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Taking the temperature of the retail industry

Its “health” depends on where you look

By Michelle Leach

There is no denying the power of retail as a job creator and economic engine. The National Retail Federation reports retailers contribute $3.9 trillion to the U.S. GDP, which at the time of this writing hovered in the $21.4 trillion-range. So, it’s understandable that one would assume this industry giant was in absolute free-fall in a COVID-19 environment characterized by store closings, reduced hours, and protocols that, say, limit the number of patrons in each location at a given time. As with most things, the data tells a much more complex story about a “K-shaped” industry that sits within a broader “K-shaped” economic recovery.

Laying the groundwork

To provide an accurate picture of what’s going on in retail, let’s provide some broader context. According to U.S. Small Business Administration figures, four out of five establishments that started in 2017 were still operating a year later. This aligns well with the historical average one-year survival rate of 79% between 2008 to 2018. About half of all establishments reportedly survive five years on, and a third are still chugging along 10 years or more later. For every three establishment exits, two are defined as firm closures. Of those businesses that close, the SBA reports a quarter cited “low sales” and “cash flow issues.” Almost as many (22%) were retiring and obviously had no exit strategies in place. Around 20% sold the firm to another party; 6.3% opened another firm; and illness or injury resulted in a “forced exit” for 4.7% of total firmwide closures.

Historically, the one-year survival rate for retailers that started in 1994 was almost 83%. Five years later, 52% were still in business. Ten years later, that figure stood at 35.7%, 21.6% celebrated their 20th anniversaries; and nearly 18% remained in operation in 2019. This compares favorably to industries such as construction; the one-year survival rate for firms in construction was around 75%. By year five, that figure reportedly dropped to less than half. Ten years later, the discrepancy between retail and construction leveled off (at a 32.6% survival rate). Though, only 14% of those businesses remained in business in 2019.

Retail in Nebraska: A look at our recent past

In May, when assessing business survivability during COVID-19, a Nebraska Department of Economic Development spokesperson directed us to the Nebraska Department of Labor’s Layoff and Closures Report. Our latest analysis finds that the number of affected organizations represent greater geographic diversity than those businesses listed on the report as of May. Formerly, the majority of affected businesses were in the Lincoln and Omaha metro. Of these newest layoffs and closures, four affected Omaha organizations, three applied to Lincoln shops, and two Sidney businesses either closed or laid off employees. Such events were also reported in Neligh, Hershey, Norfolk, Eustis, Scottsbluff, Kearney and Minden.

Over around the last four months, via data derived from this report, only one additional retailer has reported a layoff or closure; The Buckle, Inc. in Kearney had “a few” layoffs (no specifics were listed) on July 3. Most of the layoffs or closures, at five of the 16, affected restaurants or food service organizations. The next most affected industries were transportation (three organizations reported layoffs); manufacturing (two businesses reported a closure or layoff); and hospitality (layoffs occurred at two Marriott properties, in Omaha and Lincoln). The balance of the three organizations were in the financial space (mortgages), entertainment (a theater) and health care (Norfolk Medical Group).

Since March 13, when COVID-19 was declared a national emergency, 33 organizations have closed their doors or laid off employees. Of these organizations, five (or 15%) are characterized as retailers. The greatest percentage of affected organizations were in the restaurant or food service space; 12 (or 36%) fall into this category. The next most affected industries are (in descending order): transportation (four organizations reported layoffs); manufacturing (three organizations laid off employees or closed their doors); and entertainment (three theaters had layoffs or closed). The balance affected industries were in the B2B services, financial, hospitality, and health care spaces.

During the same timespan a year prior, more than 110 layoffs or closures were reported. Of those, almost all were in the retail space. In fact, around 60% of these layoffs and closures (at nearly 70 businesses) were retailers. Interestingly, most of closures related to long-struggling, well-recognized retail brands; for instance, Shopko accounted for more than half of the retail closures. Payless and Cabela’s made up another 13 closures.

In 2018, 72 layoffs or closures were reported between mid-March to late September. In much the same story as 2019, retail was the most represented industry on the list, accounting for almost 30 of the 72 reported incidents. The closure of national and regional brands, such as Toys-R-Us, Herberger’s, Younkers and Gamers, were the “Shopko” and “Payless” of 2019. In fact, Toys-R-Us, Herberger’s and Younkers each had four closures, spanning stores in Omaha and Lincoln, as well as locations in central and western Nebraska.

When diving into the U.S. Census Bureau statistics for Nebraska, total employment dove from just north of 1 million in March 2020 to 996,500 in August 2020. April represents the largest dip in employment, to a reported 967 million. Every month since, gains have been made; from 976,000 in May to 986,000 in June. July figures grew to 986,000 and remained comparatively flat (with an increase of 700 employees) in August. Accordingly, the unemployment rate has fluctuated from 4% to a high of 8.7% in April before yo-yoing back to 4% in August. While the Bureau doesn’t include specific figures for retail trade employment in Nebraska, it does track “trade, transportation and utilities.” This category sustained one of the greatest percentage year-on-year employment losses in the state, at 7.6%, in April 2020. Each month since, employment in this category has remained in the negative; however, these figures paled in comparison to losses reported by the leisure and hospitality industry in Nebraska (36.9% and 15.9% in April and August, respectively).

So, what does the national data tell us?

The U.S. Bureau of Labor Statistics’ Current Employment Statistics (CES) survey provides some insights into the health of retail and the sustainability of retail businesses collectively. In looking at the net, seasonally-adjusted employment change by industry, over the past six months (since full-scale closures started in March), the retail trades have shed 655,400 jobs. For comparison, let’s take a look at the other industries that have sustained sizeable job losses:

  • Information services – 312,000 jobs

  • Construction – 425,000 jobs

  • Manufacturing – 720,000 jobs

  • Education and health care services – 1.45 million jobs

  • Professional and business services – 1.47 million jobs

  • Leisure and hospitality – a staggering 4.13 million jobs

If we compare the pre-COVID industry employment numbers with the six-month net losses in jobs since the pandemic began, we get a sense as to how much of a bite the pandemic has taken out of each industry; for instance, comparing these figures, retail lost 4.2% of its employee base. Formerly, the U.S. Bureau of Labor Statistics reported the retail trade employed 15.6 million people in 2019. The growth trajectory was undeniable; in 2009, retail employed 14.5 million.

For comparison, leisure and hospitality lost around 25% of its employee base; however, as dire as that sounds, these figures suggest a rebound from the 47% of positions in the sector that were reportedly lost due to layoffs in April. Formerly, leisure and hospitality experienced a keen boost in employment between 2009 to 2019 – from 13 million to 16.57 million people. Prior to the pandemic, the industry was projected to outpace retail growth (to almost 18 million employees between 2019 and 2029).

Retail losses were also less pronounced as a percentage of total employment than in other industries that have also suffered from hundreds of thousands of layoffs; for instance, information services lost 10.9% of its 2.85 million-strong employee base, while professional and business services shed almost 8% of its 21 million employee-workforce, and education and health care lost 6% of the 24 million employees who reportedly worked in the industry in 2019.

The national retail industry speaks

In the most recent figures released mid-September, the National Retail Federation characterized retail sales numbers as “mixed.” President and CEO Matthew Shay referred to how consumers responded well to federal relief measures that supported spending and a recovery; however, he indicated a “pause” on spending as the $600 supplemental unemployment benefits came to an end in July. The NRF’s Chief Economist Jack Kleinhenz called August sales figures “topsy-turvy.” He was quoted as saying: “COVID-19 brought a lot of shifts and uncertainty regarding back-to-school spending and other issues but consumer spending remains intact even if sales grew less than July.”

At this juncture, he added, it’s difficult to determine what economic activity is due to government support – and what is evidence of hardcore demand due to recent gains in jobs in some sectors.

Specifically, the NRF reported a .1% increase in sales month-over-month, whereas the U.S. Census Bureau reported a .6% increase in retail sales between July to August. The differences between NRF and government figures is due to how sales are calculated. The government data includes auto sales, as well as restaurant and gas station sales. The NRF excludes these types of businesses to focus on its retail “core.” These figures have largely been on the rise every month following a historic low in April, which reflects the first month when most stores were closed.

According to the most recently-available data, over half of retail categories experienced monthly gains. Clothing stores saw the largest gains, followed by furniture and home furnishings, building materials and garden products suppliers, and electronics and appliance stores.

“The coronavirus continues as a shock to America’s small employers and there have been few parallels among the 14 recessions since the Great Depression of the 1930s” – National Retail Federation Chief Economist Jack Kleinhenz, Monthly Economic Review, September 1, 2020

We analyzed reports from the NRF between August 9, 2017 to August 14, 2020 and here are some key takeaways:

  • A “long-term pattern of increased sales” was reported in August 2017; sales reportedly grew year-on-year for each month since November 2009.

  • In February of this year, Kleinhenz referred to the strength of consumer spending as a persistent “anchor” of the current economic expansion when reflecting on retail sales gains of .3% month-to-month and 6.3% year-on-year.

  • In February, the coronavirus was first mentioned as a source of uncertainty, right alongside lingering trade wars and the presidential election. In fact, the forecast of 3.5% to 4.1% growth was assumed if “the coronavirus does not become a global pandemic …”

  • As of early March, 40% of members who responded to an NRF survey were seeing supply chain disruptions.

  • In an April 15 press release, sales figures in March for nonessential retailers plummeted, whereas sales for grocers and other essential retailers soared – offsetting some of the declines. Kleinhenz, in turn, described an “unevenly” affected industry of “haves” and “have-nots.”

  • Via May 15 information, the bottom fell out in April (as sales dropped nearly twice as much as they did in March). This bottom reflected the first full month most businesses were closed. The NRF reported a decline of 14.1% between March and April, following the preceding month’s decline of 8.3% (the previous record).

  • A month later, June 16, the NRF noted a dramatic improvement in sales over April. But those May numbers were still below last year’s figures. Economist Kleinhenz referred to stimulus money and supplemental unemployment aid as fueling spending driven by “pent-up” demand following a two-month shutdown. Some category gains were described as “unheard-of”; for instance, clothing stores’ sales surged by 188% in May.

  • In July, President and CEO Shay was “encouraged” by June sales numbers. He is quoted as saying, “It’s clear that congressional relief packages have found their way into consumers’ pockets.” His assessment was somewhat tempered by recent spikes in COVID-19 infection rates across the country.

  • The NRF, on August 14, reported gains of 1% in July, which they attributed to a spike in electronics and supplies to support the home office and home learning in anticipation of expected school closings. Demand for home improvement-related items (such as appliances) also resulted in higher sales in certain categories. Kleinhenz called the recovery “fledging,” and said households are spending. But they’re pragmatic, anxious over what the future brings for their health and economic wellbeing.

What does it all mean?

Analysts have noted the economy is taking on a decided “K” shape. Unlike the much more desirable “V”-shaped recovery, whereby sectors universally bounce back quickly, a “K”-shaped recovery is what the letter looks like. Just as the lines of the “K” diverge. So, does the economy. Some sectors rise meteorically, whereas others continue to languish and stagnate at best. Business Insider analysis makes the argument that the K-shaped recovery is exacerbating persistent income inequities. They cite U.S. Chamber of Commerce stats that illustrate how only around three-fourths of jobs in the leisure and hospitality sector have returned, which aligns well with the aforementioned 25% chunk of the workforce that has been lost in the industry. These and other lower-wage jobs in service sectors, including retail and restaurants, have not bounced back to the degree of employment in higher-paying finance or skilled professional services sectors. For comparison, a reported 94% of the financial industry’s pre-pandemic employment has been recovered.

In line with the, perhaps, surprising historical statistics from the Nebraska Department of Labor regarding retail layoffs and closures, professional services firm BDO USA reported recently that the pandemic was exacerbating industrywide changes that were already well underway. Researchers referred to mandated closures, social distancing-related restrictions, problems in the supply chain, and the now-perennial competition from ecommerce as intensifying pain points already felt by “traditional” retailers. Furthermore, the COVID-19 environment was accelerating bankruptcies, liquidations and store closings among those giants long grappling with shifts in consumer behaviors (notably, online shopping).

We make the argument that, like the broader economy, retail is undergoing a “K”-shaped recovery. Within such a diverse industry, some retail types are simply doing better (and better positioned) that other retail categories. Consider how retailers specializing in professional wear (like Brooks Brothers) or higher-end apparel and formalwear (like Neiman Marcus) have experienced severe whiplash as work from home becomes the norm and special occasion, in-person events are canceled or postponed. Of the 18 household retail names that filed for Chapter 11 protections in the first half of 2020, some (like JC Penney Co.) are well-accustomed to being on layoffs and closures lists, and were the casualties of store saturation, excess debt loads, and 21st century consumer preferences -- these and other factors were apparent well before COVID-19 was everyday parlance. And these factprs reflect comparatively glacial shifts, rather than world-changing events that quite literally transformed workplaces and households overnight.

So, assessing retail survival and failure amid the ever-changing target of COVID-19, is not a straightforward proposition. It depends on factors such as how retail, in all of its many shapes and forms, is analyzed and how closures and job losses are tracked. Perhaps more than anything, it also depends on just “where you look.” Retail is perhaps embodying the broader K-shaped recovery more than most other sectors. Some products and categories will rise, and others may become a footnote in history.

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