Outlook dims for mall stores as online shopping intensifies

WASHINGTON -- Online shopping is reaching such a critical mass with American households, many of the icons of the traditional mall -- from Macy's to The Gap and J.C. Penney -- face an increasingly uncertain future.

A government report Friday suggested a modestly healthy consumer, with retail sales up 1.3 percent in April. Americans are eating out more at restaurants. They're buying more cars. But the main beneficiaries of spending in the past year have been Amazon, eBay and other internet behemoths.

Spending at these non-store retailers shot up 10.7 percent from a year ago, the government said in a week when earnings reports showed disturbing drop-offs at Macy's, Kohl's, Nordstrom and J.C. Penney.

Shoppers who once crowded malls now are ordering on phones, computers and tablets, siphoning sales from physical stores, which face growing pressure to reinvent their businesses.

"Online is cannibalizing the store business," said Marshal Cohen, chief industry analyst at the NPD Group.

The magnitude of the change may be beginning to intensify. Online shopping has attuned customers to focusing on price and hunting for the best bargains, thereby shrinking profit margins at many stores.

Retailers have responded by closing stores to cut costs, leaving more shopping malls and plazas empty. The result has been a painful upheaval in an industry that employs 15.9 million people.

Online, in the meantime, has been catching up to the general merchandise stores that range from Wal-Mart to Neiman Marcus.

In 2000, for every dollar spent at physical stores, just 30 cents were spent online and at mail-order houses, according to government figures. Now, the online category makes up nearly 70 cents for every dollar spent at general-merchandise stores.

"We have yet to learn the ramifications of just how paramount these shifts in consumer behavior are," Cohen said. "This is a cultural shift from the younger generation that is only going to carry forward."

The April retail sales report from the Commerce Department showed uniformly solid growth. It assuaged concerns an economic slowdown in the first three months of 2016 might have disrupted consumer spending significantly.

The gains weren't just online. Though internet purchases rose 2.1 percent from March, auto sales jumped 3.2 percent. Clothiers, restaurants, sporting-goods stores, grocers and gas stations also posted gains.

Only building materials stores suffered a monthly drop, but their annual sales growth was solid.

Though sales at department stores rose slightly, they have sunk 1.7 percent over the past 12 months.

The shift online points to more disciplined consumers whose collective habits can reshape sales. Impulse buys make up 45 percent of store purchases, for example, but only 23 percent online, according to research at the NPD Group.

At the same time, the improving economy hasn't relieved the financial pressures on many Americans. Across the country, households are more reluctant to spend than they were before recession struck in late 2007.

Ken Perkins of Retail Metrics, a research firm, notes incomes have been rising tepidly despite a stronger job market. A result is women may be less likely to step up spending on clothing at a time when Amazon has intensified price competition.

"My gut says that women don't have the money outside replenishing items," Perkins said. "And the Amazon effect is gaining momentum."

Shoppers such as Morgan Province of Herndon, Virginia, said they're tightening spending for a variety of reasons.

Province said she's saving for a move, and when she buys, she's spending more online. She's going to Amazon.com every two weeks, compared with every six or eight weeks a year ago.

"It's more convenient," Province said. "It's more affordable, and there are more options."

John Blackledge, an analyst at Cowen & Co., said he expects Amazon.com to replace Macy's Inc. as the No. 1 apparel retailer by next year.

Macy's dropped its report with a clunk Wednesday. It slashed its profits and sales outlook, and other major outlets, including Nordstrom and Kohl's, also reported dismal figures.

In response to their falling revenue, some stores have announced plans to try to boost profitability. Nordstrom said it's cutting inventory and reducing expenses.

In February, Kohl's said it would close 18 stores, marking the first time in its history it was closing multiple stores.

J.C. Penney's chief executive, Marvin Ellison, told investors Friday that Penney's will reduce its dependency on the clothing business. In its place, it intends to expand services such as beauty salons and sell major appliances -- a business it had left three decades ago. It's rolling out major appliances in nearly half of its stores by this summer.

"We look at what customers are spending," Ellison said. It's "entertainment, it's experiences, it's home beautification."

Macy's plans to speed launches for exclusive fashions while cutting expenses and plowing the savings into sales help online and in stores.

"Our industry is in something of a rough patch," said Karen Hoguet, chief financial officer at Macy's.

Hoguet calls the declines puzzling, given a hiring streak that has held the national unemployment rate to a healthy 5 percent.

Analysts tend to point to a confluence of factors that aren't new but may be accelerating.

Shoppers are spending less on clothing and devoting more their income to experiences such as dining out. When they buy clothing, they're more likely to spend at T.J. Maxx and other off-price chains that compete by offering discounts.

"The big companies are suffering not necessarily from weak demand but weak pricing," said Jack Kleinhenz, chief economist at the National Retail Federation. "We've been in a deflationary mode, so consumers are getting great deals when they are spending."