You’ve probably heard the term retail apocalypse and watched some of your favorite retail stores close around you. Even stores that appeared busy shutter suddenly, leaving you wondering how did they close? They were always packed? It’s easy to blame the rise of Amazon and other ecommerce for the failing of brick-and-mortar stores, or a […]
You’ve probably heard the term retail apocalypse and watched some of your favorite retail stores close around you. Even stores that appeared busy shutter suddenly, leaving you wondering how did they close? They were always packed?
It’s easy to blame the rise of Amazon and other ecommerce for the failing of brick-and-mortar stores, or a decrease in mall traffic for mall-based stores. Yes, those have had some impact, but the biggest reason popular retail stores become defunct is simple… too much debt and not enough assets. It’s not that failed retailer had no assets, it’s that their assets weren’t enough to offset their debt.
It’s repaying that debt that becomes problematic. In some cases, debt payment is a retailer’s single biggest expense, above even payroll.
Most retail stores operate with profit margins under 10%, some as low as 3%-5%. This means even a slight drop in sales volume or a slight uptick in expenses can be detrimental to their bottom line. There is very little breathing room, and without any assets to fall back on, they have little choice but to close the doors. A buyout may be a temporary lifeline, but that almost always brings with it even more debt, sometimes crushing both companies.
Think of your own household expenses. You probably have at least some kind of debt payment… a car, home, or student loan. Even if you’re not struggling to make debt payments now, you might if your income shrinks or your other expenses increase, even slightly.
Take Joann Fabrics, which filed for bankruptcy in 2024 citing $2.44 billion in debts against only $2.26 billion in assets. The year prior, it had annual interest expenses of $64 million. That’s only the interest part of repayment, none of the principal. Putting it into perspective, it had a cash equivalency of $20 million. So its interest repayment was 3x higher than its available cash; and considering that it’s debt already exceeded its assets, it was difficult to secure additional funding sources.
The reason most retail stores don’t have many assets is that most retailers lease their space instead of own it. Even the store’s fixtures and inventory may have been bought on credit.
Leasing can be great because it offers lower risk and allows for rapid expansion without as much upfront expenditure, but it also doesn’t create any real estate assets to leverage.
If you’re a property owner yourself, you may have already seen the benefits of owning real estate. Even if you haven’t tapped into your equity, you are likely to have some from appreciation or at the very least from paying down your loan. You might use it as collateral backing for another loan, or profit from its sale. Unless you have a balloon loan or adjustable rate, that expense probably won’t increase as much over time. Most importantly, you can eventually pay it off entirely and eliminate that expense.
The majority of the most profitable retailers own their stores, therefore own a real estate portfolio as an asset. Some others do a sales and leaseback option where they finance the upfront purchase and construction of the store and later sell it to an investor under favorable lease terms. Even in that case, they likely earned a profit from the real estate sale and had much more control over the lease terms.
Even major stores you might think lease may actually own their space. This is often the case with major anchor stores of shopping centers. It’s not always the case, but many mall anchors own their stores – and often with very favorable purchase conditions because mall developers understand the worth of the anchor store. That’s why you might see one of the anchor stores remain standing and operating long after a shuttered mall sits abandoned or even demolished.
Real estate assets are the very reason struggling Kmart was able to hang on as long as it did – through decades of decline and bankruptcies. The one benefit of their aging stores is that many of them were completely paid off. If only they had leveraged those assets to improve their competitive positioning. When Kmart first filed for bankruptcy in early 2002, it cited assets of $6 billion in real estate and fixtures alone. For comparison sakes, that’s almost the equivalent to the annual sales of department store chain Kohl’s about that same time; or about 1/3 the sales of J.C. Penney.
