Americans Need to Go Shopping ...and Ignore the Internet

Last week, one of my readers asked me , “Why are your blogs so depressing?” I responded, “Why can you not understand clear thinking when you read it?” I tend to be sarcastic at times. But he got it right. I do find American news depressing these days. For example, having campaigned on a critical assessment of the Obama administration’s economic policy and deficit spending, not to mention the huge trillion dollar debt, the Trump administration has approved a $1.3 trillion budget deficit which will raise America’s debt to more than $20 trillion. Interestingly, the President has said he will never again approve an omnibus bill and is demanding a line item veto. This means he would have the right to approve some budget items and veto others. The last President to have this privilege was Bill Clinton.

Other areas of concern: the imposition of steel tariffs on China has been met with swift retaliation. China has placed a 25% tariff on pork. Many American pig farmers who export their animals to China may find it hard to stay in business, while pig producers in the EU are rubbing their hands with glee. Yes, lots of fun but a trade war helps nobody in the long run. Last week I wrote of the power of the DC banking lobby and how Congress has allowed some banks to position themselves so they can wreck our savings with abandon, much like they did ten years ago. And Sunday’s marches to protest on the lack of gun control laws might produce nothing worthwhile. Altogether, I see gross failures in American governance. Little wonder there is no joy.

If you think I am a mere scare-monger, are you aware of the state of the American retail industry? Back in the late 80s, I visited a friend of mine in Scottsdale, Arizona. Then he lived close to the centre of town, a suburb of Phoenix. Within ten years, American capitalism had taken hold. His house was now in the suburbs of a thriving city with its temples of steel and glass, the Shopping Malls.

Nowadays, wherever you go in America, you will find cities and towns with their shopping malls, outlet malls and strip malls. Often there will be one or two anchor tenants, usually well-known department stores like Sears or Neiman Marcus. From sleepy Maine to quaint Oregon, bustling New York to outrageous Los Angeles and all places in between, American retail is king. But of late, things have changed.

There is a staggering number of U.S. retail companies at potential risk of defaulting on their debts and seeking bankruptcy court protection, failing which the businesses will close with huge debts and their staff facing unemployment. The rating agency, Moody's, currently lists a whole host of companies in the retail sector facing financial struggles this year, partly as a result of competition from online retail giants like Amazon. Corporations such as the massive Sears, as well as Kmart which owns Sears, J. Crew, Claire's Accessories and two dozen other well-known retailers have some of the lowest credit ratings issued in December, 2017, by Moody's.

Household name retailers such as Neiman Marcus, nutritional supplement seller General Nutrition Centre, and foot-wear companies like Nine West and TOMS Shoes are struggling. Some businesses like Gymboree and Rue 21 filed for bankruptcy protection last year and have since opened their doors after closing stores, shedding debt and making huge numbers of employees redundant.

It is staggering to find that more than thirty substantial U.S. retailers filed for bankruptcy protection during 2017. Moody's competitor, Standard and Poor’s, has issued similarly downbeat news for store operators. It suggests the retail and restaurant sectors are the most distressed in the U.S.

Apart from the ever increasing e-commerce competition from Amazon and others, factors hurting retailers include too many stores, the need for heavy borrowing, followed by refinancing and repayment deadlines, and low cash levels, partly because of the costs of servicing debt. Cash is vital in any business. In some forty years of advising businessmen, I found the sole reason for any business failure was running out of cash. However, many retailers are their own worst enemies. Their web sites are often poorly thought out, confusing to navigate and unprepared for things I would have thought obvious. I wanted to buy a gift card from Sears. When I finally found the item – it took more than five minutes – my American debit card was not accepted, nor was my UK credit card.

On line retailers do not face the same overheads and loan requirements. They have storage facilities to maintain, not bright, attractive stores where rents are high. They do not need the same number of employees. True, they have logistics to deal with to make deliveries but their prime costs and overheads are substantially lower than those of traditional retailers. One store now out of business is Toys ‘R’ Us. It drowned in a $5 billion long term debt. Sales were inadequate to service such a vast loan. It ran out of cash.

Retail is a huge part of American life. In the Malls, you often see T shirts emblazoned with sayings like, “When the going gets tough, the tough go shopping.” My favourite: “Veni, Vide, Visa.” Thanksgiving is followed by Black Friday, when vast numbers of Americans go shopping. Not only do customers snap up discounted bargains but they stock up on Christmas presents. Had there been insufficient demand for the gigantic number of stores throughout USA, retailers would not have been parties with developers in saturating the United States with shopping malls. But sometimes the party has to stop and the future for American retail looks bleak, unless the corporations have a strong Internet facility to boost sales.

I would like to know what Congress and the executive branch, as well as the Office of Budget Management, has calculated as the tax take from the retail sector for this fiscal year? If the downward trend of failures and bankruptcies continues, the bean counters' sums could be way out and tax revenue will fall short by many billions. I am not an economist so cannot be accurate about the consequences but the America government may well have to borrow more or spend less. If the former, government bonds will come at a higher coupon rate, costing the taxpayer even more. 

 

Maybe a special tax could be levied on Amazon and other internet retailers to level the playing field? Amazon avoids tax aggressively, just like Facebook and Google. On 1st March this year, The New Republic reported that Amazon paid zero federal taxes in 2017 on a profit of $5.6 billion and was being rewarded with further tax breaks at state and city levels. Is Mr Bezos just too clever for the IRS or is he too big to touch?