U.S. retailers have a "ridiculous" problem

When Macy’s (M) CEO Terry Lundgren appeared on CNBC last week to discuss his company’s plans to shutter 100 stores, he noted that the U.S. has a “ridiculous” amount of retail space, equaling about 7.3 square feet per capita. That’s well in excess of the 1.7 square feet per capita in Japan and France, and the U.K.’s 1.3 square feet.

Indeed, retail industry observers have argued for years that the U.S. is “overstored,” and as more shopping shifts online, the costs of maintaining brick-and-mortar stores will prove too much for many chains. The problem, years in the making, is getting only worse, according to retail analysts.

“The U.S. is the most overstored it’s ever been,” said Jan Rogers Kniffen, an independent retail industry analyst. “How overstored is a question we won’t be able to answer until we understand how much business is being transferred online.”

According to Kniffen, 50 percent of all retail not tied to bars and restaurants will go online by 2030. As of now, about 11 percent to 14 percent of all retail spending is transacted over the web. Forrester Research expects Internet retail spending to hit $500 billion in 2020, up from $373 billion this year.

The picture for physical stores, though, isn’t entirely bleak. Some retailers such as eyeglass chain Warby Parker are adding locations. Even Amazon (AMZN), which revolutionized Internet shopping and established its viability, recently opened its first physical store and may open as many as 400 more. 

However, said Kniffen, “They don’t use nearly the amount of space that a traditional retail store does. Maybe you’re replacing a 3,000-square-foot store with a 1,000-square-foot store. That’s a problem if you are the mall, especially if you aren’t one of strongest, biggest malls.”

Overstoring can be traced back to the 1990s when the likes of Walmart, Kohls (KSS), Gap (GPS) and Target (TGT​) were expanding rapidly and opening new divisions, according to Ken Perkins, the head of Retail Metrics, a research firm that advises institutional investors on the sector.

“In my opinion, the housing bubble of the mid 2000s allowed consumers to take out tons of cash from their homes and spend robustly even though incomes were stagnant. This masked the overstored nature of the retail landscape,“ he wrote in an email.

That’s clearly not the case any longer. In the past few months, Sports Authority announced that it was going out of business, closing 140 stores in the process. The athletic apparel and gear retailer shuttered all of its locations last month, earlier than expected. 

Aeropostale, which filed for bankruptcy in May, plans to shutter about 154 of its 800 stores. Sears Holdings (SHLD​), which has closed hundreds of locations in recent years, is exiting 68 Kmart stores and 10 Sears stores this summer. Coach (COH​) will close 250 “stores in a stores” at department stores as it tries to reduce the availability of discounted merchandise, which has been hurting profits.

Still, owners of retail space such as shopping centers and malls aren’t hitting the panic button quite yet. The International Council of Shopping Centers said its members saw occupancy rates of 93.4 percent in the second quarter, the highest since 2007.

“We do not see an overabundance of retail space available, and developers continue to renovate and reinvest in already-built properties to safeguard against overbuilding post-recession. We see this investment in current properties across all types of shopping centers,” Tom McGee, CEO of the International Council of Shopping Centers said.

Analyst Kniffen’s response is that the trade group’s assessment is wrong. Meantime, the question remains: Is 7.3 square feet of retail floor space per American sustainable, or will that number start shrinking?