Update on US Restaurant Recession and Dying Malls; Singapore’s Malls Reach Record Vacancies as Hong Kong Retail Sales Slump Anew

Some somber updates on global retailing

The plight of US restaurants appear to be accelerating

From Bloomberg (October 21) [bold added]

U.S. restaurant sales grew in the second quarter at their slowest pace since December 2009. As restaurants start reporting third-quarter results this week, investors should expect to see the pain continue.

Check, Please

Sales growth at North American restaurants in the second quarter was the slowest since 2009

For one thing, customers are finding it's getting more expensive to eat out. Restaurants are hiking menu prices to keep up with rising minimum wages and other costs.

Aside from the 2008 recession, the last time the gap between the cost of eating at home and eating out was this wide was in 1981.

Checkout Line

Lunch-time crowds, which make up a third of all restaurant traffic, are thinning out as more people work from home, while others take advantage of low grocery prices to pack their own lunches.

Many millennials, who had been among the most-frequent restaurant customers, are cutting back, according to industry research firm NPD Group.

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But as industry sales slow further and competition heats up, even they will have to fight for growth.

Generally, labor costs make up around 30% of restaurant sales compared with 12% to 14% of grocery stores, estimates Nomura analyst Mark Kalinowski.

Restaurant traffic break down: Lunch is 33%, dinner is 30%, breakfast is 22%, and snacking/late night is 15%, according to NPD.

NPD reports lunch visits are down 7% from last year, the biggest drop since the recession. 

Yesterday, the Marketwatch declared that the restaurant recession has arrived. (November 3). They quoted the credit agency the Moodys (November 3)

Restaurant companies should brace for a challenging period as consumers grapple with the rising costs of rent, prescriptions and car loans and take advantage of cheaper groceries to eat at home more.

That’s the verdict of Moody’s Investors Service, which on Tuesday slashed its operating-profit growth forecast for the restaurant sector and revised its outlook to stable from positive. The ratings agency is now expecting operating profit to grow 2% to 4% in the next 12 to 18 months, down from a previous forecast of growth of 5% to 6%.

“Consumers are wrestling with higher nondiscretionary spending needs, while restaurant companies face higher operating costs, predominantly labor and challenged traffic trends,” Moody’s analyst Bill Fahy wrote in a note.

Restaurant bankruptcies have surged in 2016 (The Consumerist October 17 2016)

Financial pressures on restaurants will only add to the gloom that has pervaded in US shopping malls where credit stains have surfaced

From Reuters: (October 21) [bold added]

Some $128 billion of commercial real estate loans - more than one-quarter of which went to finance malls a decade ago - are due to refinance between now and the end of 2017, according to Morningstar Credit Ratings.

Wells Fargo estimates that about $38 billion of these loans were taken out by retailers, bundled into commercial mortgage-backed securities (CMBS) and sold to institutional investors.

Morgan Stanley, Deutsche Bank and other underwriters now reckon about half of all CMBS maturing in 2017 could struggle to get financing on current terms. Commercial mortgage debt often only pays off the interest and the principal must be refinanced.

The blame lies with online shopping and widespread discounting, which have shrunk profit margins and increased store closures, such as Aeropostale's bankruptcy filing in May, making it harder for mall operators to meet their debt obligations.

Between the end of 2009 and this July e-commerce doubled its share of the retail pie and while overall sales have risen a cumulative 31 percent, department store sales have plunged 17 percent, according to Commerce Department data.

According to Howard Davidowitz, chairman of Davidowitz & Associates Inc, which has provided consulting and investment banking services for the retail industry since 1981, half the 1,100 U.S. regional malls will close over the next decade.

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A surplus of stores are fighting for survival as the ubiquitous discount signs attest, he said.

"When there is too much, and we have too much, then the only differentiator is price. That's why they're all going into bankruptcy and closing all these stores," Davidowitz said.

The crunch in the CMBS market means holders of non-performing debt, such as pensions or hedge funds, stand to lose money.

The mall owners, mostly real estate investment trusts (REITs), have avoided major losses because they can often shed their debt through an easy foreclosure process.

"You have a lot of volume that won't be able to refi," said Ann Hambly founder and chief executive of 1st Service Solutions, which works with borrowers when CMBS loans need to be restructured.

Cumulative losses from mostly 10-year CMBS loans issued in 2005 through 2007 already reach $32.6 billion, a big jump from the average $1.23 billion incurred annually in the prior decade, according to Wells Fargo.

The CMBS industry is bracing for losses to spike as loan servicers struggle to extract any value from problematic malls, particularly those based in less affluent areas.

Easy money has allowed zombie companies to exist. Now such door or leverage seem to be shutting, payback time looms. 

In short, there is no such thing as a free lunch.

Yet overcapacity, stagnating economic conditions and a shift in consumer preference (via online shopping and via home dining for restaurants) demonstrate why US retail-restaurant conditions have been encountering severe downturn.

The next phase would be concerns over credit risk

Ironically, it would be a wonder to see just how a severe slowdown in the restaurant sector has led to "job growth"—based on US government’s BLS September data (chart from Zero Hedge October 7). It's an example how statistics contravenes economic logic.

Of course, faltering retail conditions hasn’t just been the US.

Hong Kong just reported NINETEENTH straight month of negative growth in retail sales.

Reuters (November 3):

Hong Kong's retail sales fell for the 19th straight month in September as China's economic slowdown and a strong local currency crimped business activity and tourism, though the rate of decline eased from the previous month.

Retail sales slid 4.1 percent from a year earlier to HK$33.8 billion ($4.36 billion) in value terms, after a 10.5 percent decline in August, government data showed on Thursday.

In volume terms, September sales dropped 3.9 percent on-year, compared to a 11 percent decline in August.

"The near-term outlook for retail sales is still subject to uncertainty, depending on the performance of inbound tourism as well as the extent to which local consumer sentiment will be affected by various external uncertainties," the Hong Kong government said in a statement.

Moreover, America’s dying malls appears to have been “imported” by Singapore. Or excess capacity has surfaced in the once mecca of consumer spending—Singapore’s shopping malls.

Bloomberg: Singapore’s Mall Vacancies Jump to Highest Level in a Decade (October 28)

Singapore mall vacancies rose to the highest level in a decade in the third quarter as an oversupply of shop spaces added to muted spending by shoppers.

A gauge of mall vacancies rose 0.6 percent to 8.4 percent in the three months ended Sept. 30, even as rents declined 1.5 percent in the quarter, data from the Urban Redevelopment Authority showed Friday. That’s the highest vacancy rate since Sept. 2006, according to data compiled by Bloomberg.

The Urban Redevelopment Authority in 2014 started including food and beverage, entertainment and fitness outlets to its retail space data, which it backdated to the first quarter of 2011, according to an e-mailed statement. Prior to 2011, the statistics only included shop space.

Demand for shopping space is being dented as consumers rein in spending amid slowing growth and buyers increasingly turn to shopping online. That’s converging with a rising supply of mall space, which threatens to further squeeze rents. Singapore will add almost 4 million square feet of retail space over the next three years, according to data from Cushman & Wakefield.

Again overcapacity, economic conditions and changes in consumer preferences impinge on the current setting.

Connectivity isn’t just a facebook or social media dynamic. If you haven’t noticed the world economy and financial markets have also been interconnected or entwined.

The difference will always be on a relative scale of impact.

So unless current trends reverses, developing quandaries in retail sectors of these developed economies are most likely to spread around the world.