A Blog by Jonathan Low

 

Aug 25, 2012

Location, Location, Location: Big Box Retailers Lost in Suburbia

'If you build it, they will come.'

That was the mega-trend think that drove big box retailers, the massive one-theme stores which dominate the commercial landscape, to follow the real estate industry into the 'burbs.

They passed go and kept going into the exurbs, thinking, as one of the most famous movie lines of all time had it, that if they built it, customers would come.

Land was there for the taking. Mortgages were cheap. Homes were America's magic money machine. Buy a stake with OPM (Other People's Money) and sell to the next family in line when you're ready to move on. No muss, no fuss. And nothing but upside. And, of course, all those home buyers were going to need garden tools, bed linens, large screen TVs, cocktail glasses, storage cabinets, guacamole and chips. So the companies that supply all that stuff could just follow the discarded cash register receipts to glory.

And then that huge bummer called 'the downside,' which everyone had heard about but no one believed existed, actually poked its head out of the dumpster. The financial markets crashed, jobs evaporated, savings disappeared and the housing market melted like an ice cube on a hot day. Suddenly, no one needed all that cool stuff. At least compared to food and clothes and gas and health care. Even in a values-laden post-industrial economy, money started to matter. Cities are looking better to people who have to be concerned about the price of cars, insurance and gas. On top of the prices for mortgage payments, air conditioning, heating oil and property taxes.

So now, in addition to empty houses with unaffordable mortgages, we have empty stores with unaffordable leases.

The US is a consumer driven economy. That but presumes the consumer has a job and some income to spend. The growth strategy the retailers pursued was a natural extension of that first initiated by the construction of the first shopping mall outside Minneapolis in the 1950s. It has never stopped. And the stores that both drove and pursued it had no reason to look back. But strategies based on the assumption that the consumer would always bounce back to buy have left their parent companies with too many locations in too many ghost towns. On top of the drain that ecommerce represents. 'Lookin' for love in all the wrong places,' as the 1970s tune had it.

The real mega-trend is urbanization and an aging population. The retailers are going to have to figure out how to write off those under-utilized locations and remember that customers have to be followed. They can't always be led. JL

Justin Lahart reports in the Wall Street Journal:
Best Buy and Lowe's don't seem all that similar. But they have a common problem: location, location, location.
Best Buy, the troubled big-box consumer-electronics retailer, announced Monday that it picked Hubert Joly as its new CEO, and the stock dropped 10% on the day. Lowe's slipped 5.8% on results that fell short of analysts' estimates and were especially disappointing in light of the solid results rival Home Depot reported last week.

Of the two companies, Best Buy is clearly in the most perilous straits. With shoppers increasingly comfortable buying electronics online, it is facing stiff competition from the likes of Amazon.com AMZN +1.88%and struggling to find a business model, if there is one, that will allow it to thrive. Lowe's home-improvement business, in contrast, has been largely untouched by online competition, and although it is facing a re-energized Home Depot, an improving outlook for housing puts some wind at its back.

But both Best Buy and Lowe's are saddled with poorly performing stores whose problems may have less to do with how they are run but more where they are located.

The decade from 2000 to 2010 was a period of rapid store expansion for both companies. In early 2000, there were 357 Best Buy stores in the U.S.; early in 2010 there were 1,069. Lowe's went from 576 to 1,694 U.S. stores over the same period. Since then both are broadly flat.

Through much of the decade, expansion-minded retailers followed a strategy of chasing rooftops. As home builders plunked down houses farther and farther away from urban centers, retail real-estate developers followed with new shopping centers. But the recession and housing bust put an end to that.

With lower incomes and higher debt loads, homeowners in the exurbs, the outermost fringes of the suburbs, were among the hardest hit by the downturn. Population growth in exurbs has slowed to a standstill, so many of the customers that were expected to be shopping at outlying malls have never turned up.

Suburbs closer in to city centers have fared better, and cities themselves are drawing more people. From July 2010 to July 2011, city centers expanded faster than suburbs in 27 of America's 51 largest metropolitan areas. That is a trend that may persist as factors like high gasoline prices and declining urban crime persuade more people to try to shorten their commutes. Moreover, higher income households, the most attractive customers, are gravitating closer to the urban core.

It's a demographic shift that could potentially be as disruptive for retailers as the previous push to the suburbs, which eventually did in the likes of Montgomery Ward. For companies like Lowe's, the test will be getting stores in the right places. For Best Buy, which helped pioneer a big-box strategy that flourished with exurban growth, the challenge runs deeper

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