Jodi’s Journal: Retail’s rocky start to 2017

By Jodi Schwan

I’ve been trying to get inside the mind of the consumer lately, and it has been a trip without much of a road map.

My instinct – and plenty of data – tell me a shift is occurring in retail spending. But getting at precisely what’s causing it requires connecting dots that aren’t so obvious.

I’ll get a better sense of the retail landscape this week, when I report from RECON, the world’s largest retail real estate convention, put on in Las Vegas by the International Council of Shopping Centers.

For the past few years, I’ve visited with representatives of national chains there about their plans for the Sioux Falls market. I catch up with several of the brokers who attend to represent our area and market properties available for development.

There generally has been a feeling of optimism and enthusiasm there for Sioux Falls and the opportunities it provides for national retail to grow.

I think that’s still the case, but underneath the surface I think some larger forces are going to start affecting us. You might argue they already are.

A sampling of retail vacancies in Sioux Falls.

So far this year, I’ve reported closures for Kmart, Payless Shoes, rue21, Wet Seal, Vanity and a near-closure for Gordmans. While they all were tied to larger national reductions, I can’t remember that many occurring so close together for at least the past five years.

City sales tax growth slowed to 1.9 percent in April, compared with 4.5 percent a year ago. That’s the smallest increase since 2009. I worked in city government then, when sales tax revenue actually fell behind the prior year, but that was during the Great Recession. We could explain what was happening.

But the economy isn’t exactly weak today. Unemployment is low. There’s not a ton of wage growth, but there has been some.  I cover new store openings much more than closings, so it’s not that the shopping options are fewer.

So what is happening?

It would be too simplistic, I think, to say that online shopping is causing the sales tax softening that we’re experiencing.

Online shopping isn’t new. It’s not like Amazon launched last year. And for the most part, we still pay sales tax on online purchases. While individual bricks-and-mortar store numbers might be weaker because of customers opting to buy online, the state and city still get their revenue share regardless.

So I think something bigger is occurring.

Here are a few of my theories.

I think the consumer, for a variety of reasons, has a renewed focus on value shopping. The chains that have added the most locations nationwide for the past few years include Dollar General, Dollar Tree and Family Dollar. They have opened multiple locations in Sioux Falls and in communities as small as Lennox and Dell Rapids. It has become so prevalent that one analysis found a dollar store opened somewhere in this country every six hours for the past five years.

And while department stores struggle, chains that sell department store brands at reduced prices are thriving. Look no farther than Marshalls and Ross Dress for Less, both of which are under construction in Sioux Falls at Lake Lorraine. But when the customer is spending less money, the sales tax revenue will track accordingly.

I also think the agriculture market, which sometimes we overlook because we don’t drive by it in Sioux Falls, has hurt spending here. We are a true regional retail destination. That’s something our brokers tout in Las Vegas when they meet with national retailers. We draw significant business from farm communities, and when market conditions force them to curtail spending, we feel it.

And finally, I think many people younger than 30 are experiencing both a decrease in discretionary income and a disinterest in acquiring as much stuff as the generation before them. Student-loan payments for new grads likely are cutting into money that might have been spent at stores and sit-down restaurants. Teen retailers, which have experienced a wave of closures, weren’t just supported by teens but by college students and early 20-somethings. They, as a generation, are proving to be less self-indulgent than their millennial predecessors. Their budgets and the housing market also are keeping them living with parents or in apartments – some with roommates – meaning less room for big purchases.

I ran this by Garrick Brown, who leads national retail research for the national brokerage firm Cushman & Wakefield.

“I think everyone has become a smarter consumer, and they’re very value-driven,” he said. “It’s a race to the bottom, and T.J.Maxx, Marshalls and Burlington are killing it.”

Easy online price comparing through smartphones also is causing consumers to bypass bricks-and-mortar purchases, he said.

Brown predicted the “frugality mode” will last at least another five years and agreed the new generation of graduates approaches spending differently.

“They have known nothing but tighter times, and I think it shaped them,” he said. “They don’t buy big luxuries. They buy little luxuries. They are springing for artisanal ketchup. They are traveling more. They are going to dinner more. But they aren’t buying stuff.”

I’m even sensing some of these forces are creeping into local retail. For a while, consumers seemed to be bypassing national chains in favor of local boutiques and handmade merchandise, but my sense is that there’s softening in spending there, too.

In the best-case scenario, these forces are going to drive innovation. I feel like that has been lacking in retail lately, too. New fashions, to me, appear uninspired. There hasn’t been a category-changer in consumer electronics for several years. The shopping experience itself, at one point evolved through outdoor lifestyle centers, is feeling in need of invigoration, too. In other parts of the country, food halls and new entertainment options are showing some potential for revitalizing indoor and outdoor malls.

In Sioux Falls, the retail environment would still be the envy of many other markets. I’m sure what I hear from retailers this week will allow me to announce that more are planning to come to town.

But I think the ones that will end up being successful here will be the ones who figure out how to adapt to a customer I’m pretty sure has changed.

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Jodi’s Journal: Retail’s rocky start to 2017

My instinct – and plenty of data – tell me a shift is occurring in retail spending. But getting at precisely what’s causing it requires connecting dots that aren’t so obvious.

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