The continuously inflating retail space bubble will continue to inflate forever. Occasionally, during tough times, a little air will be let out, (some stores and malls will be shuttered), but net, net it will expand into infinity, likely on the same pace as shown in chart #1 on page 3. And, that’s just brick and mortar space, because one cannot translate websites into square footage (more on this to come).

So, what’s wrong with that? It indicates retail is a growing sector does it not? Yes it does, but why do you think some economist invented the word “bubble?” A bubble means that, like a balloon, its demand for air is limited to a physically defined capacity, beyond which it will pop, immediately deflate and come crashing down.

So, theoretically, there is a demand limit among consumers for retail stores and the stuff in them. And, if such stores and stuff expand beyond that limit, they should (theoretically) go “pop” and deflate (hopefully not crash) back to some equivalent level of consumer demand.

Forget about it. The theories coming out of “Economics 101” and Shumpeter’s Creative Destruction are now over a century old and no longer apply to the real world of the 21st Century. So too, the theory about how “free market capitalism” is supposed to work, doesn’t come close to describing reality today. If it did, General Motors would not be called “Government Motors” today, along with numerous other examples. Get it?

The government (the Fed), printed trillions of dollars out of thin air to patch the popping balloon to avoid a crashing collapse and depression. By the way, regarding the overall economic recovery, it pales in comparison with all other recoveries including the Great Depression. In 1934, ’35 and ’36, growth rebounded 11%, 9% and 13% respectively. And, following the double dip recession of 1981 and ’82, growth averaged 6% in 1983 and ’84. So, here we are, three years after the Great Recession officially ended and our growth rate, at best, hovers between 1.5 and 2.5% (chart #2). Back to reality.

Space Reality

Without getting over-professorial, let’s just stick with bubbles, balloons and never-ending retail space expansion. In reality, chart #1 defines a smoothed out rate of retail space expansion of 4% net per year from starting in the 1970s, (incidentally, population growth has been about 1-2% during the same period).Lazard Frères conducted a study at some point in the late 1980s that found there was twice as much retail space as demand warranted. How astounding was that? Yet, the expansion continued upward.

Helloooo! Check out chart #3 and just think about what 20 square feet of retail space for every man, woman and child in the U.S. looks like. Now, add in all the “mom and pop” stores and all 55,000 square foot and under shopping centers and try to imagine about 46 square feet per capita. It is nothing less than a mind-blower. Have you had enough? Well, how high would retail space per capita be if one could translate some 4-5 billion e-commerce sites into square footage? Over-stored is an enormous understatement.

And, since those buildings and sites are not empty, “stuff reality” means an equally inflating balloon of stuff, way beyond what every man, woman and child needs or even wants. Anecdotally, chart #4 provides a picture of blue jean proliferation, from about 6 major brands in 1980 to over 800 today. And, just to provide a parallel metric of overcapacity in the food and grocery industries, see charts #5 and #6. And, I could go on, essentially describing inflating bubbles in most consumer facing industries.

Forever Blowing Bubbles…

So, why don’t they pop? Why will the space and stuff bubble inflate forever? Many reasons, among them:

• Every time a retailer opens a new “door” it’s an immediate new revenue stream for growth, so why not?
• There are financial barriers to closing underperforming stores, not the least of which are penalties for breaking lease covenants
• The realtors’ willingness to incentivize (cut deals) for retailers to stay in business
• As long as an underperforming door in a chain is “breathing,” it may financially be less costly to keep it open than to close it
• Under-performing doors and/or space productivity in general, are not always easily or measurably identified
• Just as there is too much stuff sloshing around the globe, so too, there’s too much capital in pursuit of investing in even more capacity and/or propping up “losers” (iconic brands that investors believe can be fixed). Sort of like the Fed and “Government Motors.”
• The liberal and “strategic” use (or misuse) of bankruptcy during which businesses shed debt, renegotiate contracts and emerge as new low cost competitors, thus preserving overcapacity
• The continuous stream of foreign brands and retailers entering the U.S. marketplace
• Finally, of course, the unrelenting acceleration of e-commerce, with virtually no barriers to entry, including financial. This is an unprecedented phenomenon, and there are no measures that indicate these enormous additions to the supply side are being offset by corresponding declines in the ‘brick and mortar ‘ or any other retail sector.

All of this leads to what?

Share Wars

What this admittedly gimmicky but absolutely appropriate sub-head means is that for any business competing in an over-stored and over-stuffed marketplace, the only way one can grow is either to win a customer away from a competitor or to get one’s existing customer to buy more and/or more often from the store they are currently in.

And, how does one do that? One must provide products and/or services that are newer and/or better, and/or cheaper, where, when, how and how often the consumer desires, and, oh yes, whatever it is must also be a great experience.

Now, just for argument’s sake, we assume hundreds of competitors have equivalent recipes of newer, better, where, when, how, how often and an experience. What weapon are they left with to win in share wars? Would that be price?

Flat Tires

Unfortunately, and with disastrous consequence, it seems as though price discounting is becoming the priority weapon of choice across all of retailing, including the luxury sector. And, those who do not have parity with the other elements of the so-called recipe of superior benefits, use the pricing weapon even more flagrantly because it is the only weapon they have.

A few factoids out of Mark Ellwood’s soon to be published book CHASING THE SALE: Our Obsession with Getting More for Less: Ten years ago retailers sold just 15-20% of their inventory at some kind of promotional price, today it’s up to 40-45% (according to A.T. Kearney); and, there were 322 billion coupons distributed in 2010, up from 279 billion in 2007.

A recent consumer survey described in WWD, indicated that 75% of women said “it’s important to get the lowest price on everything,” 68% “regularly use coupons,” 45% “only buy on sale,” and 43% “search online for discounts” before they shop. Jane Singer points this out in her article “When is a Sale Really a Sale?” (in this issue) along with the fact that if you Google “sale shopping” it will yield close to 2 billion results.

Of course, the discounting is exacerbated by an unknown number of new website stores launched every day, onto a distribution platform that has virtually no barriers to entry. And, each of those new sites has a discount “deal” bigger and better than the one before it. Flash sales and the now, many Groupon type sites and all other kinds of on-sale online models are proliferating at the speed of light.

As I’ve stated many times, everything is on sale all the time, both offline and on, and shipped for free. What’s more, if you wait for two seconds, your smart phone will beep with an ad or a friend telling you where you can get whatever it is you’re thinking of buying, cheaper.

Major brick and mortar retailers have shifted their pricing structures (good, better, best) down. Outlet stores are growing faster than full price stores, even in the luxury sector.

Saks Inc. has 46 Saks 5th Avenue stores and 60 Off 5th outlet stores, and plans to open three Off 5th stores annually. Nordstrom Rack sales in the 4th quarter of 2011 grew 18%, out-pacing full-line and online sales combined at a mere 10%. They currently have 125 full-line stores and 116 Rack outlets. They opened one full line store so far in FY 2012 and 15 Rack stores, and expect to open that many annually going forward. And, Nordstrom now has a flash sale discounter, HauteLook. Bloomingdale’s has 7 outlets and plans 5 more for 2012.

Two examples in the specialty chain sector: Chico’s CEO David Dyer said the outlet channel is where “the lion’s share of new center development” will be. With 127 outlets currently across their three brands, he expects “all of our brands (Chico’s, White House Black Market, and Soma), over time will have 100 to 150 outlets each; the Gap has reduced their full-line square footage by over 4%, and will grow outlet footage by 4%. And, I have not even scratched the surface with these few examples. As the darker side of my mind works, I could easily build a vision of outlet stores turning full-line stores into mere marketing tools to maintain the integrity of the brand, while the main revenue source becomes the outlets.

Across the entire marketplace, value is being recalibrated – down. The end result of all of this is the devaluation of value across the boards, both in real and perceived terms, essentially a lowering of all ships. Or, to use an automobile metaphor, it flattens all tires and the car just collapses.

Will that be the fate of retailing? At what low level does the discounting/devaluing stop? In the meantime, it seems like a race to the bottom.