The Impact of Shopko’s Reorganization

Hoffman Strategy Group’ Jeff Green and JLL’s Tom Mullaney weigh in on the company’s Chapter 11 filing and possible outcomes for its stores’ current locations.
(Left to right) Jeff Green, Tom Mullaney
(Left to right) Jeff Green, Tom Mullaney

On a national level, Shopko isn’t a major player and probably never aimed to be one. It is, however, the proverbial big fish in a small pond, that is, in literally hundreds of small ponds across the U.S. Founded in 1962, the chain had till recently operated more than 360 stores in 26 states, from the Midwest to the Pacific Northwest. As it goes through Chapter 11 reorganization, Shopko appears likely to emerge with only about one-third as many stores, just 124 in 11 states.

For the most part, Shopko has focused its portfolio in the Midwest and the Mountain States. Historically, “they have been more receptive to small markets in this region as compared to their competitors, except for Walmart,” Jeff Green, partner at Hoffman Strategy Group in Phoenix, told Commercial Property Executive. In relatively larger markets, they’ve typically gone into power centers, while in smaller markets the chain is more likely to have freestanding stores, he said.

Shopko’s typical locations, in traditionally underserved secondary and tertiary markets in Middle America, were generally too small for a competitor to occupy alongside Shopko, added Tom Mullaney, managing director of restructuring services for JLL. This “spatial monopoly” was a significant advantage, he said, though Shopko often was a “me-too competitor,” without much, if anything, to distinguish the chain, even before the arrival of online shopping. For all that e-commerce has been a game-changer in retailing nationwide, Mullaney added, it might be even more important for residents of rural areas than for those in sizable metros, where multiple retail options offer access to abundant stock keeping units.

Since the company’s 2005 acquisition by Sun Capital Partners Inc., Shopko has piled up “a skyscraper of debt on a matchbox of equity,” not unlike the situation the late Toys R Us found itself in, Mullaney said. The fact that interest rates have gone up 150 basis points in a year has been another factor in Shopko’s woes.

Shopko declined to provide additional information requested by Commercial Property Executive.

What’s next

The discount department store space has been consolidated into two major players—Walmart and Target—Green said, as others, such as Gordmans, Kmart and Shopko, have struggled. The dollars from Shopko have primarily shifted to other discounters, most notably Target and Walmart, he added, though some other chains, such as off-price retailers Burlington Coat Factory, Ross, Nordstrom Rack and Marshalls, have also benefitted from Shopko’s decline.

A typical full-size Shopko store of 75,000 to 150,000 square feet leans toward redevelopment of space and should be more demisable, Mullaney said, though in smaller markets, that’s hard to predict. One possibility is that a store that size could be a smaller format for Target or Walmart. The Shopko Hometown stores of around 10,000 to 20,000 square feet might be an awkward box size, he added. Even so, there might be opportunities. Mullaney noted that “Walgreens is always testing” and currently is experimenting with a format as small as 1,500 to 2,500 square feet.

Shopko had a compelling story in the ’70s, but maybe in the 2010s it no longer does, he said. “Everybody competes with them. It’s a death of a thousand cuts I’m not sure there’s a second act here for Shopko,” Mullaney concluded. If the chain goes under, “it will be sad, but it won’t be totally surprising.

Images courtesy of Hoffman Strategy Group and JLL