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Macy’s and the survival of retail: Is pre-emptive closing the answer?

Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America, and founder of Money Strong LLC.

Any good arson investigator can spot areas of higher concentration of an accelerant at the scene of a fire. In the conflagration sweeping bricks-and-mortar retail, it's likely that history will designate the accelerant as the newly appointed head of the first major chain to start closing profitable stores in large numbers: Macy's chief executive, Jeff Gennette.

The future of bricks and mortar depends on much more than just simple profitability. True vision entails conceiving the strong e-commerce/physical hybrid of tomorrow – today. The quicker the transformation, the better the chance of survival. Mr. Gennette is trying to prove that the best defence is a good, if offensive, pre-emptive shuttering of stores.

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Mr. Gennette, who has spent almost his entire career at the department-store chain, explained in August that Macy's "decided to close a large number of stores proactively" to maximize future profitability and invest more aggressively in the near-term in digital and mobile. The shuttering of 100 stores involves 10,000 layoffs, a fraction of the 60,700 positions that have been shed in retail in the past two months alone, the worst for the sector since 2009. Meanwhile, about 3,000 stores closed in this year's first three months, a figure that dwarfs the 2,000 closed in all of 2016.

Are we to infer that 12,000 stores will meet their maker this year? Or that 360,000 retail employees could be let go? It would seem that it all comes down to the one rule sure to stand the test of time: "Location, location, location."

Consider private-equity-held BJ's Wholesale Club, taken out in a 2011 $2.8-billion (U.S.) deal. Others in the private-equity space are also sniffing around. But the buzz on the Street is that Amazon is the true contender. Will the king of e-commerce bite? That probably comes down to whether the reported $4-billion asking price is worth what Amazon would otherwise pay to continue building out its distribution network on the East Coast, BJ's home turf.

Could the mighty Amazon be learning from one of its mere mortal brick-and-mortar competitors?

Then there's J.C. Penney's stated goal of transforming its surviving store footprint into an effective distribution network. Penney's has also caught the bug, closing stores even if they're in the black, so long as the next store isn't too far of a drive. Today's astute managers know it will be very difficult to unspoil what remains of their loyal customer base. That means being able to march into a store and return whatever it was that was delivered to their front door within 48 hours, be it loose Levi's or snug Nikes.

When it comes to the macro picture, tactical moves to expedite retail's metamorphosis may benefit the sector in the long term. Ask Smokey the Bear: Controlled fires clear forests and make way for the next generation of seedlings to grow.

Nonetheless, retail does not exist on an island. Let's say those doom-and-gloom analysts are right that only a third of the malls, or even fewer, will survive. The implication is that no amount of retrofitting will do the trick – we just don't have a collective need for temporary Halloween stores and bowling alleys.

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That means we should be looking to urban land values, in the most general sense of the word, in the aggregate, considering the central location of many of the second- and third-tier malls to be razed.

But surely one does not affect the other? Remember, we just experienced one of the most magnificent building sprees in multifamily and hotel structures in U.S. history. And even kingpins of private equity are announcing lavish, billion-dollar skyscraper makeovers. But at this stage in the cycle? With commercial real estate prices at record highs?

It wasn't so long ago that a sustained decline in oil prices precipitated a commercial real estate crash, which then brought on the savings and loan crisis. Today, we not only have that same sustained decline in oil prices but a concomitant, unrelated once-in-a-century downsizing among traditional retailers. Macy's Mr. Gennette may yet go down in history as a man ahead of his time, or he may simply turn out to have been practical.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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