Real Estate Remains Major Focus for Fading Industries

Firms in Industries on the Verge of Extinction Confront Excess Square Footage
Although the U.S. economy is headed further into recovery, not every industry is expected to perform well. Some in fact, may be at the tail-end of their lifecycle and on the verge of extinction in the United States, according to market research firm IBISWorld.com. The company analyzed its database of more than 700 industries and identified 10 that may not be around long.

CoStar Group went a step further and analyzed some of the major firms in those industries to evaluate how conditions are affecting their real estate requirements. While cutting the fat is a predominant trend, some companies within these fading industries are re-utilizing space as they gravitate towards new businesses and adapt to changing industry conditions. In other cases, some firms are growing as part of consolidations within those industries.

“Although these industries are all facing negative numbers, the operators in them aren’t necessarily on the brink of death,” said IBISWorld senior analyst Toon van Beeck. “Firms that protect their strengths in certain market segments, focus on niche opportunities and capitalize on the dwindling number of competitors can often reap the greatest rewards as sole operators, obtaining market survival and profitability.”

The 10 industries IBISWorld listed are in the declining stage of their life cycle. The industries have contracted dramatically in both revenue and establishments from 2000 to 2010. They are also expected to continue to experience revenue and establishment declines through 2016, IBISWorld reported.

Each of the industries also exhibits at least one of the following detrimental factors: damaging external competition, advancements in technology and industry stagnation.

In retail, the industries included:

  • Record stores;
  • DVD, game and video rental; and
  • Formal wear and costume rental.

In the information business, the industries included:

  • Wired telecommunication carriers;
  • Newspaper publishing; and
  • Video postproduction services.

In manufacturing, the industries included:

  • Apparel manufacturing, including costume, uniform, infant and other apparel; and
  • Mills, including hosiery and sock, textile and apparel knitting and carpets and rugs.

And in the catch-all ‘other’ category, the industries included:

  • Manufactured home dealers; and
  • Photofinishing.
Wired Telecommunications Carriers

Heavily displaying the characteristics of an industry in decline, revenue for wired telecom carriers has fallen sharply in recent years. The most detrimental factor has been strong growth in substitute products, including wireless, VoIP and cable products. The intense level of competition will subside over the next five years, as more carriers close their traditional wired services and direct funding to segments with growth potential, IBISWorld reported.

One of the largest players in this industry is AT&T Inc.

As with any large corporation, repositioning and resizing property requirements can only be done incrementally over time as leases expire and as firms attempt to dispose of excess properties in a down market. AT&T is no exception.

At year-end 2010, AT&T reported that 83% of its property, plant and equipment were owned by its wireline subsidiaries with the other 17% was owned by its wireless subsidiaries. The wireless group’s number was up 2 percentage points from a year earlier and wireline’s down 2 points.

Of course, those numbers may move more dramatically in the future if AT&T is successful in its bid to acquire T-Mobile USA, the wireless subsidiary of Bonn, Germany-based Deutsche Telekom, for $39 billion. Even that transition will likely not occur without cuts to its square footage. AT&T said it is looking at synergetic savings of nearly $3 billion. Included in those costs will be savings from retail stores and distribution centers, call centers, billing and customer care regional headquarters and redundant cell sites.

For starters, the merged companies would have to deal with significant overlap in their retail store square footage. CoStar Group shows the two companies have nearly 6,800 retail locations across the country. Among those locations, the two overlap in almost 230 malls. The two have several hundred more stores in close proximity to each other.

DVD, Game and Video Rental

This industry is facing the prospect of swift declines as technology replaces in-store rentals with online downloads and purchases. Competition from substitutes such as cable TV and internet rentals will continue to adversely affect industry operators, as they struggle to remain relevant in a changing market, according to IBISWorld. However, as some companies diversify and begin to offer different services, industry operators may have an opportunity to grow, according to the report.

For some firms, net zero square footage growth is just a starting point and will go down from there. Gamer retailer GameStop, for example, plans to close 200 stores this year. The company also reported this month that it renews about 20% of the portfolio every year and has great opportunities every year to eliminate leases or move stores to higher traffic locations in the future.

Best Buy Co. Inc. reported this past winter that it plans to significantly cut the number of openings of its larger, standard-sized store format in favor of its smaller Best Buy Mobile stores. The electronics retailer also plans to improve efficiencies in its U.S. supply chain operations. The company plans to open only six to eight large-format stores in the U.S., resulting in square footage growth of less than 1%. This is a significant reduction compared to the average square footage growth rate of 5% during the last three years. Best Buy is also said that as lease renewals come up for its big box locations, it wants to re-sign for less space.

Manufactured Home Dealers

This is one of the industries where consolidation is boosting the fortune of some firms over others. This industry is set to improve as consumers begin to purchase from dealers again. Higher prices of site-built homes will encourage consumers to buy less expensive manufactured homes. Furthermore, the rising population will lend itself to the industry, boosting demand over the next five years. Still, competition will remain stiff, as dealers are forced to compete with manufacturers that sell direct to consumers, IBISWorld reported.

Fleetwood Homes Inc., a subsidiary of Cavco Industries Inc. agreed to purchase substantially all of the assets of Palm Harbor Homes Inc. this month in a bankruptcy court approved auction. Fleetwood will be picking up 1.76 million square feet of owned space and 88,000 square feet of leased space. Of that total square footage, more than 800,000 square feet was idled manufacturing facilities.

What’s more, parent company Cavco Industries acquired Fleetwood Homes in 2009 picking up its seven operating plants and two idled plants. Cavco has said it is evaluating its options on the idled facilities, including their potential sales.

Newspaper Publishing

As the internet becomes the go-to news source for many readers, newspapers are expected to experience continued declines in advertisers and audiences. The growing popularity of real-time reporting and customizable ad campaigns means that newspapers must find ways to expand their traditional print offerings onto the internet. Despite these negative trends, developments in printing press technology and news syndication offer opportunities to cut costs, IBISWorld reported.

As examples in this group, Gannett Co Inc. has been consolidating its U.S. publishing facilities to achieve savings and efficiencies over the last three years. In that time frame, the company’s number of employees has decreased 30% from 46,100 to 32,600.

And the New York Times consolidated some printing operations in Billerica, MA, into another facility in Boston at the end of 2009. In addition in 2009, The New York Times sold its 21-floor, 750,000-square-foot interest in its headquarters in a sale-leaseback deal. The media giant used the sale proceeds to pay off long-term debt.

Record Stores

Though the economy is set to improve over the next five years, the outlook for the record stores is not looking up. Competition from big-box stores and internet music sales and streaming will continue to dominate the market for music, with consumers placing an emphasis on convenience and price. The overall increase in disposable income and consumer sentiment will help slow the industry’s decline, and some record stores will establish online storefronts to supplement their revenue, but these factors will not stop the industry’s downward slide, IBISWorld reported.

A big player in this field is Trans World Entertainment Corp., which operates more than 500 f.y.e. stores ranging in size from 3,000 to 25,000 square feet. It also operates about 50 Suncoast stores. Its number of stores has dropped dramatically over the past few years — from 991 stores as of January 2007.

Video Postproduction Services

The fallout from the recession will continue to hamper revenue growth, as production numbers slow and movie studios undertake in-house postproduction. The industry will rely on increasing advertising budgets to support overall demand, while new technologies will boost efficiency; however, external competition will have an adverse effect on services, hurting profitability, IBISWorld reported.

Technicolor SA, the major player in this industry, is based in France and this month delisted its American depository shares from the New York Stock Exchange.

Technicolor has exited a number of non-strategic money losing businesses over the last few years. It occupies a number of office buildings, manufacturing plants, and distribution and warehousing sites around the world and reported that it is constantly reviewing its real estate needs in order to improve efficiency and minimize costs.

In 2009, it consolidated office facilities in Hollywood and Burbank, CA, and distribution centers in Camarillo, CA; and closed a distribution facility in Memphis, TN.

Photofinishing

The dominance of digital cameras, ubiquity of online photo sharing and rising external competition have combined to gut the photofinishing industry’s revenue since 2005. Such technological trends for people to print photos selectively, which reduces the need to print entire rolls of film while decreasing the number of prints consumers demand, IBISWorld reported.

Eastman Kodak Co. is the notable firm in this category. In 2009, Kodak consolidated manufacturing and development facilities in Windsor, CO; Israel; and Canada. It also sold its Hollywood campus, which it had occupied for 23 years.

Formal Wear & Costume Rental

Industry demand for formal wear and costume rentals, revenue and profits are expected to continue their declines as inexpensive imports penetrate the market and increasing disposable incomes lead consumers to purchase formal wear and costumes instead of renting. The tuxedo rental segment, however, is expected to keep the industry afloat, because consumers are still likely to prefer the tuxedo rental services, IBISWorld reported

IBISWorld lists The Men’s Wearhouse Inc. as the major player in this category. As of January 2010, Men’s Wearhouse operated 1,142 retail apparel and tuxedo rental stores in the U.S., down from 1,177 a year earlier. Until this decline, the retailer had been growing its store presence.

Apparel Manufacturing

This industry is also experiencing major contractions as most major manufacturers move production offshore to countries with lower labor costs. The large increases in imports and the attempts of local firms to maintain market share have caused the market to be saturated with apparel products. Revenue declines have slowed somewhat more recently and are even projected to bounce back by 2015, indicating that there is growth opportunity for manufacturers who focus on higher-priced niche products, IBISWorld reported.

V F Corp. is one of the leaders in this category. V F’s owned industrial facilities had dropped by 200,000 square feet from the end of 2009 to 2010 to 8.8 million square. Its leased industrial facilities, however, had increased by 1.2 million square feet to 7.2 million square feet. At the same time, it cut the amount of its leased retail space by 900,000 square feet to 6.2 million.

Mills

U.S. textile mills have taken a sharp hit from overseas production. As manufacturers aim to reduce costs, they will continue to move to low cost countries like China and India in order to remain profitable. In accordance with this move, the domestic industry will suffer, with revenue and the number of establishments falling at a continuous rate. In order to remain competitive, remaining domestic companies will focus on non-woven fabrics and specialized markets, IBISWorld reported.

Two notable firms in this category include Albany International Corp., whose paper machine clothing segment includes fabrics and belts, and Dixie Group Inc., which manufactures carpets and rugs.

Albany International has manufacturing facilities in Brazil, Canada, China, France, Germany, Italy, Mexico, New Zealand, South Korea, Sweden, Turkey, the United Kingdom, and the United States. The total square footage of its operating facilities in the United States and Canada at year-end 2010 was 2.4 million square feet, of which 2.2 million square feet was owned and 200,000 square feet leased. The total was down from 2.62 million at the end of 2009.

In December 2009, Dixie Group reduced its total square footage by vacating a 98,000-square-foot leased facility in Santa Ana, CA, and consolidated that operation into a 200,000-square-foot facility it owns in Santa Ana.

Source:  CoStar
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