Retail apocalypse or business as usual?

The recent struggles of many American retail firms have some analysts warning of a retail apocalypse involving the closure of many large stores.

At first blush, this would seem ominous, with such major chains as Sears, JCPenney, Kmart, Macy’s, HH Gregg, RadioShack, Staples, GameStop, Gander Mountain and others closing many locations. Many of these firms have or shortly will declare bankruptcy, but what we are seeing is not a retail apocalypse.

Instead, it appears to be a rather straightforward adjustment to a few long-term trends.

First, Americans are continuing to buy retail goods, but the share of income spent on goods continues its lengthy decline. The consumption of services is a hallmark of a developed economy, and we are at least 350 years into that trend.

The more recent data tells the story clearly. Since the end of World War II, American consumption of goods has dropped from nearly 70 percent of household income to about 30 percent. So, the retail sales of goods will grow slower than the economy as a whole.

Second, business churn remains very high in retail. Many establishments turn over the equivalent of more than 100 percent of staff each year, and the birth and death of new firms is a constant part of the industry. Sears and Montgomery Ward killed off so many small business in the 1920s that both firms offered to ship their products to consumers in plain brown wrapping paper, so as to avoid community censure.

The retail apocalypse might simply be the illusion of many well-known firms disappearing, rather than an actual retail apocalypse. Moreover, the recent troubles might be partly due to tighter labor markets. Most struggling retail firms are unlikely to compete well on wages. From the beginning of the Great Recession until mid-2015, wages were stagnant and workers plentiful.

With few workers unemployed workers and rising wages, the exodus of marginal firms from retail markets may be inevitable due to the inability to staff stores.

Third, e-commerce is alive and well. Online sales growth has averaged 10 percent per year for a decade and a half. This is good news for consumers and for successful e-retailers, not so much for those who cannot compete online. Thus, the brick and mortar stores struggle, while Amazon and other online stores thrive.

Finally, the movement of households from rural to urban places seems to be accelerating. Thus, the declining demand for local retail items means that maybe one-third of existing covered malls will close in the next few years. The long list of closures on deadmalls.com will surely grow, leaving many small and mid-sized towns with a vacant mall.

Thus, the much ballyhooed retail apocalypse might simply be the market reaction to changing retail geography, changes in tastes and rising wages.

That leaves little for us to worry about, except how our policymakers might respond to the problem. The issue is that in too many places, taxpayers are asked to subsidize retail firm expansions.

Whether they are malls, sporting goods or groceries, the wisdom of such efforts is doubtful. The sole exception to this is within a large, growing urban community. Elsewhere, there may be no better signal of a failing community than its propensity to spend tax dollars to subsidize retail stores.

Michael Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University.
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