JC Penney and Sears weak earnings reported recently were not a big surprise to the market. Many said the middle class is gone while other expert and commentators say the business model is sagging. I think neither is true or completely wrong and let me explain you why.
Should US middle class vanish or stop shopping the depression of 1930ies would be referred as a relief from the economy collapse pandemonium and that would be a world scale crisis. Sure that the segment used to sped more during real estate bubble. Money has been pouring into the market with volume unprecedented before, inflated home values naturally resulted in temptation for home equity loans which many took. Also high sales volume in housing market caused a lot of revenue generated in moving, furnishing, building and construction industries. As it usually ends with bubbles this was no different and it ended in a violent burst. What used to generate a lot of funds stopped almost overnight and suddenly saving became important and shopping turned into way more conservative mode.
Both JCPenney and Sears positioned themselves in premium segment of shopping for middle class. This area gets hit first when it comes to savings, while discount outlets don’t have the same level of selection they offset this with bargain shopping. MSRP shopping has also migrated online, nearly every major brand sold at the retail networks has its own storefront in the internet. While bargain is a bit hard to find the selection is unbeatable. With e commerce pushing on one end and discount outlets closing in on the other there is less and less space left in the centre.
While many malls feel empty especially during the week semi wholesale retail seems to be doing well. Costco, BJ’s and SAM’s club keep growing and it always feels hard to find a spot in parking in front of those. Moreover once discount outlets keep eating into premium retail market share with Kohls being the best example of this trend. It used to close the gap between Marshalls and JCPenney but now it seems it started pushing JCPenney out of the market and taking its middle class destination id badge.
I’m pretty confident apparel retail stores would be with us for a while. After all clothes and shoes are probably last thing you’re comfortable buying without touching or trying it first. Showroom case the way we have with Best Buy is definitely a hazard the industry needs to face but with heavy diversity of apparel products I wouldn’t be too worried.