Many retailers were forced to close their doors temporarily last year when the coronavirus outbreak first began. The good news was that many were able to ramp up their digital presence so consumers could make a relatively easy shift to online ordering. The bad news is that at this point, consumers are so used to doing their shopping online that physical stores are growing increasingly unnecessary.
Such may be the case for Best Buy (NYSE: BBY). While online sales took off last year as consumers bought laptops for remote work and TVs and other gadgets to stay entertained while stuck at home, in-store purchases were sluggish. As such, Best Buy made the decision to lay off 5,000 full-time store employees last month. The electronics retailer is also expected to close more stores than usual this year as digital sales continue to peak and in-store traffic slows.
Best Buy CEO Corie Barry announced late last month that while Best Buy has routinely shut down 20 large-format locations a year in the last two years, this year, a higher number of stores could be closed. The company has also been reducing the length of its average lease term to buy itself more flexibility.
Bad news for real estate investors
Digital competition was a major factor in store closures before the pandemic began. But over the past year, many consumers have adopted digital shopping habits that could render a number of physical retailers obsolete.
That's not necessarily bad news for retailers themselves. If their online sales pick up enough, they can unload physical stores and the expense that goes along with maintaining them. And it's generally a lot cheaper to ship goods from a single massive warehouse than to maintain and staff numerous distinct store locations.
But for real estate investors, store closures are never good news, and losing Best Buy could be a major blow to shopping centers for a number of reasons. For one thing, Best Buy is a larger store, so it takes up a nice amount of square footage. Secondly, given the number of retailers that have shuttered in the course of the pandemic or are making plans to unload stores, finding replacement tenants is a difficult thing to do right now. If Best Buy really ramps up closures, shopping center real estate investment trusts (REITs) could take a serious hit.
Of course, the rollout of coronavirus vaccines could change consumer shopping habits in a meaningful way. Once more people are better protected against COVID-19, in-store shopping could pick up, and Best Buy is particularly likely to benefit from this trend, since consumers -- especially those who are less tech-savvy -- may be apt to want store employees' input when choosing appliances or electronics that come at a hefty cost. But if Best Buy ultimately has enough success with its digital sales, it could seek to shutter more stores not just in 2021, but in future years as well. And that could leave shopping centers in a serious bind.