Like Gaul under the Romans, the American retail industry has long been split into three parts. Stores that cater for high-income or low-income customers have performed reasonably well, while those that serve people on middle incomes have struggled. But now almost everyone is struggling and that is hastening the death of an American institution – the shopping mall.
Recent results from a slew of retailing companies have been little short of awful. Just this week, Kohl’s, Sears and Best Buy announced disappointing figures. Sears, the perpetual sick man of American retail, is clinging on by what remains of its fingernails. JC Penney, another big retailer, has just announced that it will sell items for a penny – one cent – in what it claims is a marketing ploy but looks more like a final act of desperation.
To make matters worse, even Walmart and Macy’s are beginning to close stores. The latter, once the unquestioned first port of call for aspirational American housewives, is in the process of closing 40 stores. Meanwhile Nordstrom, an even posher version of Macy’s, looks like transforming itself into a chain of outlet stores that, while still high priced, are presumably not the way it wants its brand to go.
They are all being killed off by wholesale changes in retail tastes, Amazon and, perhaps surprisingly, Costco. The latter, thanks to its generous salaries and benefits, even manages to appeal to liberal customers on an ethical basis – a rare feat. While it is easy to imagine a scenario where things go from bad to worse, it’s hard to imagine one where the situation gets any better. Once shoppers have made the decision to go online or to a club-style warehouse, they are unlikely to go back to department stores – at least not in enough numbers to save them.
The problem for malls is that these big stores, perhaps not Walmart but certainly Sears, JC Penney and Kohl’s, often act as “anchors”. Malls need to keep hold of big shops that pay big rent, so that the higher risk posed by smaller stores is less damaging. This is fine, so long as the anchor stays put – but across the US, malls are slowly but surely losing their moorings.
The saviour of the shopping mall was thought to be outlet stores, where traditionally high-end retailers and manufacturers would send last year’s remainders to sell at rock-bottom prices. But shoppers are increasingly growing tired of outlets too, as once-big discounts narrow and manufacturers supply items that never made it to the premium racks in the first place.
It’s not just stores that are increasingly abandoning malls. Consumers are too. My home city of Louisville made international headlines recently due to a minor scuffle at a mall that, by the time it made the headlines, had turned into a mass brawl involving “2,000” teenagers. The mall in question is now enforcing rules that prevent teenagers entering in groups of more than two at a time. So by giving in to media-induced panic, the mall is actively reducing the number of people who can go there and spend money.
Retailers have consolidated to the point of no return and are up to their eyeballs in debt, and most are fighting a losing battle. There will be survivors – despite the retail carnage, non-enclosed malls and outlet operators have been well supported by investors – but there has not been a new indoor mall built in the US in the past decade. Even if reports of the death of the enclosed American shopping mall have been exaggerated for years, there is no doubt that the industry is now in its death spiral.
What does JP Morgan have to do to ruffle its chief?
The point of investor days at big banks, apart from fancy catering and mutual back-slapping, is usually to reassure the markets that everything is just fine. Even in tough times – like now, when markets are in freefall and investors are gripped by panic – it’s rare for executives actually to say anything remotely interesting. All of which made JP Morgan’s investor day this week more noteworthy than usual.
The reassuring talk came from chief executive Jamie Dimon, who two weeks ago backed up his support for the banking sector by splashing out $26m (£19m) on JP Morgan’s stock. Trying to sound as upbeat as possible, he added that he would happily buy his own company’s stock “all day” at $48 a share. Not a bad trade as it happens – those 500,000 shares have already given him a $4m paper profit.
The bad news came from JP Morgan’s commercial division, where it tucks away most of its exposure to the energy industry. Investors should not have been surprised to hear that the company is putting $500m aside to deal with potential bad debts on loans to oil and gas companies. What was more worrying for investors was that Doug Petno, the head of the commercial bank, then told reporters: “I think we have only begun to see the range of bankruptcies in oil and gas.”
If the price of oil stays anywhere near $25 a barrel for another 18 months – not beyond the realms of possibility – JP Morgan will have to treble its rainy-day oil and gas fund to $1.5bn. If Mr Petno is right, and he probably is, there are significantly more bankruptcies in the, ahem, pipeline. JP Morgan won’t be alone in putting money aside but the bank also has significant exposure to related industries such as oil and gas real estate.
However, as Antoine Gara of Forbes magazine pointed out, the irony is that JP Morgan’s potential losses from oil and gas are a tiny fraction of its losses from paying fines levied by regulators and the Department of Justice after staff routinely ignored the rules. The bank has forked out billions in fines, which when combined with trading losses (such as the $6bn “London Whale”) are amounts that dwarf its exposure to oil and gas.
If anyone else ran a business that had paid out such huge fines, with several big claims still to be decided, they would be out of a job. Not Jamie Dimon. He is untouchable. Which is what makes JP Morgan so dangerous.