Monday, May 18, 2020
This is a rush transcript. This copy may not be in its final form and may be updated.
It's Monday, May 18, 2020. I'm Albert Mohler and this is The Briefing, a daily analysis of news and events from a Christian worldview.
Massive Changes in the Retail Landscape: What Do the Downfalls of JCPenney, Sears, and Neiman Marcus Mean?
Our worldview comes out in every dimension of our lives, but one of the ways it becomes most manifest where we see it most clearly is in our consumer behavior, in our economic lives. And thus, it's very important that we understand that a lot is going to be clarified in the midst of the COVID-19 pandemic. And this includes a certain verdict on retail. And furthermore retail will become something of an x-ray for the opening of the culture and of the future shape of our economy.
Just consider this headline in Saturday's edition of The New York Times: “Retail Sales Drop is Steepest Ever Adding to Crisis.” The article is by Ben Casselman and Sapna Maheshwari, and they tell us that retail sales fell 16.4% in the month of April. That becomes the steepest fall in the history of the American economy in retail sales. That eclipses the previous record, which was set by the previous month, the month of March, which registered an 8.3% drop.
Now, recall that the shutdown took place, basically in the middle of March. You begin to get the picture. This is what a shutdown economy looks like. When you're talking about retail sales falling, 16.4% in one month, that might sound like say less than 20% of the retail economy. But the point is that 16.4% is shut down, and the point is the numbers are going to get higher.
Now, as you look at this, there are some massive stories behind this. For one thing, what we are seeing before our eyes is the pressure of the pandemic leading to fundamental changes in the retail landscape. And these are going to continue even after the economy opens up—to use the current language—in the aftermath of the COVID-19 pandemic. We're not even sure when that aftermath is, but we are looking right now at, at least a thawing or a partial opening up of the retail sector.
But that sector is already been under enormous strain. If you look at the retail sector in the United States, just looking at say retail, consumer goods, the retail sector actually includes larger issues that people might not think about, including many food sales and even restaurant operations. But when you're looking at stores, when you're looking at economic activity, buying things, and here, we're talking about the kinds of consumer products that Americans buy by the billions and billions of dollars a year, habits have been changing.
Now for one thing, you have seen the standard of living going up. Going up in the size of the houses in which we live. Going up in how many of those houses have air conditioning? And even more recently, how many of those homes and apartments have Wi-Fi or other services? The reality is that there has been an inching up of the economy year by year, such that we take certain things for normal, that our grandparents would never even have known existed.
But we are also looking at massive changes in the retail landscape that are being accelerated by the pandemic. Interesting things to watch here. For example, in the midst of all of this shutdown, and with that record 16.4% fall off in retail sales during April, there've been some rather spectacular bankruptcy filings.
For one thing, you had JCPenney announce, just as we went into the weekend, that the 118-year-old retail chain with more than 800 stores and nearly 85,000 employees would finally declare Chapter 11 bankruptcy. The leadership of the company indicates that it hopes to survive in some form on the other side of the bankruptcy. But that's not going to be up to the company alone. It's also going to be up to the debt holders. It's going to be up to those who hold the stock. It's eventually going to be up to the American consumer.
In the end, just about all major retail decisions do. But as we're thinking about this, consider the parable of American retail. The two biggest retailers at the center of American culture at the middle point of the 20th century, they're both in bad shape. One is in bankruptcy and the other has been in all likelihood, mortally wounded. It's just living on, skimping along in some sense. We're talking about JCPenney and Sears, Roebuck and Co, now known as Penney's and Sears.
Behind those two stories is a fascinating American tale. They both go back either to the beginning of the 20th century or the end of the 19th century, and they go back to the birth of the great department store. They go back to the age of the catalog. They go back to the big age of American middle-class retail. That is a very important point. Middle-class retail. When you're looking at the development of both Sears and of Penney's, you are looking at vast retail empires that emerged at that certain magic moment in America's cultural and economic history, and they probably could not have either emerged or now perhaps even survive in a very new retail economy.
JCPenney and Co., as it became known, was established by James Cash Penney in 1902. It basically began in the American West, but as it became a nationwide chain with national and furthermore international aspirations, JCPenney moved the headquarters of the company to New York City. That is the capital of the economy of this country.
But before James Cash Penney arrived on the scene, Richard Warren Sears had already started along with Alvah Curtis Roebuck, the company that became known as Sears, Roebuck and Co. It began in 1893, just about nine years before JCPenney. Together they became the two great consumer retail empires of the American middle class.
And when you're talking about the American middle class, we need keep in mind that that middle class, as we know it, came about at just about the same time. As you look at certain points in Western history, almost the entire population is divided between two classes, the haves and the have-nots. The emergence of a professional class, the emergence of a middle class, what in the French became known as the bourgeoisie, that became possible with vast growth in capital in Western economies. And it also emerged with the growth of cities—later, as we shall see, the growth of suburbs and a vast growth in that middle-class sector. Even in America right now, most of the wealth is held in that American middle class. You do have signs of wealth disparity and what is called inequality. You do have people who are fabulously rich, and you have people who are not yet middle class, although they almost all aspire to be middle class with middle-class assumed to demonstrate a certain kind of cultural security.
The tenuousness of the middle class now is one of the reasons why JCPenney and Sears, Roebuck and Co. and others have not fared so well. But still the vast middle class is still the basic economic power in consumer retail. That was true in James Cash Penney, and with Richard Warren Sears and Alvah Curtis Roebuck started their chains. Eventually they became simplified as Sears and Roebuck.
Sears pioneered not only this kind of store addressed to middle America, but also the use of the catalog. JCPenney was also a very important trend setter. Together, they basically sold just about everything that needed to be sold to the middle class. Sears famously would sell everything from wrenches to underwear, to major appliances, and even at one point, homes, kit homes sold in the Sears and Roebuck catalog.
It would have been difficult if not impossible for anyone a generation before the emergence of these retail titans to imagine a place where you could have your car fixed. What's a car after all? Buy a house from a catalog and buy a pair of new socks in the very same location, the very same retailer.
And those retailers grew incredibly, almost beyond imagination, even as the American middle class led the way in that growth in the 20th century. And that American middle class began to migrate from the cities to the suburbs, especially in the 1950s and the 1960s. And in the 1960s and 1970s, both Sears and Penney's made their way to the burgeoning new suburban malls, eventually the super malls or the mega malls, and they became what were known as anchor stores.
If you go back to the 1960s and '70s, it became virtually inconceivable that you could build a major suburban mall that would succeed without either Sears or Penney's and usually both. But both of the chains began to fall behind. We now know in the 1980s and '90s with changes in American consumer behavior. For one thing, the middle-class grew a little more aspirational. Clothes from Sears and Penney's were no longer considered particularly cool. And in both cases, the consumer base began to grow older and over time in retail or in church life or anything else that is a severe warning sign.
But as is almost always the case, we see that pattern now far more in retrospect than it was understood at the time. If you were to look at Sears in the middle of the 1970s, you would have thought that Sears would have had a virtually unlimited retail future. It was in 1974 that Sears unveiled the tallest building in the world, the 110 story building in Chicago, then known as the Sears Tower as its international headquarters. But at the very same time, we can now understand the company was headed into decline, not into growth.
The same was true for JCPenney. And by the way, all of these titans of American merchandising were very much committed to the ethos of capitalism and Americanism, of consumerism and patriotism. It all got wrapped together and there were a few companies more associated with America than JCPenney and Sears, Roebuck and Co.
But at the same time, it's not just Sears, now united with Kmart that is increasingly in trouble. It's not only Penney's that has declared bankruptcy, there's another parable in another part of the retail sector that also serves as a parable. In recent weeks, the Dallas-based luxury chain, Neiman Marcus has also declared bankruptcy—fascinating story behind Neiman Marcus.
The company was established in 1907 in Dallas, and it became closely associated with Dallas. It is a part of Texas lore and Texas culture. Herbert Marcus and his sister, Carrie Marcus Neiman, established the department store in Dallas. Keep in mind, you really are talking about one family starting this company, Herbert Marcus and his sister, Carrie Marcus Neiman, thus Marcus Neiman. But Marcus Neiman was never associated with the middle of the American middle class. It became rather quickly associated with the highest consumer aspirations of anything that could be considered a department store.
Now, there's something interesting here. When you're looking at Sears, you're looking at a company that tried to put a store in just about every major trading post site in the United States. JCPenney was a bit more urbanized, but both of them became suburbanized with the growth of the malls. Neiman Marcus was much like Saks Fifth Avenue, Lord & Taylor, Bloomingdale's, other major New York retailers that had their vast department stores like Macy's right in the downtown. But eventually Neiman Marcus made its way out of downtown Dallas into the suburbs as well. But it was much choosier about its suburbs and its clientele had to be considerably wealthier. And if Sears and Penney's became known for their catalogs addressed to the middle class, Neiman Marcus became iconic for its Christmas catalog that included the outrageous, including the outrageously expensive.
But stores like Neiman Marcus have had to contend with several new developments. For one thing, you have people who don't necessarily want to shop in a mall in any event. They have a very different consumer expectation. They're looking for a different consumer culture. Then again, Neiman Marcus just by definition required a much greater investment of consumer interest from every single paying customer than did any company, including those like Dillard's and Macy's or not to mention Penney's and Sears. One of the problems for Neiman Marcus is that you had designers establishing their own boutiques and eventually establishing their own store. Some of them right in the same luxury malls.
The reality is Neiman Marcus found itself as a big player in an increasingly small market. But in the end, the bankruptcy of Neiman Marcus has more to do than anything else with debt. Once again, we have the reminder that debt really is an anchor thrown right in the middle of your ship. And in this case, it is debt, especially now held in the form of private equity that creates a huge problem for Neiman Marcus.
Big Questions for America’s Retail Sector on the Other Side of the Pandemic: A Look at Consumer Economic Behavior
But looking at the entire sector, it's also clear that the middle sector has moved elsewhere. And where has it moved? Well for one thing, much of the clothing and other soft goods business that would have gone to Sears or to Penney's in decades past has gone to companies now like Target and Kohl's. By the way, Target is one of the companies doing fairly well in the midst of the pandemic because it doesn't sell merely soft goods, it also sells groceries and other urgently needed goods. That's not the same for companies that primarily sell the soft goods that is clothing and related household items.
But companies like Kohl's began to undercut Penney’s in price and also policies running sales and pricing strategies that Penney's either could not or did not match. And the leadership is another issue. You can look at almost every one of these companies and understand that failures of leadership. That's not to say the leaders didn't have the right capacity, but it appears that the leadership did not have a winning strategy at least when it comes to many of these companies.
There may be a Penney's on the other side of the pandemic. There may still be a Sears and Kmart somewhere of some size. There may still be a Neiman Marcus, but none of these are now assured. And the other big development is the arrival of the online economy—a consumer economy. When Amazon started selling books, it became known as an online bookstore, but no one would describe Amazon as an online bookstore now. Actually much of its cash revenue is actually coming from cloud computing. Something that those who are just a click away by Amazon Prime for making their purchases that will be delivered to their doors probably never even think about. But clicking at Amazon and similar online retailers has now become not only a habit, but something of a necessity in the midst of the pandemic. What will be the lasting changes on the economic landscape? We don't know, but it's going to be fascinating to see.
But one thing we need to keep in mind in worldview analysis is that however this landscape is reshaped, it will actually tell us much, much more than the shape of American consumer retailing. It's going to tell us a great deal about the Americans who are active consumers at the time. It's going to tell us a great deal about fundamental shifts in our culture. That shift online is not something that just came out of the blue, but in the pandemic, the question is how much of that will ever be reversed?
How many companies are going to be able to afford the kind of rents that are necessary for location-based retail? That's going to be a very interesting question. How many consumers are actually going to want that kind of retail? The answer is we can be pretty sure that millions and millions of Americans will want some department store or stores to survive. The reality is they may not nevertheless conform their consumer behavior to make that happen.
But this is where Christians understand, even as Jesus told us, “Where our treasure is, there our heart will be also.” It's just another underlining of the fact that when we look at consumer economic behavior, we're never looking at merely something economic. We're looking at something that is a far deeper significance. We reveal who we are, who we aspire to be. The kind of consumer objects we want to buy. The kinds of goods we want in our home. The kind of clothes we want to wear. The amount of money of our spendable income, we're willing to spend. All of those are bigger questions than any economists can track.
But this is where Christians must also understand that unless there is a recovery in America's retail sector, there won't be a recovery in the total economy because here's something else Christians need to understand. Every single economic decision, every single decision made by every single individual or buying unit has ramifications linked in an economic chain to every other economic decision. That's something we don't often think about, but when you're looking at a loss of retail sales, you're looking at a loss of jobs. You're looking at a loss of income. There's less money to spend from the people that used to have jobs in that sector. Those companies also had a good deal of equity. Some of that equity will actually be destroyed by a shutdown or a bankruptcy, and some of it will never be recovered again.
Now, somewhere else economic principles tell us, somewhere else in the economy, there will be new activity, and over time it will probably be even larger activity. But when we're looking at this kind of transformation, it will come with an enormous cost.
And it also underlines the fact that many of these changes are very, very slow until they're not. A wise economist said, "That's the way it works with bankruptcy. It happens very, very slowly until it happens very, very fast.” That's just a good moral issue to remember. When you're looking at these big changes, they seem to take a long time to happen. You have stock analysts and you have investors. You have consumers just looking at companies and thinking it looks no longer so much a part of the future as it does a part of the past. But you think it's going to be there for some time until all of a sudden, there's a sign on the door.
Government Spending Is Way Up and Everyone Is Seemingly Fine With It: The Danger of Debt in the Christian Worldview
But this leads us to another issue in which changes in the economy point to even more fundamental changes in the culture. Another front page article, this one also in The New York Times. I go to the Times twice here because the fact that these stories appear in the Times in economic terms is really more important than if they had appeared on the front page of The Wall Street Journal. The Wall Street Journal is more addressed to a business culture. The fact that these headlines appeared in the New York times tells us this news is so significant that The New York Times for a general audience decided this was leading news.
The headline is this: “A Giant Deficit, Once Dreaded, Is Now Desired.” It's by Jim Tankersley. The big importance of this story is the fact that even as you have had a long-standing argument, a fierce argument in American politics now for decades about debt and the deficit and government spending, all of those old rules are now completely out the door.
In a matter of just weeks, the very conversation taking place right now in Washington about federal spending would have been inconceivable just a matter of two months ago. You have people now making virtually the opposite argument they would have made, and even on the Democratic side, which has been the more government spending side, you have arguments being made that Democrats wouldn't have believed they could have gotten away with just eight weeks ago. So Republicans don't sound like Republicans, and some of the Democrats sound like the kind of Democrat for the other Democrats would have run from.
Tankersley reminds us that in the month of April alone, the United States recorded a larger budget deficit in the single month than it did for all of the fiscal year, 2017. Folks, that's not ancient history. That's 2017. We ran up a bigger deficit in terms of our national budget in four weeks than we did in 52 weeks just in 2017. But then Tankersley writes, "Running such a large deficit would have been politically untenable just a year ago. Since the end of World War Two economists have often warned that doing so would risk runaway inflation and possibly unsustainable tax hikes on future generations. But now even some of the country's most ardent deficit hawks have watched the debt pile up and said, ‘More please.’"
While they haven't actually said, "More debt please,” that's not particularly accurate, but they have said, "More spending please." And both Democrats and Republicans acknowledged there will be vast, additional infusions of cash, and all that's going to be borrowed cash, coming from the federal government into the economy. And the reason for it is panic. And in this case, the panic is not unjustified.
Later generations will have to look back and see if these economic decisions were wise, but at least at this point what's most important is to recognize that both major political parties, if not believing that this decision is right, now believe that the policy is necessary, at least for a time. But one of the principles we often talk about is that when government expands and spends it very rarely and certainly does not willingly cut itself back.
It's not an accident that I have looked at these two stories together because even as they have broken together in recent days, they're also tied together by at least many common themes. But one of them Christians need to understand is the danger of debt. I mentioned that with Neiman Marcus and other retail chains. We also see it when it comes to the federal government. This money comes from somewhere.
And even though you don't hear much about it, let's answer the question. Where is that where from which it's coming? It's coming from borrowing from the central banks of other nations. Just think about that. Money doesn't grow on trees. So insofar as we're borrowing this money, the federal government is borrowing it from someone, and that means in the main part, foreign central banks. And it means someone's going to have to pay the bills. Who will pay these bills? Well, the reality is our children, our grandchildren, and even now our great grandchildren are going to be paying these bills.
Now there's a certain bet or gamble going on here, and I don't know a better way to put it. The biggest bet is this: Better to save this economy, even if it means piling up the debt rather than to have the economy crash, which will mean the impoverishment of those children and grandchildren and great grandchildren. At least save the opportunity for the economy to rebound.
There's another bet or gamble going on here, and that is the bet that we will have continued access to this amount of borrowing at the low interest rates that have more recently prevailed.
There's another bet that you don't hear politicians talk about. That bet eventually is inflation. The bet is this: Even if we take on trillions and trillions of dollars of debt, and yes, future generations are going to have to repay that debt, we have at least saved the potential of the economy recovering. And by the time those children, and grandchildren, and great grandchildren come along, inflation may mean that that debt isn't as costly as it is in 2020 dollars.
But all this, as we come to a conclusion, just reminds us that every single economic decision, yes, is tied to every other single economic decision. Every economic decision also reveals who we are. It reveals morality, it reveals the culture, it reveals our priorities. It also reveals our tolerance for debt.
If things hold as they are tomorrow on The Briefing, we're going to talk about the increasingly bitter divide between Americans, perhaps even between two rival visions of America as America debates coming out of the pandemic and opening up the economy.
Thanks for listening to The Briefing.
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