Does the United States Have too Many Stores?

Some chains may be struggling at least in part because they built too many locations, as did many of their competitors. In some ways, that makes the current retail situation more of a correction than the wholesale shift in shopping that many think it is.

In this segment of Industry Focus: Consumer Goods, Sarah Priestley is sitting in as host and is joined by Motley Fool contributor Daniel Kline to look at what's happening in retail. The two talk about store closures and why they're happening, as well as when they may stop. They also look at how malls are changing and what shopping centers will look like in the future.

Sarah Priestley: On that point about the physical stores and the size, I'm interested to get your opinion on whether all of this space is still going to be saved, because I have an interesting statistic. The U.S. has six times more square feet per capita retail space than the U.K. And obviously, so, that is the availability of space. But that's a huge amount of retail space. Can all of this be used?

Dan Kline: No. It's too much. We talked a lot about this -- there's jokes on The Simpsons about the sad mall, but most communities have the sad mall, which maybe has the C-level Macy's (M 0.16%) or J.C. Penney as the anchor, and it's the only mall that has some local stores, and maybe one of those places that sells $49 suits. I think you're going to start to see -- and actually, we talked about this a little bit upstairs -- the new mall is going to push out the old mall. You're going to see closures. There's a demand for housing, so you're going to see a lot of conversions. We have too much retail space. There were a lot of articles this week about how difficult it's going to be to fill the 300-something hhgregg stores. There's only so many trampoline places that can go into a town, or movie theaters. And yeah, some malls can be anchored by grocery stores. But no, we have too much space, and there's going to be an absolute pullback in that area.

Priestley: The concluding thoughts on that basis, then, is that some are going to lose, but generally, if you can target your customer, if you can meet your customer where they're at, you can still make the most of the space that you have.

Kline: Yeah. I think you have to do what J.C. Penney is doing and look at your stores, and maybe get rid of some of them. Or change locations. Apple, near where my mom lives, in Salem, Mass., was in the mall. They've recently moved to an outdoor plaza, because they found that if you're going to get your iMac repaired, it's a giant pain to walk a 27-inch computer through the mall, drop it off, then come back and pick it up, whereas if they could locate in this lifestyle plaza, you can park right in front of the store, you can walk in, and it's a much easier shopping experience. So I think stores and retailers need to examine on a store-by-store, location-by-location basis, does this location make sense? Can I make better use of the space? Can I bring in vendors or partners? Are there services? If I'm a J.C. Penney, should I double down on salons, should I put in a massage studio; should there be yoga at Barnes & Noble (BKS)? Who knows what else. I've joked for years that Barnes & Noble should put in music lessons because it would be a very logical tie-in to what they do, and they already sell all the books. You should be looking at diversification and capturing people and going beyond shopping. There's very little that you need that it isn't easier to get from [Amazon.com]. So if the experience isn't enjoyable, and there isn't a nice cup of coffee or a frozen yogurt or something that's part of the experience, then you aren't going to leave your house.

Priestley: You said double down -- that was the phrase you used on the concept, and I think that's exactly right. The problem with department stores now is they're trying to be everything to everybody and have not really been successful anywhere. I think these companies need to know who their audience is, who their consumer is, and really facilitate what they want. Barnes & Noble yoga classes sounds ridiculous, but if Barnes & Noble's cafe has a lot of stay-at-home mothers and young students that might be interested in doing things like that, then it's a great idea.

Kline: If you're Barnes & Noble, you're locked into leases, very long-term leases, in a lot of cases. And you used to stock music, DVDs.

Priestley: Those things used to exist. [laughs] 

Kline: You don't need those anymore. And while they've brought in games and some other sort of incidental retail, most Barnes & Noble locations have big, empty spaces. So what do you do with the space? You could make it a day care, you could make it a yoga studio, you could make it music -- you know, privacy places, whatever it is, figure out how to monetize that. Retailers use a formula where they look at, how many dollars is this square foot producing? If it's just picnic tables where people can read your magazines for free, it's not producing any dollars. There's a lot of low-impact ways -- bring in an outside vendor. What's compatible to book sales? Maybe women's shoes are up. Super logical. You find there's a correlation. Maybe it's pet supplies. I don't know what the answer is. But do those studies, and go to those vendors. If you go to Wal-Mart in certain markets, there's eyeglass places that are not Wal-Mart; there's Music and Arts, which is a chain of music retailers that specializes mostly in elementary-school kids and lessons. Find the things your customers want and bring them in. Even if it's just a breakeven, they're going to shop at you more. Costco worries about frequency of visits. The reason they essentially give away gas is because you're going to come to Costco more often, you're going to be more tied to them, you're going to renew your membership, maybe you'll buy more stuff. Every store needs to think that way. 

Priestley: So, final thought, if I'm a Macy's or a [Sears Holdings] investor, what would you advise me to listen out to, and in the earnings call, what would you want to see from management?

Kline: If you're a Sears investor, don't believe anything they're saying. It's a bit of a shell game. Vince and I have talked about this at least four or five times. If you have $2 billion in assets and $8 billion in debt, you might be able to use your assets for a certain amount of time to forestall your debt. But if you haven't fundamentally changed your business, which they have not, then you're in real trouble. Macy's is a different story. Macy's is a profitable company that's not as profitable, that's struggling. I would look at, are there really new ideas? Are they doing things differently? Are they making bold changes? I would like to see Macy's testing 10 concepts that seven of them sound crazy to see what they are. Maybe they're renting out birthday-party clowns in one store, and they are putting in upscale cafes, which I think some Macy's actually have. But find different things, try different things. Also realize that if you're Macy's, the negativity is partially because you are a publicly traded company, which is expected to grow, grow, grow. As a private company, which could happen, there has been some interest in buying them; they're a stable business that just needs to pivot. They're not a failing business the way Sears is.