How Much Does It Cost When a Big-Box Store Is Looted?

Watching the news last week, it was impossible to miss the first major retail casualty of the Minneapolis rioters: the Lake Street Target store, built in 1976 in happier demographic times. Wikipedia tells us that “Lake Street has attracted immigrants over the course of its history, and was a major center for the early Scandinavian culture of the city. The headquarters for the Sons of Norway fraternal organization is one remnant of this, located along Lake Street in Uptown, a block west of its intersection with Hennepin Avenue. Today, Mexican culture dominates along much of the roadway, particularly near and east of Interstate 35W.”

Needless to say, the Sons of Norway were not walking out of this store with big-screen TVs, nor beating the cash registers with hammers.

It was interesting to see Target as a focus of diverse attention; this company is among the most “progressive” in the nation. Its website notes that “At Target, diversity & inclusion are key to our business strategy. To be able to remain relevant with the products, services, experiences and messages our guests expect, we must have their experiences represented in our team and work.” We all got to see on video how much good that did for the Lake Street store.

The rioters apparently didn’t realize that Target gives 51 percent of its charitable giving to “diverse communities.” It celebrates Black History Month, the goal of which is to “amplify success stories and celebrate blackness, an uplifting sentiment to empower future generations.” The looters certainly acted uplifted and empowered.

Protesters threw Target shopping carts and smashed a police vehicle in St. Paul, Minnesota, angry at the killing of George Floyd, an unarmed black man who was pinned down by a white officer’s knee https://t.co/iWlTjfszat pic.twitter.com/uOFfp593El

— Reuters (@Reuters) May 29, 2020

I am a retail veteran with decades of experience in the big-box stores, and I can estimate the cost of these enriching adventures. As of June 2, there were six Target stores with moderate to significant damage from looting: Oakland, Atlanta, Chicago, Philadelphia, and Minneapolis–Saint Paul – including the Lake Street store. They are closed indefinitely. There are 200 total Target stores that are closed or operating at reduced hours; several had minor looting and damage. Many stores have reduced hours to match local curfews, but those close to enriched areas are boarded up and closed for the time being.

How much will this cost Target, its shareholders, and its shoppers? Let us estimate, beginning with the Lake Street store, which gained the most initial attention. The store had essentially a complete inventory loss (that would amount to at least $5 million) with significant equipment, fixture, and some structural damage. The likely bill for that single store, which will be closed for 3 months or more: $20 million including lost sales.

We can guess conservatively that the other five seriously affected stores suffered another combined impact of $20 million.

Where the losses really add up is the accumulated lost sales from the rest of Target’s fleet. The average Target does around $100k a day in sales, excluding internet sales. If we assume that these stores on average are closed for just five days, including partially closed days, that equals $100 million. I think to be conservative, you have to assume that some purchases — let’s say half — will go to other Target stores in the area or will be deferred. That means at least a $50 million impact.

We can assume there are an additional $10 million in costs, from marketing to payroll and various other incremental expenses. This means — at a minimum — a $100 million expense. But shareholders are not to worry. During the rioting, the CEO put out a message to all employees. He evoked George Floyd, Ahmaud Arbery, and Breonna Taylor, and said he had “wept that not enough is changing.”

Where will sustained “diversity” take us?

The inside of the Target is smoky; people are trying to break into the cash registers. Alarm is blaring pic.twitter.com/qfd97sfNTr

— Ricardo Lopez (@rljourno) May 28, 2020

All physical retailers periodically evaluate store viability. Retailers like Target annually evaluate existing stores, using an internal formula. This would be something similar to EBITA (earnings before interest, taxes, and amortization) applied to the “four walls” of a particular store. It would include initial invested capital, sales volume, labor productivity, internal and external theft, sales mix, and resulting profitability. Target owns most of its stores, which is essentially a sunk cost that means Target is more reluctant than other retailers to exit quickly. The mix of products sold matters a lot. Commodities have far lower profit margins than discretionary items like clothing, and commodities dominate sales in poorer markets.

After the Ferguson riots, retail sales in the area continued their long decline due to demographic change. While the Target store right off of Ferguson Avenue in Jennings was undamaged, it certainly couldn’t have seen improved sales. Diversity protesters even came to visit on the biggest shopping day of the year.

Target probably waited for the furor and attention to die down before closing the store in 2016. It had been open for just ten years. This would mean a loss of $15 million to $25 million in invested capital, along with any accumulated losses from running the store. The process of closing a major 120,000 square-foot store like this — from inventory liquidation to removing fixtures and equipment to covering payroll — can easily exceed $1 million.

The same thing happened to the store at Mondawmin Mall after the Freddie Gray riots in Baltimore. The store wasn’t directly affected, but it was attached to a mall that was ransacked. Stores in neighborhoods like this are built with generous tax incentives and therefor require reduced invested capital. This makes it possible to operate at lower sales volumes and profitability. Still, the theft rate was probably absurdly high, and the store was most likely bleeding cash. It closed, after only ten years in operation. The Lake St. store in Minneapolis will follow the same pattern as the tide of diversity rises.

Dozens of Target stores have met this fate after population change killed them. Atlanta, an area with which I am familiar, has closed at least a dozen stores as casualties to demographic shifts — including Target’s first SuperTarget in the Southeast, at Stone Mountain. For Target — for this one company alone — demographic change has consumed hundreds of millions if not in the low billions of invested capital. These losses cut jobs directly, and increase costs to consumers, who must absorb higher retail prices. When a Target store closes, it hurts other retailers that rely on Target to be the anchor of a shopping center. And it hurts the local tax base.

It really is astounding to think of this built-in cost of diversity — “our greatest strength.”