Don’t ignore Macy’s CEO: physical retail is still important

Despite the big rallies last year, real estate investment trusts (REITs) in shopping malls have been suffering since around 2016 or so. It is important to understand the reasons why and even more important to grasp the vital nuances of the big picture. These two elements will help explain why the CEO of Macy’s (M 1.91% ) recently sang the praises of brick-and-mortar retail stores even as the company seeks to continue closing physical stores.

Was it really the Internet?

It wasn’t that long ago that the only way to buy something was to go to a physical store or call a catalog retailer. Then the internet came along and created a whole new sales channel, propelling Amazon in a household name as it gutted the retail book industry.

The simple story was that it was cheaper and easier to buy online than to buy from a store, especially as shipping costs and times went down. The model quickly migrated from books to just about every other form of product you can think of.

Image source: Getty Images.

Retailers have started to close stores and in some cases go bankrupt. The trend has been called the “retail apocalypse”. But there is more to this than it seems.

For example, very often struggling retailers have failed to keep up with their customers. Yes, that included the delay with the online experience. But it also involved things like merchandising faux pas. Both were often exacerbated by high levels of leverage, which inherently limited a retailer’s ability to make the necessary changes. Ultimately, the burden of debt was the real reason once iconic names like JC Penney and Brooks Brothers ended up in bankruptcy court.

That’s not to say that there aren’t significant headwinds in retail linked to the growth of online shopping. For example, Macy’s has been closing stores for years and plans to announce the closure of 10 more locations slated to close in January. That said, he has a list of 60 planned closures in total that he is currently reassessing.

A flip-flop for retail?

CEO Jeff Gennette explained during Macy’s third quarter 2021 earnings conference call:

Our data confirms that in markets where we have a physical presence, our online activity is stronger. The interplay between traditional and physical assets is more important than ever, and we are focused on building an appropriate footprint in the markets that drive our sustainable and profitable omnichannel growth.

Gennette isn’t the only CEO to make this kind of statement, either. While The SAF of Chico‘s (SCH 2.65% ) annual meeting in June, the company noted: ‘The stores continue to be a strategic asset. Digital sales are generally higher in markets where we have a retail presence. The fashion retailer is still closing stores, but it is careful to keep the ones that will benefit overall sales the most.

During this time, American eagle (AEO 1.67% ), which continues to develop the global footprint of its stores, stressed that “digital + stores = frictionless and convenient shopping”. The retailer is looking to adjust the size of its in-store footprint, but it’s certainly not looking to go all-digital. In fact, it has bought out distribution companies in the hope of helping mall competitors meet their distribution needs, because the more buyers there are in the malls, the better the performance of its brands. American Eagle and Aerie.

The key theme here, however, is having stores located in the right places. And that plays directly into the hands of the biggest and best-placed shopping center owners, like Simon Real Estate Group (SPG 2.80% ), Tangier factory outlet centers (SKT 5.18% ), and Macerich (MAC 5.30% ), which generally have the most productive properties.

Additionally, as weaker mall properties close because tenants leave and, as a result, customers stop showing up, the remaining malls become even more valuable. This reverse network effect is also a general statement, applicable to both consumers (who have fewer malls to shop) and retailers (who have fewer malls in which stores can be placed).

The truth is not that simple

Wall Street often takes a complex story and creates a straightforward narrative that lacks the important niceties. The shift from wholesale to online shopping, dubbed the retail apocalypse, is a case in point. The reality is that the interaction between physical stores and online sales is complex and can even be complementary.

In fact, the pandemic may have helped the retail industry in the long run, by knocking out weaker names, reducing competition, so the stronger can survive and thrive. And this should continue to strengthen the shopping centers that house them for years to come.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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About Joshua M. Osborne

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