Retail store closures spread across the United States like wildfire in 2017.  Just this past week Charming Charlie announced they are closing 97 stores after Christmas.  That's small potatoes compared to RadioShack, which is closing 1,470 stores, Payless, which is shuttering 700, or Rue21, which is closing 400,... the list goes on and on.

In fact, so far this year there have been around 6,985 store closings announced, already more than three times as many as all of 2016.  There have even been more store closures announced in 2017 than in all of 2008, during the height of the Panic!

Anytime a statistic is worse than, or close to, what was experienced in 2008, the pouting pundits of pessimism come out full force touting the end is near, and it's no different this time for retail and the consumer.

Economist Joseph Schumpeter called it "creative destruction" – the process through which something new brings about the demise of whatever existed before it.  He argued that this process generated higher living standards for the majority, even though it was painful for some.  That pain is felt by companies (i.e. workers and shareholders) that cannot, or will not adapt, leading them to obsolescence.

One of the most documented cases of creative destruction happened when the invention of the automobile caused the demise of carriage and buggy manufacturers.  The new invention of the auto lifted living standards overall.  The majority was better off, but the economy was roiled by the shift.  Today, this is occurring today in retail as brick and mortar gives way to the internet.

This doesn't mean the economy is in trouble.  Retail sales and the consumer are not struggling and GDP is actually accelerating.  Both consumption and retail sales are sitting at all-time record highs and spending in the 2017 Holiday shopping season is expected to be the highest ever recorded.  But instead of walking into shopping malls at an ever increasing rate, consumers are buying more items via the internet.

Internet and mail-order sales made up 9.6% of retail sales in the third quarter of 2017, the largest portion ever. A decade ago, internet and mail-order sales accounted for 5.0% of retail sales. And if you adjust for the areas where the internet has not had a dramatic effect, taking out autos, building materials, and gas stations, internet and mail order sales now make up 14.4%.  This will only grow in the years ahead.

Amazon is the Wal-Mart of the Internet, forcing change.  As of the third quarter of 2017, Consumer Intelligence Research Partners estimates there are over 90 million Amazon Prime memberships in the United States.  Assuming one membership per household that would mean around 75% of households are Prime members.

In order for traditional retailers to survive, in the words of Wayne Gretzky, they need to "skate to where the puck is going, not where it has been."  Most carriage and buggy companies went out of business, but one of the survivors, the Studebaker Brothers Manufacturing Company, saw change coming and adapted.  Although they were one of the biggest buggy makers in the United States, they decided to start building the "horseless carriage."  While many other buggy manufacturers went under, their radical rethink kept them in business for another 60 years.

It's easier for brick and mortar stores to manage that radical rethink than it was for buggy whip makers.  Technology is helping them, making it easier to deliver goods and services online – better apps, faster browsing speeds, online payment technologies, and more efficient delivery systems.   In other words, if you think retail is dead, think again.  Picking winners and losers is difficult, but owning a broad basket of retail stocks in this environment still looks like a solid investment decision.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist