E-Commerce as Share of Core Retail Sales

Core Retail Sales Are at All-Time High Despite Industry Shakeout, Says Nadji at RECon

by Jeff Shaw

LAS VEGAS — The roof isn’t about to cave in on the retail industry despite a rash of store closures and bankruptcies. Far from it, insists Hessam Nadji, president and CEO of Marcus & Millichap.

Core retail sales, which exclude auto and gasoline sales, have risen 28 percent from the peak of 2008 on a nominal basis and 12 percent when adjusted for inflation, according to combined data from the Bureau of Labor Statistics, the U.S. Census Bureau and Marcus & Millichap.

Unlike the period leading up to the Great Recession, when unsustainable consumer spending was fed by temporary factors such as overleveraging and homeowners using positive equity in their homes as ATMs to fund unaffordable lifestyles, those behaviors have largely been squelched in this recovery, Nadji points out.

“We have not overleveraged. We have not stretched the consumer,” Nadji told a crowd of several hundred retail real estate professionals gathered at the Renaissance Las Vegas Hotel last Monday, May 22, to hear his presentation followed by a panel discussion on the state of the industry moderated by Bill Rose, director of the national retail group at Marcus & Millichap.

The hour-long program was part of RECon, the annual dealmaking show hosted by the International Council of Shopping Centers. The show attracted 37,000 registrants to the Las Vegas Convention Center.

Economy on Solid Footing

Total employment in the United States is at an all-time high, according to Nadji. The nation’s economy has added 16.3 million jobs since the recovery began. That follows a grim period in which employers shed 8.7 million jobs, mostly in 2008 and 2009. In fact, the U.S. economy has posted 79 consecutive months of continuous job gains. (The recession officially ended in June 2009, according to the Bureau of Economic Research.)

“We continue to add 2 million to 2.5 million jobs a year. The benefit of its slowness, of its gradual trend, is that it’s sustainable. There are no signs of a recession around the corner. As far as the economy goes, it’s steady as she goes.”

In addition, after being a drag on the economy for so many years, the housing market over the past 18 months has been a driving force in the recovery as evidenced by a sharp rise in median home prices since 2012. Every dollar of net worth gained by rising home values generates five cents of retail spending within the following 12 months, according to Nadji. And every home sale creates $5,200 in retail sales.

“The good news is the pie is growing,” said Nadji.

The bad news is that the online commerce has caused a “massive disruption,” leading to store closures and bankruptcies.

The share of department store sales as a percentage of total core retail sales has fallen from about 12 percent in the early 1990s to 4 percent today. Conversely, the share of e-commerce sales has risen sharply during the same period.

E-commerce has also dealt a blow to the retailers in the electronics sector. In March, Radio Shack filed for Chapter 11 bankruptcy protection for the second time in two years and expects to close 550 stores

Unalarmed by Rate of ‘Churn’

The displacement stemming from the growth of e-commerce has resulted in plenty of pain, Nadji acknowledged. “This has caused empty stores, this has caused financial chaos, and it’s not been a fun experience for a lot of investors and shopping center owners.”

From a historical perspective, Nadi said the current wave of store closures is not out of the ordinary. “Going back to the 1990s, we’ve always had store closures in this business,” he said. The high rate of “churn” is to be expected, he said. “That’s the entrepreneurial nature of retail.”

Even though it’s a growing segment and here to stay, e-commerce is just one piece of the puzzle in a broader retail picture, said Nadji. “It’s really important to think about that in the context of your investment strategy.”

What’s more, many traditional brick-and-mortar retailers continue to thrive in the age of online shopping for a variety of reasons. “The common common denominator seems to be value, being nimble and fast, and being extremely consumer-aligned,” said Nadji.

Coming out of the Great Recession, for example, Home Depot capitalized on the fact that many Americans were choosing to renovate their home rather than buy a new one. T.J. Maxx and Marshalls have stayed relevant by keeping their inventory fresh.

Eight of the top 10 online retailers today are “traditional retailers” who operate physical stores while simultaneously having a strong online presence. On the flip side of the coin, tech giants Apple, Microsoft and Amazon collectively operate more than 400 stores, Nadji points out.

Shopping center owners need to determine which of the three categories retailers fall into today when evaluating rent rolls: (1) cheetahs because they move so fast; (2) chameleons

because they have the ability to adapt to the surrounding environment; or (3) slow moving and highly vulnerable retailers.

“Which category does your rent roll fit it in today, and how can you recompose it tomorrow (if necessary) through a value-added process?” asked Nadji.

Enviable Demographics

The United States is a developed economy that finds itself in an “unbelievable demographic position,” Nadji noted. Japan, Russia and Western Europe are all experiencing declining populations compared with a growing population in the United States spread primarily across three demographic groups: millennials (ages 20-34); Generation Xers (35 to 54 years old); and Baby Boomers (the oldest of which are about 70 years of age).

“Notice that there are three waves moving through the system at the same time for the next three decades,” said Nadji. “This is unprecedented. This is highly unusual. It is up to all of us to figure out a way to play in this pool and capture the opportunity that it creates because it’s plentiful.”

All three demographic groups have demonstrated the willingness to spend money on travel, entertainment and dining, said Nadji. “If you could combine travel, entertainment and dining together, they would be the largest category of expenditures: 34 percent for the younger people, 28 percent for the older people.”

Consumers are spending more on dining out than on groceries for the first time ever, said Nadji. “This is a profound statement.”

— Matt Valley

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