Consumers reach their breaking point, forcing retailers to shutter stores at a worrying pace

By Nathaniel Meyersohn, CNN

New York (CNN) — Family Dollar has announced 677 store closings this year. Walgreens is closing 259. Big Lots is closing 360. LL Flooring is shutting down entirely.

Major retailers have announced 6,189 store closures so far this year, already outpacing last year’s total of 5,553, according to Coresight Research. Chains are on track to close the highest number of stores in 2024 than any year since 2020, when the Covid-19 pandemic decimated the industry.

Closures have picked up this year because the retail sector’s sugar high of 2021 and 2022 — when consumers were snapping up new couches, televisions and clothing — has ended. Companies have raised prices higher than many consumers can afford and interest rates have soared, making it more expensive to borrow money for big-ticket items or to get a mortgage or a car loan. Consumers have reached their breaking point and are pulling back on items they don’t absolutely need.

“Companies were buoyed by Covid-related shopping patterns,” said Michael Brown, partner at global strategy and management consulting firm Kearney. “It kept these players alive that couldn’t survive in normal situations.”

Competition from juggernauts like Amazon, Walmart, Costco, Home Depot and other big-box retailers has also squeezed smaller chains. And years of over-expanding and failed strategies, like Dollar Tree’s $8.5 billion acquisition of Family Dollar, are coming back to bite some chains.

The scale of Amazon, Walmart and others can crush smaller companies. Bigger chains can buy larger quantities of goods at a steeper discount than smaller players, and they can put vast sums of money into technology improvements that even medium-sized retailers can’t afford, widening the gaps even further.

“All these large chains are putting pressure on smaller players,” Brown said. “They lack the scale to get lower pricing. They lack the capital to be able to reinvest in the stores and the business to be able to be relevant.”

Retailers big and small also expanded much more than they probably should have. The United States has nearly double the amount of retail space per square foot compared to other countries.

“Any retail chain that is over-stored, you’ll see a pulling back,” said Barbara Kahn, a marketing professor at the University of Pennsylvania’s Wharton School who studies retail.

Sugar high is over

The rise in store closures this year harkens back to the days prior to the pandemic, when retailers were closing thousands of stores a year as online shopping grew rapidly. Online sales grew from roughly 6% of all retail sales in 2014 to 12% by the beginning of 2020.

In 2017 and 2018, retailers closed a combined 13,400 stores, according to Coresight. Retailers closed a record 9,800 stores in 2019. Payless, Gymboree, Charlotte Russe and Shopko all filed for bankruptcy that year.

The beginning of the pandemic in 2020 flushed out some of the remaining weakest chains like Sears, JCPenney, Pier 1 and others that filed for bankruptcy and closed stores. Around 9,700 stores closed in 2020, according to Coresight.

Retailers that made it through got a boost in 2021 and 2022 from extra federal stimulus payments and revenge spending among consumers eager to shop after being stuck at home.

But this turned out to be a blip, rather than a permanent improvement. Chains that were struggling before the pandemic are once again faltering as high interest rates inflate debt payments and price hikes weigh on many consumers. Inflation is getting back to normal, but prices are still up around 20% from 2020.

In short, if people are paying more for their car, their home and their credit card every month, there’s less money to go around for other things.

“Higher interest rates and greater macroeconomic uncertainty pressured consumer demand more broadly, resulting in weaker spend across home improvement projects,” Ted Decker, Home Depot’s CEO, said in August.

More than 80 companies that sell discretionary goods have filed for bankruptcy through September, up 27% from a year ago, as the sector continues to be hit hard by increasingly budget-conscious consumers, according to S&P Global Market Intelligence. Tupperware, Big Lots and Joann Fabric have been among the largest consumer bankruptcies.

A similar shift is playing out in the restaurant industry, where consumers looking to save money have pulled back on dining out.

Casual dining restaurant chains have struggled as consumers eat at home or gravitate toward cheaper fast-casual restaurants such as Chipotle and fast-food chains like Chick-fil-A.

Red Lobster, Roti, Tijuana Flats, Buca di Beppo and other restaurant chains have filed for bankruptcy this year and closed hundreds of restaurants. Denny’s said this week it’s closing 150 restaurants.

“Everyone has lost traffic. Everyone,” Denny’s CEO Kelli Valade said this week.

Discount chains struggling

Smaller discount retailers that cater to lower- and middle-income shoppers are under the most pressure, particularly from Walmart.

While lower- and middle-income shoppers have traditionally formed the core of Walmart’s customer base, the chain’s market share of people making more than $100,000 a year has grown recently. Walmart has used its giant scale and profits from higher-margin businesses like advertising to muscle down prices. And it has invested billions of dollars in recent years, remodeling stores and building a strong online business to rival Amazon’s.

The end result is that its smaller competitors at the inexpensive end of the market have been getting squeezed out.

Family Dollar hit trouble as its core low-income customers struggle to afford basic necessities and dial back their spending.

Other discount chains have faced similar challenges: Big Lots filed for bankruptcy in September and has closed more than 360 stores. 99 Cents Only went out of business permanently and closed 371 stores.

Drug store chains are also shrinking. CVS, Walgreens and Rite Aid have announced 945 closures this year combined, according to Coresight.

These chains overexpanded during the 1990s and 2000s to drive out competitors and draw more customers, but they weren’t able to foresee vastly lower reimbursement rates for prescription drugs on the horizon; nor that Amazon, Walmart and others would chip away at the snacks and household staple sales that the front end of their stores relied on.

Those two unpredictable factors are now squeezing the back of the store, where the pharmacy is, as well as the front. The result has been thousands of shuttered pharmacies.

Stores opening

It’s not the end of retail as we know it, however. There will be suitors for vacant retail and restaurant space.

“It’s not that there’s an indictment of physical retail. It’s just a correction and a shifting to the type of retail people want to visit in person,” Kahn said.

More than 5,300 stores have announced openings this year. Many companies opening stores are targeting bargain hunters.

TJX, the parent company of TJ Maxx, Marshalls and HomeGoods, is opening 99 stores this year. TJX has pressured department stores like Macy’s and Kohl’s by offering designer brands for low prices.

German discount grocer Aldi announced plans this year to open 800 new stores nationwide in a $9 billion expansion strategy to reach shoppers looking for cheap groceries.

“Where consumers used to shop is not where they’re shopping now,” Brown said. “There are new players coming into the market.”

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