A wave of store closures has hit the retail industry, with Family Dollar announcing the closure of 677 locations, Walgreens 259, Big Lots 360, and LL Flooring shutting down completely. According to Coresight Research, the number of store closures has already surpassed last year's total, reaching 6,189 closures so far this year. This trend is expected to continue, potentially making 2024 the year with the highest number of closures since the pandemic's onset in 2020.

The retail sector experienced a surge in sales during 2021 and 2022 as consumers eagerly purchased furniture, electronics, and apparel. However, this boom has now subsided. Companies have increased prices beyond the reach of many consumers, and soaring interest rates have made borrowing for large purchases, such as mortgages or car loans, more expensive. As a result, consumers are cutting back on non-essential items, leading to a decline in sales for many retailers.

Michael Brown, a partner at Kearney, a global strategy and management consulting firm, explained that the pandemic-driven shopping patterns kept many retailers afloat that would have struggled under normal circumstances. However, the competition from retail giants like Amazon, Walmart, Costco, and Home Depot has intensified, putting pressure on smaller chains. These larger retailers can leverage their scale to secure better discounts on goods and invest heavily in technological advancements, which smaller retailers often cannot afford, further widening the gap between them.

The overexpansion of retail chains in recent years has also contributed to the current wave of closures. The United States has nearly twice the retail space per square foot compared to other countries, leading to an oversupply of stores. Barbara Kahn, a marketing professor at the University of Pennsylvania’s Wharton School, notes that any retail chain that has overexpanded will likely see a contraction.

Before the pandemic, retailers were already closing thousands of stores annually due to the rise of online shopping. Online sales increased from approximately 6% of all retail sales in 2014 to 12% by the start of 2020. In 2017 and 2018, a combined 13,400 stores closed, and in 2019, a record 9,800 stores shut their doors. The pandemic accelerated the closure of weaker chains like Sears, JCPenney, and Pier 1, which filed for bankruptcy and closed stores. However, the stimulus payments and a surge in consumer spending in 2021 and 2022 provided a temporary boost for some retailers. This boost was short-lived, as high interest rates and rising prices have once again put pressure on consumer spending.

Home Depot's CEO, Ted Decker, stated in August that higher interest rates and greater macroeconomic uncertainty have led to weaker spending across home improvement projects. More than 80 companies selling discretionary goods have filed for bankruptcy through September, a 27% increase from the previous year, as consumers become more budget-conscious. Tupperware, Big Lots, and Joann Fabric are among the largest consumer bankruptcies.

The restaurant industry is also experiencing a similar shift, with consumers cutting back on dining out to save money. Casual dining chains have struggled as consumers opt to eat at home or choose cheaper fast-casual or fast-food options. Several restaurant chains, including Red Lobster, Roti, Tijuana Flats, and Buca di Beppo, have filed for bankruptcy this year and closed hundreds of locations. Denny’s announced the closure of 150 restaurants, with its CEO, Kelli Valade, acknowledging the loss of traffic across the industry.

Discount retailers targeting lower- and middle-income shoppers are particularly under pressure, especially from Walmart. Walmart has increased its market share among higher-income earners by using its scale and profits from higher-margin businesses to lower prices. The company has also invested billions in remodeling stores and building a strong online presence to compete with Amazon, squeezing out smaller competitors at the lower end of the market.

Family Dollar has faced difficulties as its core low-income customers struggle to afford basic necessities and reduce their spending. Other discount chains have encountered similar challenges, with Big Lots filing for bankruptcy and closing over 360 stores. 99 Cents Only went out of business and closed 371 stores. Drug store chains are also consolidating, with CVS, Walgreens, and Rite Aid announcing a combined 945 closures this year. These chains overexpanded in the 1990s and 2000s but failed to anticipate lower reimbursement rates for prescription drugs and the encroachment of Amazon and Walmart on their front-end sales.

While the retail landscape is changing, it is not the end of retail as we know it. There will be new occupants for the vacant retail and restaurant spaces. Kahn suggests that it is not a condemnation of physical retail but rather a correction and a shift towards the types of retail experiences that consumers wish to engage with in person. More than 5,300 stores have announced openings this year, with many targeting bargain hunters. TJX, the parent company of TJ Maxx, Marshalls, and HomeGoods, is opening 99 stores this year, offering designer brands at low prices and putting pressure on department stores like Macy’s and Kohl’s. German discount grocer Aldi announced plans to open 800 new stores nationwide as part of a $9 billion expansion strategy to attract shoppers seeking affordable groceries.

The retail industry is undergoing a transformation, with new players entering the market and established chains adapting to changing consumer preferences. The closures and bankruptcies are a sign of this adjustment, as the industry shifts towards more cost-effective and convenient retail experiences.