Supply Chain Digest Entry: February 19, 2018 (here).
In 2017, Moody’s Investor Services identified 26 distressed retailers with troubled financials that could make them potential bankruptcy risks. The list of 26 represents a stunning 19% of the retailers that Moody’s tracks and it surpasses the list of 19 recorded at the peak of the Great Recession. While 2017 will no doubt be remembered for its record-setting pace of retail bankruptcy and store closings, the question is whether or not the situation will improve or worsen in 2018.
At the start of 2018, the following 26 retailers are under heightened distress due to heavy debt loads and low amounts of available cash as per the Moody’s list: 99 Cents Only Stores, BI-LO Holding Finance, Bluestem Brands (Fingerhut, Old Pueblo Traders and Appleseed's), Boardriders (Quicksilver), The Fresh Market, General Nutrition Centers, Guitar Center, SHO Holding Corp., Tops Holding II Corp (Tops and Orchard Fresh supermarkets), Fairway Group Holdings Corp, Neiman Marcus Group, Bon Ton Stores, Nine West Holdings, Sears Holdings, Claire’s Stores, Calceus Acquisition (parent company of Cole Haan), Charlotte Russe, FULLBEAUTY Brands Holdings, Payless, David’s Bridal, Everest Holdings (manages Eddie Bauer), Evergreen AcqCo 1 (Savers thrift stores), J. Crew Group, TOMS Shoes, Vince, and Indra Holdings (parent company of Totes Isotoner).
Furthermore, according to Garrick Brown of Cushman & Wakefield, major retail store closures increased from 4,000 in 2016, to 9,000 in 2017, with the forecast for 2018 anticipated to be 13,000, many of which will be anchor stores at shopping malls, particularly if Sears and/or Bon Ton Stores declares bankruptcy.
This profound turbulence in the retail landscape is not just about distressed retailers. Talk to any major retailer with a healthy balance sheet and the story of the day is that the business is shifting from away retail to on-line, and that store closures are being planned. By way of example, the recent announcement that Walmart is abruptly closing 63 Sam’s Clubs stores of which 10 will be converted into regional e-commerce fulfillment centers seems to be the order of the day.
At the same time, Amazon continues to churn out sales increases that defy the laws of gravity. Amazon’s forecasted 2017 sales revenue is $177 Billion, up 30% from $136 Billion in 2016. Looking ahead, Wall Street analysts are projecting 2018 revenues to increase by 29% to $229 Billion, and 2019 revenues to increase by 21% to $277 Billion. If this comes to fruition, then the implication is that $100 Billion of retail spending will shift away from established brick and mortar retailers to Amazon. Keep in mind that there is some serious investor capital backing up these projections, so even if Amazon’s net income remains at around 1%, their stock price will continue to go through the roof because earnings per share estimates are expected to increase significantly due to anticipated higher earnings per share.
All this to say that Amazon will continue its record-level spending on distribution infrastructure build-out in 2018, which is good for suppliers of buildings and equipment, and bad for Amazon’s competitors. We track Amazon’s distribution infrastructure closely and by our estimates, in 2017, Amazon added about 26.6 Million square feet of distribution space in the U.S. and another 12.6 Million square feet in the rest of the world. In 2018, we are aware of an additional 23 Million square feet of distribution space being added to the U.S. market and we fully expect that this number will be closer to 30 Million by year-end 2018. To put this into perspective, Amazon’s total square footage of warehouse space in the United States is currently equivalent to 3.5 Central Parks and in 2018 this will likely increase to 4.4 – and that is only floor-level space (i.e. mezzanine space is excluded from these figures).
Looking ahead, Amazon also plans to open its own airport hub in Hebron, KY sometime in 2020. This mammoth $1.5 Billion project will catapult the company into the transportation sector in a very significant way. The sortation facility will enable coast to coast service levels of 2 days for the major metro markets serviced by Amazon – without the need to rely on the duopoly of FedEx or UPS. By our estimates, this implies that Amazon will be in a position to move packages to 80 - 85% of the continental U.S. population such that the last mile delivery can be performed by either USPS, regional parcel carriers, or Amazon Flex drivers. The real question is whether or not the USPS can keep up with the increase in volumes being demanded of them by Amazon and all other e-commerce shippers.
Amazon is continuously raising the bar in terms of competitive pricing, rapid service levels, and innovative thinking. It is just a question of time before they figure out new ways to reduce their reliance on human labor within their fulfillment centers by implementing automated picking machines for a subset of the SKUs that can be handled by robots. Everything that this company does is having an impact on all of us, whether we know it or not. Very few of us can smugly wake up in the morning believing that our business model is “Amazon-proof”. By way of example, every company that we are working with right now, regardless of industry, is seeking to speed up order turnaround and delivery time. There is an immense top-down pressure to rethink the supply chain with the goal to improve speed to market. The pendulum of power has officially swung away from the manufacturer and even the retailer, and now the consumer has the power.
In closing, I predict that 2018 will be a year of unprecedented retail distress and bankruptcies, that retail store closures will increase significantly as sales revenue continues to shift to the e-commerce channel, and that companies from all walks of life will invest heavily into supply chain strategies that enable improvements in their speed-to-market.
Marc Wulfraat is the president of MWPVL International Inc. He can be reached by clicking here. MWPVL International provides supply chain / logistics network strategy consulting services. Our services include: supply chain network strategy; distribution center design; material handling and automation design; supply chain technology consulting; product sourcing; 3PL Outsourcing; and purchasing; transportation consulting; and operational assessments.