America Confronts the Retail Apocalypse: A Debate
(Bloomberg Opinion) -- Shuttered storefronts are common in cities across the U.S. Shopping malls that once thrived at the intersections of busy suburban thoroughfares are empty and abandoned. Meanwhile, online retailing lead by Amazon.com keeps taking a bigger share of the consumption pie. The outlook for traditional retailers seems doubtful at best. Bloomberg Opinion columnists Conor Sen and Noah Smith met recently online to discuss the state of the industry.
Noah Smith: The U.S. is sometimes said to be in a retail apocalypse. The number of stores peaked in 2011, the rate of closings has risen, and the rate of openings has fallen. And this has come during an economic expansion, implying that a downturn would look even grimmer. Though some disagree, the obvious culprit would seem to be the relentless rise of e-commerce, which takes demand away from brick-and-mortar businesses.
In a world of perfectly mobile capital and labor, store closings wouldn’t seem like a big deal — after all, if e-commerce is more productive, then we should switch to that, right? But in reality, store closings can have negative economic effects on the surrounding areas. Fewer local retail jobs can cause towns to shrink, making it hard to support existing infrastructure. Empty stores can become havens for crime, as well as simply being eyesores that make a town a less attractive place to live. Given all these negative local effects, should we be worried?
Conor Sen: There’s a lot to unpack here. There are three related factors people think about when the topic of the retail apocalypse comes up. There’s the fate of specific struggling retailers like Sears and the now-bankrupt Toys “R” Us. There’s the fate of the real estate left behind when those retailers go away. And there’s the outlook for brick-and-mortar shopping in general.
The first should be the least controversial — a lot of brick-and-mortar retailers will disappear. I speculated late last year that consolidation could look a bit like what’s happened with airlines over the past generation, where some franchises go away, the remaining franchises cut capacity, and we’re left with middle-class communities having one or two big box stores instead of the greater variety that exists today.
The second issue, what happens with the real estate left behind, isn’t so much a retail story as it is a health-of-the-community story. Adam Ozimek at Moody’s has shown that the decline of retail has not been traumatic at the aggregate level, and at the community level retail employment has closely tracked population growth. In communities with good economies, empty retail boxes are likely to find a suitable replacement use, whereas in struggling communities they might not. So the vacant boxes conversation isn’t that much of a retail story.
The third issue about the future of brick-and-mortar retail looks better than it has in awhile, mostly due to the growing hurdles for e-commerce. Unless you’re Amazon, the cost of acquiring customers online is surging, thanks to higher ad rates at Facebook and Google. Freight costs are rising, making shipping to customers more expensive. Consumers might prefer shopping online, but if it’s more expensive, that’s going to make it a more onerous proposition for households with tight budgets. Unless e-commerce firms figure out a way to cut Facebook and Google out of the process, and we roll out self-driving trucks soon, I think brick-and-mortar shopping will stabilize sooner than people think.
NS: The idea of rising costs for e-commerce is interesting — if you’re right, e-commerce’s growth in market share might be a temporary phenomenon rather than an inexorable trend. But remember that brick-and-mortar retail has a huge cost that doesn’t commonly get calculated — time. Going shopping takes a lot more time than clicking some Amazon buttons. As people’s time becomes more valuable — hopefully because of rising incomes, but also because of consumer technology that makes our leisure time more fun — it seems like they’ll increasingly value that convenience.
As for e-commerce jobs replacing retail jobs, that’s great. In fact, I never thought e-commerce was a big threat to employment. But that doesn’t much help the problem of local externalities. It doesn’t help the problems of half-depopulated towns, shrunken tax bases, wasting capital assets and bad neighborhoods that can result from removing a large percentage of a town’s businesses. How do we deal with that?
CS: Regarding your comment about the value of time, if productivity growth leads to rising incomes, giving people more resources to have things delivered to them rather than having to do that shopping themselves, then great! But I wonder if labor slack and stagnant incomes, particularly at the low end, in the earlier part of this decade was a temporary phenomenon. If low-end service wages rise to a high level, either due to a strong labor market or higher minimum-wage laws, then we might look back at the era where everyone could get things shipped to them cheaply as an aberration, like how people our age think about gas costing less than a dollar a gallon in the late 1990s.
For communities reliant on retail employment that have lost or are losing those job centers, I wonder if their economic changes and political passions will show similarities or differ with struggling Rust Belt communities. Will the locals there long for the return of vibrant malls and big-box store jobs the way some hope for the return of manufacturing jobs? You’ve thought a lot about the Rust Belt, so I’m curious to get your take on this.
NS: Yep, the Rust Belt was exactly what I had in mind. Maybe soon we’ll be talking about the Boarded-Up Belt?
In both cases, the decline would happen because of a reduction in what economists call external multipliers. Every dollar of stuff a city sells to other places gets circulated locally. In the case of the Rust Belt, the export industry — manufacturing — dried up. But in the case of the retail apocalypse, the export industries of sprawling suburban towns — health care, insurance, business services, etc. — might still be going strong, but the dollars wouldn’t get spent locally. Instead, they’d get spent online, and the money would flow to the people working for Amazon in big cities — increasing demand for life in those places, while leaving everywhere else to rot, and essentially compounding the geographic inequality we’ve seen in the last couple of decades.
That’s the scenario that has me worried.
CS: It raises the question once more of if, and what kind of, redistribution at a geographic level makes sense if market forces can’t resolve these issues, and if people in struggling communities either can’t or won’t relocate to communities with more dynamic economies. Targeted geographic redistribution historically hasn’t been a policy focus for legislators at the national level, but the way we do political representation at the geographic level seems to make the debate inevitable at some point.
Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
©2018 Bloomberg L.P.