They say there are two sides to every story and no doubt the situation with tariffs that is threatening trade between China and the United States is no different.

But the contrast in how America\’s retailers see the problem – \”catastrophic\” is a word you are starting to hear more and more frequently – and how the Trump Administration portrays it – \”there is absolutely no need to rush\” the President said in a recent tweet – points to a disconnect that could cripple the American economy…taking down retailers with it.

Ever since the Administration unilaterally raised the tariff rate to 25 percent and threatened to add virtually every single product the country imports from China to the list, retail executives have been nearly unanimous in warning of the dire consequences to the overall economy, their individual businesses and the American consumer that will result.

A Consistent Chorus

Listen to the chorus of big red flags raised in the past few days as many retailers lowered their financial performance estimates going forward due to tariffs:

• Brian Cornell, CEO, Target: \”As a guest-focused retailer, we are concerned about tariffs, because they lead to higher prices on the everyday products for American families.\”
• Brett Riggs, CFO, Walmart: \”Increased tariffs will increase prices for customers.\”
• Jeff Gennette, CEO, Macy\’s: \”If the potential fourth tranche of tariffs is placed on all Chinese imports, that will have an impact on both our private and our national brands.\”
• Carol Tome, CFO, Home Depot: Tariffs so far have had \”roughly a billion dollar impact\” on the store\’s business.
• Bruce Besanko, CFO, Kohl\’s: \”Right now these tariffs primarily affect our China-sourced merchandise in our home and accessories business. China is not our largest source of merchandise but it is a big one. It\’s a little over 20 percent of our goods.\”
• Jill Soltou, CEO, Penney: \”In looking ahead, we do anticipate a more meaningful impact on both our private and national brands if the potential fourth tranche of tariffs does go into effect on all Chinese imports.\”

And it\’s not just individual retailers sounding the alarm. The National Retail Federation in a recent trade hearing said, \”prices will rise and the economy will suffer.\” Earlier it had said the Trump Administration should \”change course and stop playing a game of chicken with the U.S. economy.\”

Even retail legend Allen Questrom, who has run some of the country\’s largest retailers over the course of his career, was alarmed, telling CNBC \”If the tariffs don\’t get solved this year than you\’ve got a real problem.\”

$300 Billion And Counting

According to the research company Trade Partnership, American families will pay an additional $767 a year for everyday items following the latest round of tariffs and if they are extended to all imports from China that number would climb to $2,389 a year. With the U.S. having about 127 million households that could mean more than $300 billion in added cost to Americans.

According to a J.P. Morgan report, the hardest hit retailers would include Best Buy, Dick\’s Sporting Goods, Bed Bath & Beyond and AutoZone. None of this seems to be heard by the Administration. The President, in a statement that while politically expedient represents a naïve lack of knowledge about how business is done today on a global basis, tweeted, \”Such an easy way to avoid Tariffs? Make or produce your goods and products in the good old USA. It\’s very simple!\” He has repeatedly claimed that the additional tariffs are being paid by foreign suppliers and have contributed to the strength of the American economy but even his chief economic advisor Larry Kudlow conceded on Fox News that the Trump tariffs have hurt jobs as well as the GDP and that it is American consumers who pay the cost of these tariffs.

And Treasury Secretary Steven Mnuchin – who should know something about retailing since he served on the board of Sears for a number of years – told a House committee hearing that he was concerned that American retailers weren\’t working hard enough to find alternative solutions. He said he spoke to Walmart \”to specifically understand what things they can source from other areas and what items they can\’t. \”I can tell you I am monitoring the situation very carefully.\”

He may indeed be monitoring the situation but that has been little comfort for American companies who source Chinese products. Perhaps the most vulnerable are those in the shoe industry where close to 75 percent of its goods come from that country. In a strong letter to the Administration a group of footwear companies did not pull any punches. \”We can assure you that any increase in the cost of importing shoes has a direct impact on the American footwear consumer. Companies cannot simply move factories to adjust to these changes.\”

With the nearly unanimous stand being taken by American retailers and an Administration that seems unwilling to listen to its constituents on the front lines, the word used by the footwear group in its letter is both unfortunately increasingly likely and eerily chilling: \”Catastrophic.\”

Warren Shoulberg is speechless.

Tariffs were a huge talking point for most of 2018. However, by the midterm elections, tariff concerns barely registered a blip on the radar in all but a handful of rural districts across the United States. Media mentions have died down and companies are adjusting to the new normal. However, that doesn\’t mean that the threat of tariffs has passed; there is unquestionably more turbulence to follow.

But first, the positive news. The negotiations around the US-Mexico-Canada Agreement (USMCA), which will replace NAFTA, were completed on September 30, 2018 and signed by the countries\’ leaders exactly two months later. The threat of this front of the trade war looks to be averted for now. Even with the Democrats in control of the House of Representatives next year, the risk is low that this deal will be derailed. Retailers-and grocers, in particular-can breathe a sigh of relief knowing they will miss what would have been a $5 billion direct hit on their bottom lines.

Now for the bad news. The trade war with China appears to be intensifying. Unless a deal is struck with China, the Trump Administration will raise the 10 percent additional tariffs currently in place on Chinese goods to 25 percent. After the recent meeting between Donald Trump and Xi Jinping in Buenos Aires, the deadline was extended from January 1, 2019 until the end of February. Despite the temporary truce, the U.S. and China are still far apart on many issues, making a new deal appear unlikely even before the extended deadline.

A 15 percent increase represents a significant impact on retailers, with a projected $30 billion in additional tariffs collected. Unfortunately, this increase is not the only trouble on the horizon for retailers. Washington is also considering further tariffs on all imports from China-approximately $267 billion worth of products. The Office of the United States Trade Representative (USTR) has a list of more than 5,700 goods that will face tariffs under Section 301 of the Trade Act. Many of these imports are consumer goods, including food products, beverages, personal care, and furniture, which up until this point have avoided tariff increases. Retailers will feel the direct impact of these immediately.

Beyond China, there are other worrisome developments ongoing with Japan and the EU. One important, yet less discussed, concern is the Section 232 automotive tariffs which are the focus of increased trade conversations in Washington. If these tariffs were enacted, it would open yet another front of the trade war, and both Japan and the EU can be counted on to retaliate in kind to maximize political and economic damage in the US.

Ongoing gridlock over the future of the World Trade Organization (WTO) is also looming; the US is refusing to appoint new judges to the WTO for the upcoming term. Without a conflict resolution mechanism in place for the multilateral trading system by the end of 2019, trade could be entering uncharted territory. While G20 leaders committed to reform the organization, such a process is difficult even in the best of times. And with growing economic tensions between countries, these are not the best of times.

Although the tariffs have faded as a talking point, the uncertainty around tariffs has not. It\’s retailers who should be paying attention and, more importantly, developing a plan for the impact of tariffs on the global market.

What should retailers do to prepare?

One way to help mitigate the looming risk posed by tariffs is through transparency. That starts with the origins of the supply chain. Understanding where supplies (and their suppliers) are coming from can allow retailers to calculate value at risk. There has been little in the way of trade risk over the last few decades. Thus, most companies don\’t have a system in place to quickly estimate the damage from tariffs and other trade actions, leaving the potential to be caught unawares.

Retailers need to have a solid understanding of not only new tariff proposals, but also what is churning its way through Washington machinery. Particular attention needs to be paid to how trade actions will impact bottom lines over the next 6-12 months. Using scenario planning, retailers can run simulations to determine what impacts will happen over extended periods. These outcomes can affect decision-making around both sourcing strategies and supplier relationships over the long term.

It\’s also necessary to develop strategies and action plans for the steps taken once a new tariff becomes a reality. Companies will need to lock up alternative supply sources. It\’s likely that the companies with action plans in place will not be caught flat-footed, and thus have a chance of gaining a competitive advantage over the market.

In capital cities across the world, from Washington to Beijing, governments are operating in preparation for a trade conflict that is looking more certain than ever. Retailers need to do the same. As tariff lists continue to grow, strategies that address not only direct impacts from trade, but also ripple effects, need to be prioritized now.

No one can dispute that free trade should be fair to both sides. And no one can dispute that the U.S. and China trade relationship (the biggest among all nations) has been unbalanced in favor of China for several decades. But to be accusatory towards China for treating us unfairly is a bit hypocritical. Our industries were more than willing (maybe even happy) to relinquish huge chunks of our economy\’s manufacturing base to China\’s low-cost work force so that we could turn around and import lower-cost finished goods, that in turn would benefit our consumers with lower prices, stimulating more consumption, and, oh yes, perpetuating profitable growth (which at the end of the day is all our captains of industry care about).

Now some delusionary thought process among President Trump and his merry \”Trumpets\” has them all believing that, not only can they fill the government coffers with billions, they believe it will awaken the dead manufacturing industries. In fact, we already see the fallout: Harley Davidson and GM closed plants and moved to other countries.

The grandiose theory (that might have worked during the go-go explosive growth years following WWII and up to the 1980s) was the belief that by lowering corporate taxes, it would incentivize corporations to stimulate growth by investing in more plants, equipment and workers — plus providing higher wages (those workers, as consumers, would then use to consume even more). Sadly, this grandiose theory went the way of the buggy whip a long time ago. Quite simply, the theory rests on the assumption that somewhere out there across the nation there are millions of consumers chomping at the bit to consume more, and might even be willing to pay higher prices.

Do I have to go through my tutorial once again about the imbalance of supply and demand? Too much supply chasing too little demand began in the early 1980s, and it has continued to this day. The only reasons the mounting supply hasn\’t created a bubble that would collapse under its own weight is because our smart captains of industry (not including Trump) keep finding ways to lower costs, and therefore prices, to keep the imbalance from crashing. How ironic is it that contrary to the grandiose theory, it will drive more companies out of the U.S. seeking better markets or others that will be forced out of business by consumers who will refuse to pay higher prices – mostly because they cannot, since the potential wage increases will be minimal at best.

In the general retail and branded apparel space, the only robust growth is coming out of the discount, outlet and off-price sectors, as well as e-commerce. The bad news is that it\’s not organic or new demand growth. It\’s being stolen from all of the other sectors.

Full circle, back to the tariff war.\” In my opinion, it is a war, and China and the U.S. have already started it. And amazingly, the self-proclaimed business genius, President Trump, doesn\’t have a clue that the U.S. consumer will decide who wins. They will not give in to higher prices, because they either can\’t afford to, or they will just increase their shopping in the discount sectors.

Regardless, all retailers will likely take a hit on their bottom lines to prevent losing share in an over-saturated marketplace. These dynamics could very well push our economy into another recession.

This is a war between China and the U.S. with no good ending. Neither President Xi nor President Trump will succumb to losing face. The facts, numbers, economic dynamics and other variables in the negotiations won\’t make any difference. Furthermore, in this era of 24/7 ultra-transparency saturated with dogged media coverage, they have no secret place to hide and hammer out their differences. Finally, Xi also has an advantage. He is President for Life and runs a state-managed economy that is growing at twice the rate of the U.S., soon to overtake it as the largest economy in the world. But even if Trump wins the trade war, he will really lose in the end because manufacturing will not come back and consumers will not pay higher prices. Again, a recession may follow.

An old Chinese proverb might be: reframed: \”Man loses face, man loses everything.\”

The home furnishings industry, if you’ll excuse the expression, is scared silly. Virtually every product that you plug in, sleep on, dry yourself off with, put your clothes in, eat on, and generally use in your home comes from someplace other than the United States.

And if these products are going to be the ping-pong balls of international diplomacy over the next four years, the consequences could be unprecedented and possibly devastating as well. We all know the new administration in Washington has made what it perceives as an unfair imbalance in global trade to be a benchmark of its policy initiatives. We know too that talk is cheap—not to mention easy—and that the ultimate outcome of any radical change in international commerce is far from certain. We also know that the home furnishings industry is far from alone in the broader consumer products universe in being potentially turned upside down by all of this. Other industries, from apparel to automotive to agriculture, will all see enormous impacts if this rhetoric turns to reality.

Home Alone

But home is somewhat different. While a lot of attention has been focused on the car business with its intertwined global sourcing models, the fact of the matter is that the majority of cars and trucks sold in America are still made in America. Apparel, while largely an import-dominated business, has a relatively low cost of entry and there are still thriving pockets of American manufacturing in the South, Los Angeles and several other locales. Even agricultural products are still largely grown, processed and manufactured domestically.

Home products, not so much.

If something has a plug in your home, chances are it came from overseas. Whether it’s a lamp, a toaster oven, a TV or a hair dryer, it will say in the same print “Made there…not here.” In fact, the small appliance business was one of the first major American industries to move offshore, first to Japan, then to Taiwan, eventually settling for the most part in China … yes, that China that is being threatened with a 35 percent duty.

Household items like dishes, flatware and glassware used to be largely American made but they too followed a similar route and today are mostly Asian. And what isn’t from Asia is usually from Europe, from places like Portugal, Italy and Germany.

Furniture is a little more diverse, as much a function of size as any other dynamic. Today about 90 percent of the bedroom, living room and dining room wood-based products we buy here are made there. Still using a less automated manufacturing process than other household items, products like dressers, chairs, tables and bookcases have followed the cheap labor route, moving first to Taiwan and then China, but more recently to Vietnam and other Southeast Asian countries.

Upholstered furniture—what the industry calls sofas and such but what regular people call couches and chairs—are not quite as import-dependent. Perhaps as much as 40 percent of that business remains domestic if you count the final assembly stage where components from Asia are shipped here and put together by U.S. hands. That number has remained pretty steady, driven in large part by the custom-made nature of most sofas that negate the advantages of mass production overseas.

Bedtime Story

Then there’s sheets and towels. The next time the folks at the Harvard B School are looking for a good case study, they really ought to take a look at this category because it exemplifies the good, the bad and the ugly of international commerce.

Up until the turn of this last century, home textiles products like sheets, other bedding products, towels and assorted accessories were largely domestically made. Big textiles mills like WestPoint Stevens, Springs and Fieldcrest Cannon spent a lot of money keeping their manufacturing facilities up to date and state of the art to keep costs—and headcounts—down.

And it worked. It was one of the most efficient, low-cost and import-busting industry sectors in the country.

But then came the opening of international trade and the breakdown of barriers. It wasn’t NAFTA in this case; neither Mexico nor Canada had robust industries in this field, so they were not the threat. It was Asia. And when duties came off imports from China and elsewhere in the early 2000s, the dam broke…the tide changed…and well, you get it: All hell broke loose.

In a matter of just a few short years, an industry that was 90 percent domestic totally flipped and became 90 percent imports. Eventually that number went even higher and today there is only one—count ‘em, one—decent-sized home textiles mill in the United States selling to the retail market. (Ironically it is owned by a Pakistani company, which is another one of those subtleties that has escaped the conversation so far on trade imbalances.)

With this shift came an enormous advantage for consumers. Suddenly, they could choose products from literally hundreds of suppliers from a number of countries, rather than the limited assortments they were subjected to when just a handful of American companies controlled the marketplace. This new competition not only brought new product options but also lower prices. Today you can buy high-quality sheets and towels for the price you would have paid for opening-level goods 15 years ago.

Of course, the shift also brought a devastating loss of jobs throughout the American southeast where most manufacturing had been centered. Tens of thousands of workers lost their jobs and it has taken at least a decade for recoveries in some of these regions to take hold. But take hold they have. The area along the Georgia and Alabama border where WestPoint Stevens had its main manufacturing is now the home to two giant automobile factories, from Kia and Hyundai. BMW set up a factory in the former textiles region of South Carolina around Spartanburg and its suppliers, including Michelin and others, followed. (All from foreign-based companies employing American workers…but I digress.) And what was once the giant Kannapolis, NC headquarters and mill for Fieldcrest Cannon is now a medical research center.

This normal ebb and flow of business and industry is not uncommon, of course. The original home textiles and apparel manufacturing bases in New England, around Boston, have become the East Coast capital of high tech, rivaled only by Silicon Valley in California. It’s just what happens.

The 35 Percent Solution?

Nobody—at least nobody in their right mind—expects all of this talk of duties and tariffs of as much as 35 percent to ever become reality. They are being fostered by someone who is the first to admit that he takes an outrageous opening negotiating position, knowing the bluster will drive an acceptable deal in the end.

But any change in the rules of international commerce will have profound effects on the home furnishings business…and not necessarily the intended ones:

• Manufacturing of home furnishings will not return to the United States in any meaningful way. Building big factories to make things like toasters, towels and teapots requires big bucks. The return on investment is low, slow and not entirely guaranteed. People with money almost always can find a better way to spend it. Besides, the people who know how to make these products aren’t around anymore. For some of these industries, it’s been a generation —maybe two—since anyone worked doing this. Do you know any millennials who want to run a sewing machine hemming pillowcases?
• Any additional costs due to things like increased duties, taxes and whatever are going to be pretty much passed along to the consumer, with predictable results. Makers and sellers of these products don’t work on big fat margins like Apple or Facebook. They are not going to eat these costs. And consumers, faced with higher prices on household goods they’ve gotten used to paying low prices for, are not going to rush out to spend more.
• American home furnishings companies are also not going to get any better at learning how to export, prolonging a dismal track record of ignoring overseas business opportunities. Even the few that get their export acts together are going to face retaliatory trade barriers from the rest of the world, which will not be too pleased with the new rules of international commerce.
• Finally, without the option of buying goods from around the home furnishings producing world, American consumers are going to be faced with not just higher prices, but with fewer choices, diminished assortments and generally less interesting products. That ain’t going to go over real well either.

Put it all together and the look of worry on the faces—and balance sheets—of the home business are easy to understand. These are very much scary times.

In the meantime, all those ships of imports are still on their way to American shores and American shelves. If the walls go up, not just on our borders but in our ports and loading docks too, it will indeed have been perhaps the most foolish move in American business history.

“What I wouldn\’t give for twenty more years! Here we are, protected, free to make our profits without Kefauver, the goddamn Justice Department and the F.B.I. ninety miles away, in partnership with a friendly government. Ninety miles! It\’s nothing!” — Hyman Roth, The Godfather Part II

How right he was! Well, at least partly right!

For all you devotees of the film—and you know who you are—this character was based on the real life gangster Meyer Lansky, who, along with a Who’s-Who of organized crime, made millions investing in hotels, casinos and other businesses in Cuba during the 1940s and 1950s.

It was Vegas before there was a Vegas! And far more stylish.

Enter “the Beard”

As any student of history or the cinema knows, this came to an abrupt end on January 8, 1959 when Fidel Castro and his “barbudos,” bearded revolutionaries, rolled into Havana, sending the business-friendly Cuban president Fulgencio Batista running for greener and safer pastures, and turning elegant venues like the Hotel Nacional and the Tropicana into government-occupied chicken coops. Literally.

It was an ignominious end to what had once been a hotbed of trade and a playground for Americans, who swarmed to the island’s beaches, hotels, shops and casinos.

Could it become that again? Condos on the pristine beaches of Playa Paraiso, new designer shops in the Spanish Colonial architecture of Old Havana and maybe a JCPenney or Walmart in a suburban mall? (See related article, “Postcard from Havana,” page 18.)

An Emerging, Emerging Market As the Stars and Stripes were being raised over the newly minted U.S. embassy in Havana in August—the first step to ending the 56-year, emotion-fueled U.S. embargo—industry watchers started licking their collective chops over the prospect of normalized relations with the island nation. Or, as they see it, commercial opportunities in an emerging fourth-world market.

And why not? We have a long history of making friends with former enemies. That’s why you can book a luxury cruise along the Mekong River Delta without worrying about snipers.

For Cuba, the road back may be paved with good intentions, but it will be a bumpy ride. Getting a handle on the Cuban economy is tricky since the government dominates every aspect of it. Therefore, opening trade, tourism and capitalism is not simply accomplished by a flourish of the Executive pen.

As the International Council of Shopping Centers (ICSC) recently stated, real progress won’t happen in Cuba until the spending power of the island’s 11.3 million residents increases and convoluted barriers to trade are dismantled. This could be a Herculean task for a do-nothing Congress, which, by the way, is the only body that can lift sanctions completely.

Although some feel that Communism’s shelf life is getting close to its expiration date, the country has always had a history of political instability—not an attractive prospect for retailers who might consider multimillion-dollar investments (including gratuities to government officials for greasing the wheels of economic progress).

On top of that, we have the inflammatory rhetoric of the Cuban diaspora in the U.S. and the few narrow-minded politicians who side with them (hey, it’s an election year and Florida is a swing state!). By the way, if you value your eardrums and “cojones” don’t ever get into a political argument with a Cuban exile. They are an extremely passionate group.

Fueling Growth

Interestingly, the country’s future may be fueled, in part, by Cuban exiles that have prospered in the U.S. and may be induced to return with the right financial, political and social incentives. In fact, it’s been suggested that the same energy and vitality that transformed Miami from a decaying city into the center of Latin American economics could work for Cuba.

Labor costs would be relatively low but under current laws foreign investors would have to hire people through a state-run employment agency, which is one reason for low worker productivity.

Not exactly what today’s retailers are looking for.

On the other hand, the island has a fairly high literacy rate, a functioning health care infrastructure that is used by a majority of Cubans and a small but growing entrepreneurial class of small businesses or “micro enterprises,” made possible by government liberalization of private industry and $2 billion annually in remittances to the island from Cubans overseas. The latter could quadruple if additional restrictions on money transfers are lifted and lead to significant income and spending power.

Cuba already imports about 30 percent of its food from the U.S., thanks to years of political pressure from the U.S. agribusiness industry—and this number is expected to rise with increased liberalization of government policies.

Jockeying for Position

Basically, Cuba should be viewed with cautious optimism. This is what companies like Kellogg and Hormel are doing as they reportedly jockey for position in order to stay ahead of the growth curve in an untested but potentially lucrative market.

Moreover, Cuba wants foreign investment in order to sustain its growth. It wasn’t Communism that caused most of Cuba’s economic woes—it was the collapse of Russian oil subsidies in the early 1990s that sent agricultural production plummeting and laid waste to the fishing industry. Shortages developed when exports and imports took a nosedive. The same thing may be happening now with Venezuelan oil.

The good news for business is that imports and exports are continuing to recover thanks to projects like the Brazilian-backed $1 billion modernization of the Mariel Harbor deepwater port as a free trade zone.

Meanwhile, a number of Canadian, European and Chinese firms have already staked claims on the island through joint ventures. And the last thing an American company wants is to fight an established monopoly. As such, getting in first—or being among the first—may offset a somewhat risky investment.

Retail Prospects

How attractive a retail opportunity does all this present? It depends on your timeframe. Tomorrow, next week, next month or even next year—no! Everyone knows that Cuba is a long-term play. But the situation—economically and politically— should be closely monitored, and that’s exactly what the agricultural, automotive, energy, shipping and airline industries are doing.

As socialist policies dissipate, tourism will likely be the first business to be rebuilt. In fact, online rental company Airbnb has already figured out how to enable people from outside the U.S. to rent private homes in Cuba. This has provided an infusion of capital into the economy, and boosts the average wage, which is running a little over $200 per month for the average government employee.

This might seem too meager to support retail initiatives. But consider what happened to the standard of living in China as business developed and a middle class with money evolved. I’ll give you a hint—W-M!

I’m sure the Cubans would welcome a Walmart Supercenter. It’s an unlikely scenario at this point. But is it so far fetched to consider Cuba for a version of its Neighborhood Market or another small store format like Aldi, Lidl or Save-ALot— or even Target, if they’ve learned anything from their Canada debacle. But this will require a complete overhaul of the Cuban monetary and governmental subsidy system.

Cuba is not going to be a destination for Neiman Marcus or Bloomingdales any time soon. But observers say that a Sears, Walmart or JCPenney is not out of the question. Nor is it out of the question that opening the country to private industry could lead to a U.S.-infused apparel manufacturing industry only 90 miles away—China West. Clearly, the recent refurbishment of Mariel Harbor could facilitate imports and exports.

The next few years will be crucial to Cuba’s economic and social development; even Raul Castro’s designated successor, Miguel Diaz-Canel, has stated that the country has yet to deal with the big issues.

To again quote one of moviedom’s most nefarious characters—“What I wouldn’t give for another 20 years!” But… it may not take quite that long.

1. Photos by Bruce Byers

I was in Havana on August 14th, the day the American flag was reinstated in front of the American Embassy, still in lock-down.  John  Kerry must have sensed, as I did, the continuing gamesmanship with the Cuban government. The Stars and Stripes stood forlornly on a standard sized pole, overshadowed by the field of gargantuan  flag poles Fidel Castro defiantly built facing the embassy with dozens of Cuban flags the size of small fishing boats. But it’s a start.

The Cubans seem to be  thrilled about the possibility of a return to normalized relations with the U.S., having had the American coast in their sightlines for over five decades of imposed isolation. But they have no idea how their lives are going to change. And it won\’t be anytime soon. U.S. companies are already meeting and planning to bring our commercial culture exports to this island caught between its colonial past and a future not yet  realized. But that won’t be  anytime soon, either. Meanwhile, the Chinese are busy ramping up, already building a hotel near the Museum of the Revolution. But anyone who thinks Cuba is a golden opportunity might want to recalibrate.

High Finance

Let’s get the elephant in the room out in the open. The average Cuban receives $20 a month from the state. And there are over 11 million average Cubans.

Every Cuban citizen is also given a ration book each month that entitles him or her to government-subsidized staples: one pound of chicken, 5 eggs, rice and beans, and cooking oil. No subsidies for vegetables, and no one is allowed to buy any fish unless they have a doctor’s order for dietary reasons. These provisions have to be paid for in pesos, and those pesos come from the $20 monthly stipend. Just to make life more complicated, Cuba has a dual currency. Pesos for the average Cuban, CUCs (Cuban convertible peso) for the tourists and Cubans working in the tourism trade. From an economic perspective, the peso is keeping them down at the farm. Fruit and vegetables are sold off food carts from local farms. Canned goods are scarce in the sad and understocked food stores, which is a generous description. If you aren\’t living on food coupons, you pay much higher prices in the very few food centers outside central Havana.

The level of poverty in Havana is palpable. Yet it provides paler-faced tourists an opportune setting to snap endless photographs of the picturesque urban ruins. There is an ambitious program funded by the government to restore the extraordinary colonial buildings in Old Havana to their former glory. But that noble effort isn\’t doing much for the majority of the population that’s been living in temporary housing for the past 20 years. Nor for the people living just on the outskirts of Havana, in completely undeveloped, fourth world conditions.

Can-Do Culture

What is impressive is the Cuban spirit of resilience. We know about the music; also Cuba is a rich haven for contemporary art. All those 1950s Chevys have been rebuilt, and rebuilt again. With a resource-constrained economy, stainless steel scrap is repurposed into formerly chrome bumpers and trim. Those cars continue to be a highlight for every visitor. It is as though they have been in stasis for 60 years. There is a very small wave of independently owned restaurants, though most are still government owned. Cuba will be the ideal place for micro-financing: the resourceful Cubans are ripe for building their own businesses.

The population is aging, and by 2030 about 30 percent of Cubans will be over 60. Resignation may etch the faces of the older population, but the next generation of Cubans is restless and ambitious. The government pays for everyone’s education and healthcare, and subsidizes basic living expenses including housing, electricity, and water. But for the Millennials, who do workarounds to connect with the outside world via the Web, graduating from college with a degree in economics provides little hope for a job future. There is no MBA program, but a two-year stint in the military is compulsory once they graduate. Many of them choose not to complete university to avoid the military duty. It’s a tough proposition to have a great degree, and nowhere to use it.

One 27-year-old graduate I met teamed up with his college friend to start a restaurant that has the most sophisticated food I found in Havana. His degree? Mechanical engineering. Now he is a bartender constructing complex cocktails and engineering architectural garnishes adorning the glasses. He is proud of his creations, and he co-owns the business. The Millennials are less interested in supporting the traditional constructs of Cuban society; they just want to make money.

Retail on the Rocks

So, retail. The prospects are slightly bleak, in light of that $20 monthly stipend. In Old Havana, there is Benetton and the absurdly overpriced Paul and Shark, a Ralph Lauren wannabe with branded yachting logos plastered on everything (both in Plaza Vieja); a brand-new leather goods store and one stylish shoe store (both on charming Calle Oficios). All of these shops are Italian. The only reason they can be in business is to appeal to the tourists they hope will arrive sometime soon on oversized cruise ships. The residents of Havana could never afford $177 ballet flats or $100 leather bags. There are no jewelry stores. No lingerie boutiques. The one local retail apparel store in Plaza San Francisco offers perfume, and cheaply made clothes in the $20 to $50 range. Even that exceeds the monthly income.

On the carnival weekend while I was there, groups of families, dates, friends and teenagers strolled down the Malecon. Women in vivid leggings and form fitting tops, most with lace or net inserts, looked like a flock of brilliantly colored tropical birds. The men were in jeans and bright logo-emblazoned athletic jerseys and T-shirts. There is a lot of glitter, sparkle and gold on the clothes, a signature of Caribbean clothing culture.

So where are the Cubans getting these brightly colored clothes? There is the Galerías Paseo shopping center near the Tropicana selling upscale labels, but that’s beyond the reach of most Cubans.

When you fly to Cuba you get a pretty good idea where the apparel is coming from. Suitcases and boxes the sizes of refrigerators arrive on the carousels, stuffed with merchandise. Resourceful entrepreneurs also offer catalogue sales for stylish women, manufacturing the clothes in Mexico and delivering them personally.

So back to that $20 monthly income. Any way you cut it, there’s not a lot left over for clothes, accessories, shoes – let alone Pizza Hut or McDonald’s snacks. The purists resist the commercial colonization of Cuba with fast-food brands and other mass-market icons of American culture. But to the Cubans, this is a sign of success.

Personally, I think the Cubans are in for some major reality checks when credit cards, wireless internet and foreign goods eventually flood their system. Entrepreneurship will flourish, but consumers are still going to need the cash to buy things. Cuba will likely become another Caribbean tourist mecca, but without the infrastructure to sustain it. They have so far to go to catch up. My prediction? Online retail sales of apparel will leapfrog over brick-and- mortar for Cuban consumers. Amazon and other online retailers are going to have an absolute field day five years from now, when the Cuban gates are truly open for business.

Joni Mitchell wrote the line “They paved Paradise and put up a parking lot.” How much of our lives are defined by parking. Call it a tangible ramification of the invention of the wheel or perhaps an odd cultural addiction to smooth hard surfaces.  For global retail it is the apron, in whatever form it takes. Visit a new urban shopping mall in Tokyo: the model is a conceptual Ferris wheel, an elevated spinning parking lot where each car has its own compartment. Drive your car into the cube, it gets lifted and stored away in the sky.  In Seoul, many shopping malls have cameras focused on each space and a software package that reads license plate numbers; through an interactive screen in an elevator bank or a phone app, you are guided you through a dimly-lit maze to your vehicle. For all the innovation across the world, parking is still mostly flat asphalt and concrete, accessorized with a little paint.

Parking lots are the historic starting and ending point for retail. They are often barren and windswept, especially on a winter weekday inside a garage at Mall of America. They are sometimes scary; who ever loved a parking lot? No one ambles; everyone rushes to unlock their cars. More accidents happen in parking lots than on the highway. They are laid out by engineering teams trying to fit in as many spaces as they can. Outside of Seoul and Tokyo, parking lots have not conceptually changed since the invention of automobiles. Until now.

General Shopping is a Brazilian mall developer/operator and, full disclosure, I serve on its advisory board. It currently has some 23 locations across its portfolio. Some urban locations in Rio and Sao Paulo, an old Olivetti Typewriter Factory repositioned as a mall near Guarulhos Airport, and a series of outlets called Outlet Premium. It is a family-owned business. The CEO, CMO, COO and CFO were high school classmates now in their late 30s and early 40s. They can complete each others’ sentences. In the rough and tumble world of emerging market shopping, they have managed to tiptoe through the landmines of politics, expensive financing and larger competitors.

The first Outlet Mall location opened some 40 miles outside of Sao Paulo. It is set into the side of a hill, with industrial buildings, an open-air food court and exterior parking. The plan was to replace parking areas as needed with new buildings. Almost 10 years old, it has been a major hit in the mall marketplace. A water park and hotel were quickly developed on an adjacent piece of property, and a destination was created.

The second and third Outlet Premiums have been built outside Brasilia and Salvador. In a troubled Brazilian economic climate, both malls are flourishing. About 20 months ago, we conducted our first comprehensive review of the two new properties. What was working, what wasn’t, what General Shopping could be doing better and where the opportunities were. Not surprisingly, parking lots were our starting point.

One of the things we noticed about the region was the high number of motorcycle cruisers; Yamahas, Harleys, Hondas — all the big ones. Brazil is known for its crazy Cycle Boys, the young men that make their living making deliveries and die daily zipping in and out of heavy traffic. These Boys drive medium-sized bikes that lend themselves to high-risk, high adrenaline zipping. What we saw in our parking lots were not these smaller bikes, but hogs. Based on our informal survey, wealthy middle-aged Brazilian males like big cruisers, not unlike their American counterparts. Driving to the Outlet Premium malls on a big motorcycle has become very popular. Park the wife or girlfriend on the back of the bike and roar off on a forty-mile excursion out of town to the mall. It’s a perfect weekend activity, and a happy trade-off, for everyone.

What we also noticed were all the gawkers. High-end bikes just attract attention. Our thought was, why not move motorcycle parking into the body of the Outlet? In this case, it was in the Brasilia location, sited right next to a popular restaurant.

One the nice things about working for family companies is that a good idea doesn\’t have to go to a committee. It took a month to make the improvements: new concrete floors, lighting, and training for the parking lot guards on how to direct traffic and manage the men.

The results were awesome. The number of bikes on display increased with each passing weekend. The interior lot was filled with people, often families just fawning over the bikes. The adjacent restaurant reported a serious increase in sales. Visiting the informal bike display became one of the leading reasons families, especially with young boys, liked coming to the mall. And a year later, we started getting calls from motorcycle dealers asking if we could build them showrooms on site. They are a mall tenant we never imaged having, and couldn’t be happier to have. One of the brands even asked if they could have their own lot.

General Shopping is rethinking parking altogether. New malls will have power and water built in to parts of their lots. We are thinking food trucks, crafts fairs, car shows; we now look at our asphalt not as a cost, but an opportunity for place making. Wouldn’t you like to see a lot of cool bikes all in one place? Or even better, go to a weekend Maker Faire? The transformation of parking lots has also re-energized the parking lot managers, because they, too, realize that if their lots go from a cost to a profit center, they might make more. A LOT more. No pun intended!

Remember the old adage that “retail follows the rooftops”?

If you do, then you probably have fond memories of the Eisenhower administration, the post World War II suburban building boom when Sears Roebuck and J.C. Penney ruled the retail roost, and Sam Walton’s 5&10 variety store in Bentonville, Ark.

So much for nostalgia!

For 2015 and beyond, following those rooftops — the population centers retailers crave to be near — will get trickier. Fewer of them are being built, and they are no longer where they once were. Concurrently, premium locations are getting more expensive and some lenders, unsure of what new retail formats will look like, are keeping a lot of cash on the sidelines until they see another shakeout.

Maybe it’s time to adopt a new mantra. Namely, that retail follows the population and the population follows jobs and new technology. With that as a guide, we should be looking at two major factors that are already having an enormous impact on store development:

• Migration of younger consumers (Millennials) to urban areas in top tier as well as secondary and tertiary cities.
• Channel migration in which omnichannel and e-commerce initiatives, including mobile, are cannibalizing in-store sales and more than making up for any reductions in physical square footage.

Retail Schizophrenia

These trends are major challenges for retailers whose financial models are bound by the old idea that bigger is better. As such, we are seeing a sort of retail schizophrenia. One voice says expand or die. Another says expand and die. The question, to borrow a line from the movies, is “if you build it, they will come?”

A bewildering blitzkrieg of new technologies has put a retail store on every digital device and radically changed shopping habits. Has brick-and-mortar retailing as we knew become obsolete — or far less important — for a new “storeless” generation of shoppers?

Even developers, always anxious to get new projects out of the ground, are only cautiously optimistic. In their hearts, they admit that the old if-you-build-it-they-will-come attitude doesn’t work the way it did in decades past — especially when it comes to large anchor tenants.

Everyone is coming to the difficult realization that unbridled building of more retail space is economically unsustainable and fiscally irresponsible in an already overstored industry.

Reduced Productivity

This was underscored by Accenture, whose analysis of 29 top U.S. retailers revealed that from 2005 to 2010, total square footage increased 38 percent while store count increased 21 percent. Unfortunately, sales per square foot during that period declined 5 percent. Less productive stores reported a 25 percendrop in return on invested capital. The majority of traditional retailers are overstored. Even with store closings over the past four years, there’s no reason to believe this trend hasn’t continued.

The result is an industry that must change the way retail real estate is viewed, obtained and developed. No one is suggesting a slash and burn strategy when it comes to store counts, but a comprehensive analysis of store portfolios. This could also be an opportunity to renegotiate leases with landlords who no longer have the upper hand.

Back to the Future

This transition is also taking the industry back to its roots — smaller footprints that cost less to build and stock and, in the process, create a more profitable store network. This speaks to the redevelopment of the inner core or the “18-hour city” — areas that are becoming more vibrant at night and during the day due to the influx of younger consumers who are patronizing local stores as well as shopping on their phones and laptops.

Even Walmart, the supercenter’s most ardent cheerleader, has concluded that building simply for the sake of getting bigger is a recipe for disaster. Consequently, the company’s investments and experimentation with smaller formats like Walmart Express, On Campus and Neighborhood Market, is a clear indication that the 200,000-250,000 square foot behemoth is no longer the dominant and fear-inducing format it once was.

The same is true of retailers like Target, with TargetExpress and CityTarget, Best Buy and others that are expanding into smaller formats that are a better fit for revitalized inner-city locations.

These and other formats are also geared to quick fill-in grocery trips enabling them to compete more effectively against dollar stores, drug stores and small formats like Aldi and Trader Joe’s — both of which are expanding into some of Walmart’s markets. Of course, small footprint stores, in and of themselves, are no guarantee of success as Tesco’s Fresh & Easy stores discovered after burning through several billion in capital.

Managing Change

Aside from the fact that the real estate needed for supercenters is getting more expensive and harder to find, consumers want more manageable alternatives. They no longer have the time or patience to walk miles of aisles when smaller stores and specialty shops have everything they need. This doesn’t point to the demise of the one-stop shopping concept. Rather, the industry has to adapt and create a compelling shopping experience in less space or in mixed-use developments that are going up across the country.

Meanwhile, we are seeing the remodeling and redevelopment of regional malls into family entertainment centers with more innovative restaurants to augment or replace overcrowded fast food courts, cinemas and more fun things to do in architecturally pleasing environments. An example is the Mall of America in Bloomington, Minn., which has its own aquarium on site. Here I have to steal a quote from Starbucks’ CEO Howard Schultz, who said: “You walk into a retail store, and if there’s a sense of entertainment, excitement and electricity — you want to be there.”

On another front, neighborhood shopping centers, usually anchored by supermarkets, are attracting attention as one of the main drivers of real estate demand. In some cases, they are replacing regional malls as the center of center of consumer activity. In effect, they are becoming the lifeblood of many communities and increasingly desirable locations for every segment of retailing.

One question that’s emerged about local shopping centers as well as malls is whether cheap leases signed during the recession and now coming to an end will throw a lot of excess real estate on the market. We could see more empty spaces dumped by retailers that are unwilling to renew at exorbitantly higher rents. But many insiders feel there is enough demand to absorb the space.

Another major trend that is likely to have a significant impact on physical space is hybrid retailing, or so-called “click and collect” operations, that enable customers to buy online and pick up purchases in store rather than waiting for home delivery by companies like Amazon or other providers. The customer convenience angle is undeniable. But will it turn brick-and-mortar stores into nothing more than fulfillment centers that exhibit little more creativity than a warehouse? Overall, the competition for good, productive space is going to intensify this year in many locales across the United States. So let me end with this quote from the comedian Milton Berle: “If opportunity doesn’t knock, build a door.”

In the horror story of the declining fortunes of the American shopping center, the central character is the “Ghost Mall” – abandoned, forlorn, and lifeless — but looming, casting a post-apocalyptic pall over the American Dream. The website, DeadMalls.com, provides ample evidence that ghost malls are real and that they appear to be a growing insidious blight across America. The eerie photos show boarded-up entrances, broken glass, empty storefronts and hulking monolithic edifices surrounded by desolate unkempt parking lots. Hollywood even used a ghost mall to symbolize menace and hopelessness in last year’s psychological thriller “Gone Girl.”

Frightened yet? Well don’t be. In a country with an astounding 23 square feet of shopping mall space for every man, woman and child – representing almost 70% of the world’s supply — it should come as no surprise that some obsolescence and creative destruction is inevitable…even desirable.

Over the next 10 years it is estimated that between 10% and 15% of existing malls in the U.S. will be redeveloped or closed. On the surface this seems dire, but it is an obsolescence rate of only around 1% per year. Also consider that an estimated 760 new malls will open in the next three years through 2016, adding almost 2% to America’s abundant mall inventory. Despite the hand wringing, the American mall is not experiencing a seismic shift, but instead by a process of natural selection, is going through a healthy evolution to a state better adapted to a changing world. Some might even say, “not fast enough.”

Many malls will not be able to adapt to the numerous external demands. Those destined to join the netherworld of ghost malls will succumb to some combination of the effects of demographic shifts, lifestyle preference changes, competition from other distribution channels and an increasing demand for higher quality retail environments. Broad economic changes – like the diverging trends in stratified income growth – threaten the middle class, and therefore the malls that cater to this crucial group. Some malls are also dying from the inside out burdened with lackluster tenants like Sears and JC Penney that struggle to remain relevant to consumers.

A mall is ultimately only as good as its tenants. The retailers that create a desirable offering will continue to be the engine of success for American malls. The design of shopping centers however also has an important role to play, and many ghost malls with their low ceilings, inadequate natural light and monolithic exteriors offer lessons worth learning from. The design of most of these ghost malls can best be described as functional and bland. Developed in an era of rapid expansion, it was not considered a competitive advantage to enhance the customer experience through mall design – and it shows.

As the landscape became saturated and the supply of shopping centers began to exceed demand, the quality of the retail environment, and therefore “Design,” finally became a competitive advantage. This has provided a great benefit to consumers who are now wooed with a variety of retail experiences specifically designed to delight and charm them. Two distinct approaches to shopping center design have emerged, and in many ways, they occupy opposite ends of a spectrum.

On one end of the spectrum is Los Angeles developer Rick Caruso’s “Back to the Future” developments like The Grove and The Americana at Brand. Inspired by the traditional town centers that rampant suburban mall development helped destroy half a century ago, Caruso’s community shopping centers attract tens of millions of visitors each year. With their town greens, ample landscaping and human-scaled traditional architecture, they offer a compelling vision that is familiar, comfortable and reassuring. If these retail centers were only a little less pastiche and had a little more design integrity, they would be truly timeless. One of the best hopes for immortality is design integrity; it offers one of the authentic forms of immunity against becoming a ghost.

At the other end of the spectrum is the “Brave New World” of visually arresting modern architectural extravaganzas epitomized by architect Daniel Libeskind’s CityCenter in Las Vegas and Santiago Calatrava’s spectacular transit hub and shopping center at New York’s World Trade Center. Instead of being “familiar, comfortable and reassuring,” these avant-garde architectural fantasies are original, exciting, and brazen. Their larger-than-life scale and dynamic geometries can be unsettling as well as uplifting, even inspirational.

At both ends of the spectrum we are moved and made more alive by the power of design.

However, the vast majority of malls, living and ghosts, have shops uniformly stacked shoulder-to-shoulder on either side of a bland central corridor. They follow this format, not because they are inherently appealing to shoppers or retailers, but because they are efficient for developers to build, operate and lease.

Shopping center behemoth, Simon Property’s hostile bid for Macerich, is also driven by a desire to realize operating efficiencies, but moreover, to increase its negotiating power with retailers. If the $16B bid is successful, it will further consolidate the already heavily consolidated shopping center industry in America. This may not bode well for consumers or retailers. High quality design, and the myriad other consumer benefits born through innovation and creative destruction, depend on a fiery crucible of competition. Simon’s bid, if successful, will surely turn down the heat

John Burr Fairchild, who turned a family owned bread and butter garment center trade publication, Women’s Wear Daily, into a fashion powerhouse, passed away last week at 87 years of age.

John completely understood the business of publishing. His father, Lewis Fairchild, drummed circulation, advertising and administration into him. His father had no need to school John in journalism; he had spawned an editorial genius.

Rarely has a man’s talents and interests been so perfectly synchronized with John’s innate journalistic abilities, his love for fashion and those who practiced it, as well as his incredible fashion instincts, all married to pitch perfect taste. He was, without question, simply the best fashion editor there ever was in the time, of his time, and maybe for all time. No one even came close during his reign at Women’s Wear Daily and W. And no one has come close since. Legendary Vogue Editor, Diana Vreeland, walked in the same rarified atmosphere, but lacked all of those other skills that John possessed combined with the right vehicle to exploit them.

John’s, and therefore WWD’s/W’s power, came from the fact that he knew how clothes should be made, the right fabric choices, and the use of color in fashion– few designers had his mastery of blending colors. That’s why he loved Yves Saint Laurent who designed his own fabrics in virtually any style, could mix colors better than any designer, and cut clothes to perfection.

Designers feared John Fairchild because they knew he knew what a well-cut dress or suit should be; what colors worked together, and whether the end result was in the best taste of the season. Moreover, the designers knew that other designers, as well as retailers, knew that his words carried the weight of “as close to genius” as one could find in the fashion world. They wanted his blessing and feared he would judge them as coming up short.

I worked closely with John, more closely than anyone else from 1971 until 1997. I was editor of WWD and the first editor of W, as well as CEO of Fairchild Publications. I remember when Stuart Elliott of The New York Times was interviewing us and asked how we worked together. I said we had a “pilot/co-pilot relationship. John set the course, and sometimes he flew the plane and sometimes I did.” John then looked over at me and said, “That is so boring.” He looked at Stuart and said, “We are two mad monks stirring up a witches brew.” The reporter looked at us and didn’t know what to say. John was delighted with his quote and after the reporter left, said, ”Mine was much better than yours.” I said, “Yes it was, but I hope he uses mine.” In the end he left out both our quotes.

John was always witty and the smallest things about the fashion and the fashion world amused him to no end. It is his silly side that gets written about so often; his teasing of fashion celebrities with nicknames, his feuds with designers, and his “In and Out” lists about virtually anything, while all the serious stuff about him got overlooked.

He understood marketing, and in particular, how to sell a story. It drove him crazy when editors would come upon a potentially important story and would produce a short piece with no pop. He would say the poor boy or girl wouldn’t know a story if it hit him or her in the face. Or more often he would say, “The poor thing just doesn’t have any taste.” That was about the worst thing he could say about anyone. In his world, the best taste was reserved for the highest order of beings. And in John’s opinion, many well-known celebrities, and that included many well-known designers, lacked that highest of all virtues.

Don’t forget. John Fairchild did know.