A giant wave of store closures is about to hit the US
(Rolling Acres Mall in Akron, Ohio.Nicholas Eckhart)
Retailers are bracing for a fresh wave of store closures at the start of the new year.
The industry is heading into 2017 with a glut of store space as shopping continues to shift online and foot traffic to malls declines, according to analysts.
"If you are weaker player, it's going to be a very tough 2017 for you," said RJ Hottovy, a consumer equity strategist for Morningstar.
He said he's expecting a number of retailers to file for bankruptcy next year, in addition to mass store closures.
Nearly every major department store, including Macy's, Kohl's, Walmart, and Sears, have collectively closed hundreds of stores over the last couple years to try and stem losses from unprofitable stores and the rise of ecommerce.
But the closures are far from over.
Macy's has already said that it's planning to close 100 stores, or about 15% of its fleet, in 2017. Sears is shuttering at least 30 Sears and Kmart stores by April, and additional closures are expected to be announced soon. CVS also said this month that it's planning to shut down 70 locations.
Mall stores like Aeropostale, which filed for bankruptcy in May, American Eagle, Chicos, Finish Line, Men's Wearhouse, and The Children's Place are also in the midst of multi-year plans to close stores.
Many more announcements like these are expected in the coming months.
The start of the year is a popular time to announce store closures. Nearly half of annual store closings announced since 2010 have occurred in the first quarter, CNBC reports.
In addition to closing stores, retailers are also looking to shrink their existing locations.
"As leases come up, you're going to see a gradual rotation into smaller-footprint stores," Hottovy said.
Despite recent closures, the US is still oversaturated with stores.
The US has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia — the next two countries with the highest retail space per capita, according to a Morningstar report from October.
"Across retail overall the US has too much space and too many shops," said Neil Saunders, CEO of the retail consulting firm Conlumino. "As shopping patterns have changed, some of those shops are also in the wrong place and are of the wrong size or configuration."
As stores continue to close, many shopping malls will be forced to shut down as well.
When an anchor store like Sears or Macy's closes, it often triggers a "downward spiral in performance" for shopping malls, Morningstar analysts wrote in the report from October.
The malls don't only lose the income and shopper traffic from that store's business. The closure often triggers "co-tenancy clauses" that allow the remaining mall tenants to exercise their right to terminate their leases or renegotiate the terms, typically with a period of lower rents, until another retailer moves into the vacant anchor space.
To reduce losses, malls must quickly find a replacement tenant for the massive retail space that the anchor store occupied, which is nearly impossible — especially in malls that are already financially strapped — when every major department store is reducing its retail footprint.
That can have "grave" consequences for shopping malls, especially in markets where it's harder to transform vacant mall space into non-retail space like apartments, according to the analysts.
The Morningstar report supports another recent analysis from Credit Suisse that said about 200 shopping malls are at risk of shutting down if Sears continues to close stores.
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