time, in the quality A centers, Yenser says, closures allow for an opportunity for landlords to “upgrade economics and merchandise mix.” He adds that it can also create a path to a larger expansion or redevelopment opportunity. “For the tougher centers, it could bring about co-tenancy issues and lead to further closings of other stores,” he says, adding that “Sears has a lot of great real estate but the store closing list probably skews more toward the tougher locations.”

But it really does depend on the market, the center’s quality and location, Yenser adds.

Michael Wiener, president and CEO of Excess Space Retail Services Inc., a specialist in real estate disposition and lease restructuring for retailers with offices in Lake Success, NY, and Huntington Beach, CA, expects to see more store closures in 2012. Although he won’t name specific retailers, he “predicts a large number of non-bankruptcy closings,” but points out that it will be due in part to “tepid expansion,” which he says gives retailers an opportunity to review the portfolio for closures of underperforming stores.

Wiener says that although doubtful that store closures on the whole will ever be welcome, “there are exceptions where the spaces are well located and perhaps where the retailer is in well under market.” In that case, he says, “their departure creates an opportunity for the landlord to get a higher rent.”

Marcus & Millichap’s Matthews predicts that the next retailers to face trouble will be those that sell electronics. “The Best Buys of the world have basically become a showroom for Amazon,” he says, adding that Best Buy has already revealed that it’s seeking smaller footprints moving forward and plans on walling off to sublease space at existing sites. In addition to the online assault, Matthews says, “you’re seeing shrinking demand for DVDs and CDs.”

He continues, “Many of these larger big-box concepts are realizing that they just don’t need the amount of space they once did. Because more and more purchases are taking place online, you can shrink the brick and mortar store to basically act as a showroom, without needing as much of the physical product on site as in the past.”

Walter points out that the big-box retailers that are doing best actually follow the “clicks and bricks” business model, whereby they compete with internet sellers and have the advantage of locations where consumer can “touch” the product easily. “Many consumers are leery of buying a 60-inch flat-screen TV online because of the potential issue of returning the product or service,” he says. As for retailers that sell CDs, Walter, like Matthews, says they have to adapt to the changing consumer. “Why buy the album when you can ‘cherry pick’ the songs for 99 cents each and get them immediately on your iPod?” he asks.

And while some retailers are closing shop, Macy’s recently revealed that it plans to open 11 new Macy’s and Bloomingdale’s stores, but it will also close nine existing stores of the two brands, and will replace one of each. According to Terry Lundgren, chairman of Macy’s, the moves focus growth on the best and most productive locations. “This requires us to make some difficult decisions to close stores that no longer meet our performance requirements,” he said in a statement.

One Macy’s landlord says the closure isn’t too detrimental. As sister publication GlobeSt.com previously reported, David Browning, manager at Parmatown Mall in Parma, OH, where one Macy’s store will close, says that “The long-expected departure of Macy’s from the Parmatown family of tenants helps facilitate our goal of redeveloping and reconfiguring this dynamic mall.”

As in any business, the larger the retailer the more difficult it is to be agile in this market cycle, explains Faris Lee’s Walter. “Discounters are doing well because consumers in many regions have less money to spend, and they want to spend it more efficiently and feel like they are getting great value.” Case in point is Dollar General, which recently revealed plans to open 50 stores in California alone this year.

Instant Insights /

Retailers' New Reality: Smaller Stores, Shrinking Sales

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