By Mark R. Smith, Contributing Writer
The lazy refrain on the street these days about retail has become familiar to the point that society is believing it.
Brick and mortar is dying. The future is about online sales and the future is now. Look at the amount of available space in the many of the malls and shopping centers, and how long it takes to backfill. And when it is backfilled, it’s often with nontraditional tenants.
It’s easy to see how people who aren’t closely analyzing the changes in the market would swear that the shopping options that a market that has been mightily influenced by department stores and big box options has no future.
However, while numbers vary depending on the source, the percentage of retail sales online is predicted to reach just about 12.5 percent in 2020, compared to nine percent in 2017, according to Become, an online platform for small and medium-sized business that deals with optimizing funding solutions. That means that, despite the semi-constant appearance of delivery trucks in your neighborhood, 87.5 percent of the purchases are still made at brick-and-mortar locations.
Furthermore, what’s appearing on the horizon suggests not the demise of brick-and-mortar retail, but a union of online and brick-and-mortar options that’s strengthening, thus affecting how retail chains select sites for stores ― or don’t ― and warehouse locations to service both sectors of their markets.
The Experience
Stories of troubled retailers make the national news most days. Sure, plenty of retail icons like Macys, for instance, are still standing, but the corporation just announced the closing about 200 stores; Sears/Kmart is continuing its downward spiral and will close about 100 more locations; Pier 1 Imports, Papyrus and Forever 21 are winnowing down their brick-and-mortar rosters; the list goes on.
True, many retailers are “seeing some real trouble,” said Bruce M. Hoch, managing director at DCG Corplan Consulting, in West Orange, New Jersey, yet Hoch also offered the answer that many professionals from various sectors nationwide are offering.
“[Retailers] today need to come up with entertainment-oriented retail, because everyone is sitting behind their computer.”
“The idea is that the shopping malls that are still operating are getting plug-in retail, like fitness centers, video arcades and better restaurants, but they’re also getting services, like ‘doc-in-the-boxes’ (as in medical professionals), veterinarians, post offices and other such tenants. Any potential storefront use now has an opportunity,” Hoch stated.
That approach extends to downtown areas, too, that the malls once siphoned business from. “New projects in these areas have to be focused on experiences and highly-engaged social levels, with restaurants and bars,” he said. “They’re a bigger part of retail than ever.”
Hoch offered the example of the Restoration Hardware store, in West Palm Beach, Florida: it’s a four-story store with a rooftop restaurant/bar. Customers browse the store and order what they like, go upstairs to eat, drink and (maybe) think about what they want to buy during their next visit. “And when they get home, whatever they bought may have shipped and may already be there,” Hoch said.
Such offerings are gaining popularity because, while online shopping has an ample number of advantages, consumers “still like to see feel, touch, smell, experience and possibly try on what they’re purchasing, such as clothing,” he said, “though there is competition, some online companies even for those businesses, like MTailor, are great at providing measurements.”
Which comes back to the brick-and-mortar vs. online comparisons, which are tricky to quantify. “The problem is when we do an analysis, we can’t quantify what Amazon is doing. We don’t have the data to support what it’s selling, so we follow whatever guidelines we do have and just observe the local markets.”
Sound Advice
Hoch offered his insights on how to he advises a retail development clients to craft a retention/expansion strategy.
“First, identify the experience-based businesses, like food service, entertainment, recreation and miscellaneous retail that have high potential for growth in your downtown or your mall area,” he said. “Recognize that these businesses provide a social experience that can’t be duplicated by online retailing. Accordingly, these businesses will be less vulnerable to growth of online retailing.”
It’s also key to understand that a successful downtown or mall should attract new spending and potential sales that are at least as great as the sales of new businesses. “This growth should support both expansion of existing businesses,” Hoch said, “as well as attraction of new businesses.
“Actions taken by the [local economic] development agency to encourage reuse of vacant or underdeveloped properties, including conversion of office or warehouse structures, will maximize the net increase of commercial space, and minimize business displacement,” he said.
Store ’n Ship
Retailers obviously rely on warehousing, and it’s never been more important to pick the right site, given the combined distribution needs for brick-and-mortar locations, as well as the fact that some online markets can be hotter for a given company than others.
“At some point, there is a gigantic equation based on various aspects of the industry retailers care about,” said Owen Rouse, vice president of investment sales, with the Lutherville, Maryland office of MacKenzie Commercial Real Estate Services.
“One aspect is labor costs and warehouse workforce. The warehouses tend to be near interstate-oriented distribution routes,” said Rouse, “but at some point, does the industrial occupier choose to be farther away from its customer base so it can find an able workforce to staff its warehouse?”
Rouse gave the example of how retailers prefer certain junctures over others. For instance, many logistics firms that serve the retail industry as fulfillment centers locate along the Route 81 corridor in the Harrisburg, Pennsylvania area “to stay away from the congestion of Route 95,” he said. “But if you can’t find labor in the Lehigh Valley region of central Pennsylvania, that firm will move farther are away from its customers in order to be closer to the price and availability of its workforce,” he added.
“If all of the occupiers in a given market have mopped up the labor supply, what’s a new company entering the market to do?” Rouse queried. “It can offer higher wages to steal workers from a competitor, but there’s a limit to how much success that approach will bear.”
From the distribution standpoint, easy access to the company network is also key. In ’n Out Burger locations would likely be met with enthusiasm by the chain’s thousands of East Coast faithful, but the company emphasizes freshness and has stuck to a closer-knit network the Western U.S. and Texas.
That thinking also applies to brick-and-mortar stores because if retailers want to expand, “it’s natural to move as close to an existing [location] as possible,” said Bill Clements, partner with The Retail Companies, in Birmingham, Alabama. “If you have a store in Birmingham, your next location won’t be at a far-away point along the Gulf Coast, like Mobile, but Tuscaloosa, Montgomery, Huntsville or Auburn. The idea is to grow a given area, in the direction where you can naturally expand outward to new markets.”
It’s ‘Rebooting’
On the retail side, Rouse continued, there are three dynamics at work: a targeted traffic count on a road that that provides for specific demographics within a distance ring, combined with existing building or site availability.
“You can have five fast casual restaurants that want to be along a certain route, such as Route 40 in the western suburbs of Baltimore,” he said, “but if there are only two storefronts available, that’s that. That’s one side of the retail equation ― they’re all similar eateries, vying for the same traffic counts from the same market, so there is intense competition for that space. That ultimately driving up rental rates.”
“Conversely there are junior boxes and big boxes that are putting space back on the market, like Sears/Kmart, and that space is getting sliced up into smaller units and released, which in some cases is bringing more supply to the market that might not have been needed,” Rouse said. “This is really about creating density and ‘outpacing’ your competition before you need to.”
Some retail developers, like Annapolis, Maryland-based Greenburg Gibbons, added components at Hunt Valley (Maryland) Town Centre to bolster that which is working, but may be threatened. In that case, the developer added about 350 apartment units delivered by industry leader Avalon Bay to create the residential component.
“If you have a dead strip center, an owner may choose to let the remaining tenants go so they can reload with a variety of food options which remain a hot sector in the market,” said Rouse.
Still, retail seems to be reinventing itself on daily basis, due in part to the popularity of online shopping. But while popular, online shopping isn’t dominating the market the way some people think it is, he said, noting that Internet retail sales account for 12.4 percent of all sales now; in 2017 it was nine percent, according to the National Retail Federation (NRF). “The point is that everyone is scared that online is some monstrously large market, but it’s not anywhere near what people think it is. There is a level of certainty operating online. But it hasn’t replaced the experience.”
“Retail isn’t dying,” he said. “It’s just rebooting. Rumors of death of traditional retail are greatly exaggerated.”
Data Decisions
Holding that thought is Carol Spieckerman, founder and national retail consultant with Spieckerman Retail, of Bentonville, Arkansas, who added that there “is a great deal of data that goes into store and warehouse location decisions.”
“It’s a mistake to assume that retailers are in a downward spiral when they close stores,” said Spieckerman. “Today, they often do it simply because they can. They may have an expired lease and feel that they can pick up the slack online, for instance. Retailers now have the data to make better decisions regardless. Even so, there is a hazard of going too far with store closures, because it jeopardizes brand awareness, which can compromise digital sales.”
So store location “Isn’t done by gut instinct anymore,” she said. “Digital makes the equation more interesting and more complex. For instance, Walmart does well [with online sales] in New York City, but doesn’t have any stores there.”
Also, “No retailer opens hundreds of stores these days, so they use that feedback from online sales to help determine where they should spend that money,” said Susan Reda, vice president of education strategy for the NRF. “Also, the timeline to keep a store open is shorter than it was 10 years ago. They’ll try a new location and tweak it a couple of times, but if it doesn’t work, they don’t go much further than four or five years.”
Going forward, most major retailers will be multi-format operators, like Walmart, Target, Kohl’s and Best Buy, with locations that also feature smaller stores. “At the same time, you’re seeing a resurgence of flagship stores, because they act as gigantic billboards that can drive digital business,” Spieckerman said. “Some function as giant learning labs where retailers can test [various] concepts.”
It used to be that retailers “hoped websites would drive traffic to stores,” she said, “now they realize that the stores are critical to driving brand awareness that promotes their digital platforms.”
There is an exception, however. “Dollar stores are a bit of an exception,” said Spieckerman. “Rather than constantly weighing the productivity and viability of individual stores, their strategy is all about brick-and-mortar saturation, convenience and low prices. They see the potential for thousands more location on top of the tens of thousands they already have.”
And there are retailers that have very specific location criteria. “For example, Walgreens is focusing on high-traffic corners; and ALDI aims to locate near Walmart supercenters,” as is the case around the ring road at Arundel Mills, in Hanover, Maryland “in order to wick off traffic,” Spieckerman said. “So, there is no one-size-fits-all strategy.”
Anchors Dropping
“The downfall of the mall concept has been a big topic that often gets conflated with brick-and-mortar in general, but are really two separate issues,” said Spieckerman.
“Some malls are outdated and have been too reliant on big anchor department stores like JCPenney, Macy’s and Sears and others that are also paring down locations,” she said. “These empty shells are being subdivided into a host of smaller stores or even their own concepts, such as the former Lord & Taylor location in Westfield Annapolis, in Maryland, being rebranded into several home furnishing offerings.”
But that’s not all that happening to bring consumers back to what has been a very popular shopping locale for almost 40 years. “It’s exciting that the 110,000-square-foot Lord & Taylor space will be redeveloped,” said Cailey Locklair, CEO of the Annapolis-based Maryland Retailer’s Association, “but the mall has also [made other significant additions like] Rodezio Grill, and a new Retro Fitness and an Anne Arundel County Public Library branch” that are almost set to open. The mall even has a new 7-11.
But it’s not just about the stores. “There will be a kid’s zone that will become a hotspot for families, as it will be very visually appealing with various climbing apparatuses. Again, it’s about creating experiences,” said Locklair. “[Westfield management] is doing a really good job attracting people to not just a retail space, but an engaging gathering spot.”
“So when you hear about the death of the mall, you’re really hearing about the death of anchor stores. That whole model of the big imposing department stores is going by the wayside, making those spaces prime locations for backfilling,” said Spieckerman.
Her point is that scale is no longer achieved in a single channel. “That’s why we’re seeing more former digital pure players, including Amazon, open stores, as well as brands that traditionally relied on wholesale relationships, like Nike, opening stores and focusing on building out their direct-to-consumer digital platforms,” she said, though some brands that have taken this route, “like Bose, went too far with brick-and-mortar and have retreated from that strategy.”
“The bottom line is that there will be ‘a constant ebb and flow’ between business models going forward,” said Spieckerman.
“There will be more flexibility, but also more complexity,” she said. “In general, for wholesale brands, brand ubiquity is the new exclusivity. It’s no longer risky behavior to operate multiple models,” she said. “The thinking is that it’s all good because the more your brand is out there, the better it is for anyone who is involved with it.”
Oddly enough, Macy’s is an example of a large-format retailer that is pulling back from simple the large anchor strategy and leaning into spinoff boutique concepts: The Market at Macy’s features a constantly-rotating line-up of brands that should drive more frequent traffic and be more appealing to younger generations of shoppers.
“The evolution of Macys will be fascinating to watch. Will its multi-pronged reinvention strategy be too little too late or will it mark the beginning of a turnaround? At least they are making proactive decisions while the brand is still standing,” said Spieckerman. “Best Buy and Target have turned that corner, having graduated from playing catch-up and putting out fires to making proactive decisions. Kohls and JCPenney, on the other hand, are still figuring out” how to move forward.
“The big thing is retail is innovating again, and it’s happening now with the renaissance of the malls,” said Locklair. “In order to survive, they’re reinventing themselves. We’ve seen this [shift in the market] happen [before]. Retailers have to figure out how to attract people and keep them in the mall, which has become more of a destination.”
‘Retail Is Money’
Hoch said that consumers are generally consuming same amount of goods they always have, with the main difference being that some of the goods are being delivered. “People still go to the grocery store, to the garden shop, get gas; consumer staples are non-changeable. It’s the discretionary purchases that are causing the evolution.”
In observing the retail industry, he added that most site selectors don’t analyze retail, nor do economic development professionals. He thinks that’s a large oversight on their parts.
“Much like many tourism departments that seek the collection of ‘bed’ taxes from lodging, the sale of retail goods generates sales tax, which many communities share with their county or state counterparts. This revenue fuels economic expansion,” Hoch said. “So from an economic impact viewpoint, local retail spending is a key component of induced benefits and should not be overlooked.
“The fact is,” he said, “retail is money.”
Bio: Odenton, Maryland-based Mark R. Smith joined Expansion Solutions after having written about site selection among the vast number of topics he has covered in the business universe. That part of his career began in 1993 when he joined The Daily Record, a Baltimore business and legal publication, where he delved into the worlds of economic development and commercial real estate, among numerous other industries; in 2003, he was named editor-in-chief of The Business Monthly, another Maryland publication that covers the scene in the Baltimore-Washington Corridor counties.
Concurrently, he’s written at length about the film and video industry for a variety of publications, and about his other loves, including music, sports and leisure.
