As penetration continues to rise, more stores will close

An enduring legacy of the pandemic is that online penetration rose sharply. We expect that it will continue to increase, which will drive further rationalization of retail stores, especially as some of the unique support measures from the government subside. Our deep dive analysis lays out our base scenario where we expect ~80k stores to close over the next five years. This will bring the total number of retail stores to 797k from 878k in 鈥20. This assumes that online penetration grows to 27% in CY'26, from 18% in 2020. Yet, our analysis also presumes that retailers evolve and adapt their store formats to be the centerpiece of interacting with consumers, including fulfilling online orders. In this case, we assume that eCommerce sales fulfilled by retail stores grows from 10% in CY'20, to 20% in CY'26. Overall, under this framework, every 100 bp increase in online penetration results in the equivalent sales of 8k stores shifting to eCommerce. Going forward, we think retailers best positioned to adapt their store formats or levered to categories with less disruption from the shift online will be best positioned.

What sectors of retail should be best insulated from closures?

Our analysis assumes that store closures will vary widely by subsector. Notably, we think that store closures should be modest in Home Improvement (-1.6k), Grocery (-1.2k) and Auto Parts (+160). We believe these sectors benefit from lower online penetration and an ability to fulfill eCom sales through their stores. Conversely, we think Apparel (21k), CE (8k), and Home Furnishings (7k), will be the most adversely impacted. We believe that malls will likely continue to be a source of closures. If the number of malls per household regressed to 1980 levels, it would imply a 9-10% decline in malls. Importantly, online competitors continue to scale their fulfillment capabilities.

Why did more stores not close in 2020?

Despite eCommerce penetration accelerating to 18% in CY'20 (vs 14% in CY'19), the number of retail store closures decelerated to -3.5k as of 3Q'20 (the most recent data) from -3.9k in 3Q'19. Importantly, we think the retail landscape was supported by significant government stimulus, and a wallet share shift to goods from services. However, we think those trends are temporary. Further, the delinquency rate on retail loans grew to 11% in Feb '20 (vs 4% Feb '19). As the consumer backdrop normalizes, we think the challenges faced by undifferentiated retailers will become more apparent.