When last we checked in on the brick and mortar retail apocalypse (and in this case that’s really not hyperbole), we noted that the CMBX6 BBB- short was “so last month.”
The better option is to go straight to the damn source and buy protection on retail CDS one name at a time. Specifically, Citi recommended the following set of “target” (pun fully intended this time) candidates:
Well guess what? Nothing’s changed in the last two weeks which means “brick and mortar” is still on the verge of being “martyred” (how about that for word play?).
So that’s an intuitive assessment, but BofAML wasn’t sure. Specifically, the bank “chalked up the [61,000 jobs retail jobs that were lost over February and March] to a slowdown in consumer activity on weak demand for seasonal goods.”
Even if true, I’m not entirely sure that helps the bullish thesis, but as it turns out, “a deeper dive into the data suggests there is more to the story than just the recent weather patterns with evidence of more persistent weakness.”
More to the story than weather? Imagine that.
Actually you don’t have to “imagine that” because it’s real. Read below as BofAML’s economists explain why this may be “the beginning of the end” and why, when it comes right down to it, a whole bunch of people that used to spend their days folding jeans for $11/hour are about to be serving martinis.
Since October 2016, employment has been steadily declining in two retail sectors: general merchandise stores (which includes department stores) and sporting goods, hobby, book and music stores (Table 1). We have seen a similar story in BofA on USA which we publish on a monthly basis. According to Bank of America aggregated credit and debit card data, we see considerable weakness in card spending in department stores (Chart 1). We suspect that these sectors are being weighed down by increased competition from online retailers who have gained significant market share.
The beginning of the end?
Department stores and the like have been under pressure from ecommerce competition as consumer preference has shifted towards “experiential” shopping. Since 2000, ecommerce retail sales has been growing on average 4.8% per year, well above the industry’s average growth rate of 0.8. Also, traditional retailers are adapting as well. As Lorraine Hutchinson’s equity retailing team highlights, the declining sales at brick and mortar stores has led to major retailers announcing significant number of store closures and to focus on innovating and integrating different methods of shopping such as online or by phone (i.e. omnichannel).
Given the disruption in the retail sector, we think we are headed for a structural change in the retail industry and it’s likely to disrupt the retail workforce. In this context it’s worth considering where displaced retail worker may end up. To get at this issue, we take a look at the CPS microdata from the Bureau of Labor Statistics. Using a match sample across adjacent months, we can see which industries unemployed retail workers find jobs. So far most displaced retail workers are finding another job in the retail industry. In 2016, approximately 42% of unemployed retail workers ultimately found another retail position (Table 2). But others are moving into other service sectors such as leisure and hospitality, professional and business services, and education and health. In particular, majority of retail workers that find jobs in the leisure and hospitality sector find jobs in the food services and drinking places industry. This isn’t all too surprising given that skills that are useful in the retail sector overlap with skills needed in other service industries.
On the bright side, this might actually be ok, because I’ve never met a bartender that made less than a retail clerk.