Last year, Donald Trump won the election for president by bemoaning the disappearance of the American factory and pledging to bring back manufacturing from other countries.
Now in power, he might have to start worrying about the decline of another traditional pillar of the US economy — the American shopping mall.
Fears that the rise of online shopping will lead to substantial dislocation in the retail sector were stoked on Tuesday when Sears, which also owns department store chain Kmart, warned that “substantial doubt” existed over its ability to operate in the next year.
Although the problems at Sears have been years, if not decades, in the making, they underscore the difficulties faced by many of the large retailers which serve as the so-called “anchor” tenants in the four corners of the standard mall.
“Where are we today? Sears is in a death spiral. Malls are dying,” says Scott Rothbort, a professor of finance at Seton Hall University’s Stillman School of Business and president of Lakeview Asset Management, a boutique advisory firm.
The US has more than five times more retail square footage per person than the UK, France or Japan, according to the International Council of Shopping Centres. At the same time, online shopping is growing in the US at an annual 15 per cent clip compared with an overall rate of just 2.9 per cent, according to government data.
To cope, many big retailers are cutting back on space. This month, JCPenney announced 138 store closings. In January, Macy’s said it would shutter 68 stores. At Sears and Kmart, the number of stores has fallen from about 3,800 a decade ago to 1,430 at the end of the last fiscal year. This year, another 150 are to close.
Department store earnings growth has underperformed all of retail in every quarter since the start of 2012, according to Retail Metrics, with almost all outside of Nordstrom slow to invest heavily in the ecommerce and click and pick options favoured by younger customers.
Analysts fear the result will be further bifurcation in US retailing. Malls in wealthy areas will continue to prosper, as will so-called fast fashion outlets such as Forever 21 and H&M that sell low-cost, on-trend clothes to younger customers. The likely losers will be second-tier malls located in more rural and less well-off places — the kind that voted for Mr Trump.
“There are consequences to large box store closures,” says Chris Bushart, senior director in Fitch’s US commercial mortgage-backed securities group. “Occupancy rates rise at malls and when they lose their anchor tenant, then some of the smaller stores re-evaluate whether they want to be in the space as well.”
The Sears revelations — which appeared in its annual report this week — represented a setback for Eddie Lampert, a Goldman Sachs banker turned hedge fund manager who steered Kmart out of bankruptcy, engineered a takeover of Sears in 2004 and kept the name for the merged entity.
At that time, Mr Lampert promised to create “greater long-term value than either could have generated on a standalone basis”, and offer “a new, more compelling shopping experience with differentiated and expanded product range”.
But as sales fell and losses grew — Sears has reported about $10bn in red ink in the past six fiscal years — the company reacted by cutting costs, raising funds by placing property in a real estate trust, and selling assets, such as its Craftman tool range.
“The primary mistake was not having a retail strategy,” says Neil Saunders, managing director at GlobalData Retail. “Lampert produced multiple financial strategies for Sears but, ultimately, he forgot that stores, assortments and service are the drivers of the financials and not the other way around.”
Where this leaves Mr Lampert is not entirely clear. Like any equity holder in the company, he has lost more than 90 per cent of his investment since the company’s share price peaked in 2007.
However, his hedge fund, ESL Investments, has also loaned hundreds of millions of dollars to the company, giving it creditor status, which could help mitigate losses should Sears seek to reorganise under the bankruptcy code. The annual report said the company has $596m in debt expiring in 2017, and $1.29bn in debt maturing in 2018.
The looming debt deadlines look particularly ominous given the failure of efforts to revive sales at Sears. Same-store sales fell 9.3 per cent at Sears last year, and 5.3 per cent at Kmart.
One former senior Sears executive questions what the retailer can do to turn its fortunes around.
“Declining same stores sales are a nightmare,” says the former executive. “The only way to react is to cut costs. When you cut costs, you cut people, you cut knowledgeable people, you cut inventory, and all of that makes you a less attractive store to go. You keep spiralling down.”
The fall of Sears is particularly politically poignant in the US because of its historical role in the retail sector. For shoppers of a certain age, the company is as American as apple pie.
Richard Sears started out in 1886 as a watch seller in Minneapolis before teaming up in Chicago with Alvah Roebuck to form one of America’s first mail order catalogue businesses, a venture that placed the company squarely in the living rooms of homes around America.
Sears started opening its own stores in the 1920s and shifted its attention to America’s fast-growing cities as chain stores started to eat into its mail-order business. It formed insurer Allstate in the next decade.
After the second world war, Sears was the pre-eminent US retailer with commanding market shares in hardware products and home appliances, and well known brands such as DieHard car batteries, RoadHandler tyres and Winnie the Pooh children’s clothing.
However, the company’s fortunes waned along with the baby boom. Family formations were the wind at its back, and as marriage and birth rates fell, Sears began to search for a new strategy in the 1970s.
It tried to find salvation in financial services, the logic being that an ageing population would seek out help in saving money. But the transition was halfhearted and before long, Sears was spinning off financial holdings — including the Dean Witter brokerage, the Discover credit card, Caldwell Banker realtors and finally Allstate.
What was left has failed to keep up with online retailing competitors such as Amazon, discounters such as Walmart or offline innovators that provided shoppers not just with goods but with experiences — the beauty stores Sephora and Ulta being good examples.
As Mr Lampert cut costs, Sears stores acquired a reputation for simply being dirty. Even with consumer confidence high at the moment, the company’s fortunes look murky.
“It does tell a cautionary tale,” says Mr Saunders of GlobalData Retail. “In the digital era, stores and brands need to give consumers compelling reasons to visit and buy from them. If you fail to do this, you run the risk of being irrelevant.”
