Retailers Pull Back on Construction Plans; How Will Fixture Industry Fare?

By Steve Wiesner, Lincoln International

Here we go again. Five years after pulling out of the last downturn, the retail industry finds itself on the front lines of a new economic crisis. Consumers are concerned about too much debt, too little savings, surging unemployment and dwindling 401(k) accounts. While we all expected a downturn at some point, the sharpness of this slump appears to have caught many by surprise.

In light of weaker operating results and a softer economy, many notable retailers, including Wal-Mart, Starbucks, Chico’s and Wet Seal,have announced plans to shutter unproductive stores and curb the pace of new openings.

The decline in store openings reflaects a broader reduction in overall capital investment on the part of retailers. Lincoln International’s “Retail CapEx Monitor,” which tracks the capital spending patterns of fifty of the nation’s largest retailers, confirms that investment is beginning to decline significantly. Total capital spending for the fifty retailers increased by 14 percent year-over-year for the twelve months ending July 31, 2007. Since that time, the year-over-year capital investment increases have declined to 8 percent, 4 percent and -1 percent and -14 percent over the past year. These figures reflect the first declines since April 2003, which was the end of the last retail downturn. Large retailers, including Wal-Mart, have cut investment sharply, and smaller retailers appear to be following their lead.

As seen in the graph that follows, the American Institute of Architects is now estimating that overall retail construction spending will decline by approximately 8.3 percent in 2008. Data from McGraw-Hill, which reflects a 10 percent decrease, supports this outlook. While the remainder of 2008 will be tough, we are actually more concerned about the outlook for 2009 and the lag effect of the credit freeze. We believe that demand for fixturing and displays will likely stabilize in 2010 before mounting a more sustained recovery in the U.S. and abroad.

So what impact will this have on the retail supply chain infrastructure? We all remember the consequences of the last retail downturn for fixtures suppliers and their retail customers. As retailers retrenched, under-capitalized suppliers who lacked scale and a breadth of customer relationships fell into distress. Retailers were looking for trusted partners but, instead, found that many of their suppliers were unable to meet their commitments. While retailers may have been able to push for lower prices, shipments were often late, damaged or incomplete and, when they picked up the phone to address the problem, there was often no one left to speak with. Ontario Store Fixtures disappeared and other competitors struggled to keep the lights on in the plant. Distressed acquisitions became more common as larger players looked to broaden their product and service offerings. Our conversations with companies throughout the industry reflect a similar trend. There are a significant number of smaller fixtures manufacturers that are currently seeking buyers but, given market conditions, may be unable to complete a transaction. Without a larger partner or financial backer, many will have difficulty weathering these difficult market conditions.

So how does today’s environment differ from the last downturn? While the economic conditions may actually be worse, we feel that there are some very positive differences this time. First, retailers have become much better at running their businesses – they are significantly more professional, efficient and analytical than they were earlier in the decade. Accordingly, they are better-prepared than ever to navigate these challenging times. Second, the industry has gone global, and demand in dynamic new markets should soften the downturn we are seeing in the U.S. for those suppliers with international reach. Third, the fixtures industry has rationalized and evolved in a meaningful way. The large players who remain active are well-capitalized and able to offer a full-suite of services and material solutions to their retail customers. Business models have become more flexible, with outsourcing enhancing efficiency and limiting fixed costs and overhead.

In the months ahead, retailers will seek fixture partnerships with companies that can deliver creative designs; efficient sourcing and manufacturing; reliable logistics capabilities; and high levels of customer support and service. Fixture companies that can fulfill those needs will find this difficult market is an opportunity for growth.

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