High streets and shopping malls face a ‘domino effect’ from major store closures

Another one bites the dust: House of Fraser plans to close the majority of its stores. Image: Getty.

Traditional retail is in the centre of a storm – and British department store chain House of Fraser is the latest to succumb to the tempest. The company plans to close 31 of its 59 shops – including its flagship store in Oxford Street, London – by the beginning of 2019. The closures come as part of a company voluntary arrangement, which is an insolvency deal designed to keep the chain running while it renegotiates terms with landlords. The deal will be voted on by creditors within the month.

Meanwhile in the US, the world’s largest retail market, Sears has just announced that it will be closing more than 70 of its stores in the near future.

This trend of major retailers closing multiple outlets exists in several Western countries – and its magnitude seems to be unrelated to the fundamentals of the economy. The US, for example, has recently experienced a clear decoupling of store closures from overall economic growth. While the US economy grew a healthy 2.3 per cent in 2017, the year ended with a record number of store closings, nearly 9,000 while 50 major chains filed for bankruptcy.

Most analysts and industry experts agree that this is largely due to the growth of e-commerce – and this is not expected to diminish anytime soon. A further 12,000 stores are expected to close in the US before the end of 2018. Similar trends are being seen in markets such as the UK and Canada.

Pushing down profits

Perhaps the most obvious impact of store closures is on the revenues and profitability of established brick-and-mortar retailers, with bankruptcies in the US up by nearly a third in 2017. The cost to investors in the retail sector has been severe – stocks of firms such as Sears have lost upwards of 90 per cent of their market value in the last ten years. By contrast, Amazon’s stock price is up over 2,000 per cent in the same period – more than 49,000 per cent when considering the last 20 years. This is a trend that the market does not expect to change, as the ratio of price to earnings for Amazon stands at ten times that of the best brick-and-mortar retailers.

Although unemployment levels reached a 17-year low in 2017, the retail sector in the US shed a net 66,500 jobs. Landlords are losing longstanding tenants. The expectation is that roughly 25 per cent of shopping malls in the US are at high risk of closing one of their anchor tenants such as a Macy’s, which could set off a series of store closures and challenge the very viability of the mall. One out of every five malls is expected to close by 2022 – a prospect which has put downward pressure on retail real estate prices and on the finances of the firms that own and manage these venues.

In the UK, high streets are struggling through similar issues. And given that high streets have historically been the heart of any UK town or city, there appears to be a fundamental need for businesses and local councils to adapt to the radical changes affecting the retail sector to preserve their high streets’ vitality and financial viability.


The costs to society

While attention is focused on the direct impacts on company finances, employment and landlord rents, store closures can set off a “domino effect” on local governments and businesses, which come at a significant cost to society. For instance, closures can have a knock-on effect for nearby businesses – when large stores close, the foot traffic to neighbouring establishments is also reduced, which endangers the viability of other local businesses. For instance, Starbucks has recently announced plans to close all its 379 Teavana stores. Primarily located inside shopping malls, they have harshly suffered from declining mall traffic in recent years.

Store closures can also spell trouble for local authorities. When retailers and neighbouring businesses close, they reduce the taxable revenue base that many municipalities depend on in order to fund local services. Add to this the reduction in property taxes stemming from bankrupt landlords and the effect on municipal funding can be substantial. Unfortunately, until e-commerce tax laws are adapted, municipalities will continue to face financial challenges as more and more stores close.

It’s not just local councils, but local development which suffers when stores close. For decades, many cities in the US and the UK, for exmaple Detroit and Liverpool, have heavily invested in efforts to rejuvenate their urban cores after years of decay in the 1970s and 1980s. Bringing shops, bars and other businesses back to once derelict areas has been key to this redevelopment. But today, with businesses closing, cities could once again face the prospect of seeing their efforts unravel as their key urban areas become less attractive and populations move elsewhere.

Commercial ecosystems featuring everything from large chain stores to small independent businesses are fragile and sensitive to change. When a store closes it doesn’t just affect employees or shareholders – it can have widespread and lasting impacts on the local community, and beyond. Controlling this “domino effect” is going to be a major challenge for local governments and businesses for years to come.

Omar Toulan, Professor in Strategy and International Management, IMD Business School and Niccolò Pisani, Assistant Professor of International Management, University of Amsterdam.

This article was originally published on The Conversation. Read the original article.

 
 
 
 

Uncertainty is the new normal: the case for resilience in infrastructure

Members of the New York Urban Search and Rescue Task Force One help evacuate people from their homes in Fayetteville, North Carolina, in September 2018. Image: Getty.

The most recent international report on climate change paints a picture of disruption to society unless there are drastic and rapid cuts in greenhouse gas emissions. And although it’s early days, some cities and municipalities are starting to recognise that past conditions can no longer serve as reasonable proxies for the future.

This is particularly true for America’s infrastructure. Highways, water treatment facilities and the power grid are at increasing risk to extreme weather events and other effects of a changing climate.

The problem is that most infrastructure projects, including the Trump administration’s infrastructure revitalisation plan, typically ignore the risks of climate change.

In our work researching sustainability and infrastructure, we encourage and are starting to shift toward designing man-made infrastructure systems with adaptability in mind.

Designing for the past

Infrastructure systems are the front line of defense against flooding, heat, wildfires, hurricanes and other disasters. City planners and citizens often assume that what is built today will continue to function in the face of these hazards, allowing services to continue and to protect us as they have done so in the past. But these systems are designed based on histories of extreme events.

Pumps, for example, are sized based on historical precipitation events. Transmission lines are designed within limits of how much power they can move while maintaining safe operating conditions relative to air temperatures. Bridges are designed to be able to withstand certain flow rates in the rivers they cross. Infrastructure and the environment are intimately connected.

Now, however, the country is more frequently exceeding these historical conditions and is expected to see more frequent and intense extreme weather events. Said another way, because of climate change, natural systems are now changing faster than infrastructure.

How can infrastructure systems adapt? First let’s consider the reasons infrastructure systems fail at extremes:

  • The hazard exceeds design tolerances. This was the case of Interstate 10 flooding in Phoenix in fall 2014, where the intensity of the rainfall exceeded design conditions.

  • During these times there is less extra capacity across the system: When something goes wrong there are fewer options for managing the stressor, such as rerouting flows, whether it’s water, electricity or even traffic.

  • We often demand the most from our infrastructure during extreme events, pushing systems at a time when there is little extra capacity.

Gradual change also presents serious problems, partly because there is no distinguishing event that spurs a call to action. This type of situation can be especially troublesome in the context of maintenance backlogs and budget shortfalls which currently plague many infrastructure systems. Will cities and towns be lulled into complacency only to find that their long-lifetime infrastructure are no longer operating like they should?

Currently the default seems to be securing funding to build more of what we’ve had for the past century. But infrastructure managers should take a step back and ask what our infrastructure systems need to do for us into the future.


Agile and flexible by design

Fundamentally new approaches are needed to meet the challenges not only of a changing climate, but also of disruptive technologies.

These include increasing integration of information and communication technologies, which raises the risk of cyberattacks. Other emerging technologies include autonomous vehicles and drones as well as intermittent renewable energy and battery storage in the place of conventional power systems. Also, digitally connected technologies fundamentally alter individuals’ cognition of the world around us: consider how our mobile devices can now reroute us in ways that we don’t fully understand based on our own travel behavior and traffic across a region.

Yet our current infrastructure design paradigms emphasise large centralized systems intended to last for decades and that can withstand environmental hazards to a preselected level of risk. The problem is that the level of risk is now uncertain because the climate is changing, sometimes in ways that are not very well-understood. As such, extreme events forecasts may be a little or a lot worse.

Given this uncertainty, agility and flexibility should be central to our infrastructure design. In our research, we’ve seen how a number of cities have adopted principles to advance these goals already, and the benefits they provide.

A ‘smart’ tunnel in Kuala Lumpur is designed to supplement the city’s stormwater drainage system. Image: David Boey/creative commons.

In Kuala Lampur, traffic tunnels are able to transition to stormwater management during intense precipitation events, an example of multifunctionality.

Across the U.S., citizen-based smartphone technologies are beginning to provide real-time insights. For instance, the CrowdHydrology project uses flooding data submitted by citizens that the limited conventional sensors cannot collect.

Infrastructure designers and managers in a number of U.S. locations, including New York, Portland, Miami and Southeast Florida, and Chicago, are now required to plan for this uncertain future – a process called roadmapping. For example, Miami has developed a $500m plan to upgrade infrastructure, including installing new pumping capacity and raising roads to protect at-risk oceanfront property.

These competencies align with resilience-based thinking and move the country away from our default approaches of simply building bigger, stronger or more redundant.

Planning for uncertainty

Because there is now more uncertainty with regard to hazards, resilience instead of risk should be central to infrastructure design and operation in the future. Resilience means systems can withstand extreme weather events and come back into operation quickly.

Microgrid technology allows individual buildings to operate in the event of a broader power outage and is one way to make the electricity system more resilient. Image: Amy Vaughn/U.S. Department of Energy/creative commons.

This means infrastructure planners cannot simply change their design parameter – for example, building to withstand a 1,000-year event instead of a 100-year event. Even if we could accurately predict what these new risk levels should be for the coming century, is it technically, financially or politically feasible to build these more robust systems?

This is why resilience-based approaches are needed that emphasise the capacity to adapt. Conventional approaches emphasise robustness, such as building a levee that is able to withstand a certain amount of sea level rise. These approaches are necessary but given the uncertainty in risk we need other strategies in our arsenal.

For example, providing infrastructure services through alternative means when our primary infrastructure fail, such as deploying microgrids ahead of hurricanes. Or, planners can design infrastructure systems such that when they fail, the consequences to human life and the economy are minimised.

The Netherlands has changed its system of dykes and flood management in certain areas to better sustain flooding.

This is a practice recently implemented in the Netherlands, where the Rhine delta rivers are allowed to flood but people are not allowed to live in the flood plain and farmers are compensated when their crops are lost.

Uncertainty is the new normal, and reliability hinges on positioning infrastructure to operate in and adapt to this uncertainty. If the country continues to commit to building last century’s infrastructure, we can continue to expect failures of these critical systems, and the losses that come along with them.

The Conversation

Mikhail Chester, Associate Professor of Civil, Environmental, and Sustainable Engineering, Arizona State University; Braden Allenby, President's Professor and Lincoln Professor of Engineering and Ethics, School of Sustainable Engineering and the Built Environment, Ira A. Fulton Schools of Engineering, Arizona State University, and Samuel Markolf, Postdoctoral Research Associate, Urban Resilience to Extremes Sustainability Research Network, Arizona State University.

This article is republished from The Conversation under a Creative Commons license. Read the original article.