By Mark R. Smith, Contributing Writer
First things first: inflation, supply chain issues and a flat stock market were not the talking points anyone would expect to inspire optimism when talking about the retail industry.
With that observation out of the way, know that there are still plenty of positive happenings in the U.S. retail industry, which is valued at $7.2 trillion according to IBISWorld, for which it projects a growth rate of 4.1 percent in 2023.
According to Deloitte, there are three key trends will likely influence retail sales this year. They include strengthening last-mile capabilities with automated micro-fulfillment centers (MFCs), which can increase warehouse capacity and heighten same- (or next-) day service for multiple stores, thus freeing-up in-store employees for other tasks; making use of in-store reverse logistics capabilities on in-person returns by engaging in return bars, which are stores that pack and ship returns for partnering retailers; and the use of social commerce to enable shoppable tags embedded with company and product information to simplify in-app transactions.
Those observations are not lost on such industry insiders as Carol Spieckerman, founder and national retail consultant for Spieckerman Retail, Bentonville, Ark.
“The outlook for retail is bright, yet “retail” will be defined quite differently as retailers and brand diversify into new formats, business models and categories,” she said. “The seismic shift to solutions and services will be quite disruptive, particularly as retailers create in-house media networks to monetize first-party consumer data.”
While Spieckerman’s comments address the online and digital sides of the industry, they also hit home under roof at the brick-and-mortar locations. That’s despite some observers thinking in-person shopping would be less a factor after the surge in online shopping during the early stages of the COVID-19 shutdown.
However, that doesn’t mean that B-and-M doesn’t have a different look than it did several years ago.
“As retailers focus on digitizing stores, even more data will be collected and more value derived from bricks-based experiences,” she said. “[Retail landlords] will continue to diversify into health care, financial services and other non-traditional businesses, ensuring that product sales will no longer be their primary profit centers.”
That said, Spieckerman is still calling 2023 “The Year of the Store,” because so much of the innovation that will be unleashed will be directed to B-and-M. “That doesn’t mean that all traditional brick-and-mortar retailers will succeed. As we’ve seen with Bed Bath & Beyond’s [pending bankruptcy], category killers are particularly vulnerable as retailers attack high-margin categories like home products.”
While high-profile closures of big chains like BB&B to those of small and smaller concerns will be leaving space on the market, don’t expect those available spaces to last long.
“There will be a fistfight for most of BB&B’s spaces, for instance so I don’t foresee any problems with backfilling,” said Owen Rouse, senior vice president of MacKenzie Commercial Real Estate Services, in Baltimore. “Most of those spaces are in the 20,000-square-foot range and that’s a good sweet spot, though there could also be some subdividing.”
As for what categories are hot today and might be part of backfilling those spaces within several months, Rouse quickly cited the various offshoots of the food sector. “Grocers are white-hot right now and already have a captive market,” said Rouse.
“We’re also seeing growth in restaurants, be it from the expansion of familiar names like McDonald’s and Chipotle – I’ve even saw a four drive-thru window at a Taco Bell location – as well as an ethnic food expansion by national chains like Bonchon and more regional concerns like Quickway Hibachi,” he said.
While online shopping had been on the rise before the pandemic and became decidedly more pronounced upon the shutdown, Rouse noted some leveling off of the trend as the world has moved back toward normalcy. According to Zippia, last year 14.8 percent of U.S. retail sales occurred online, which was up 12 percent from a dip of 13.2 percent in 2021. However, both figures represent a decrease from the height of the pandemic in the second quarter of 2020, when 15.7 percent of U.S. retail sales occurred online.
And that, he said, partially explains the demand in the overall market for retail space. Most products are still purchased in-person.
“We’re also finding much of the heightened activity in mature markets, where new projects are the exception,” said Rouse, given that a healthy population with close proximity remains key to success for most local shopping centers. “Space is at a premium and the backfilling will continue.
“As the old saying goes, ‘Retail follows rooftops,’” he said. “That has remained true even in our digital age.”
Brett Paul offered a slightly different take than Rouse when discussing backfilling, calling doing so “a bigger challenge during the past [several] years. However, he added that “We’re seeing more creative adaptive uses,” said Paul, a principal with XSite Real Estate, of Chicago, “like day care businesses, medical facilities, municipal offices and other nontraditional options.”
That’s about the money. “The occupancy costs of a traditional retail space for those types of tenants can be relatively low compared to what they might pay elsewhere,” he said, “and they’re good from a marketing standpoint simply because passersby can see them.”
Paul also agreed that online shopping “has leveled out since many retailers have figured out how to combine brick-and-mortar with digital offerings, and that they can go hand-in-hand.”
Like Rouse, he also observed that the restaurant space has been “one of the hotter sectors” in retail, especially since the stronger waves of COVID-19 have dissipated. “People are eating out more, yet are still looking for convenience and delivery,” said Paul. “It’s all part of what’s evolved into a bigger equation for the various dining-type businesses.”
Noting that some eateries that were decimated by COVID-19 may have shuttered, they were often quickly backfilled by another bistro. “That’s relatively easy, since those spaces already have the infrastructure in place,” he said. “Today, the replacement restaurants have had to raise their prices, but most are doing well.”
One alternative to getting into this very healthy segment of the market has been franchising, where smaller snack eateries like Crumbl and Cinnaholic are exceling, especially after what had been a somewhat stagnant market for the sector, though it “seems to have picked up, as well,” said Paul.
For other retail concerns outside of the food industry, it’s been more of a “wait-and-see approach to how everything shakes out with the economy,” he said, “before they proceed with expansion programs.”
One sector of the retail estate market that isn’t always backfilling as quickly, however, are some of the smaller malls and outdoor centers. That often means one thing: redevelopment.
“The really strong malls are not having a difficult time keeping occupancy. That’s been the case for more than a decade.” Paul said. “One trend we’re noting is that companies like Macy’s that own their real estate are carving out pad sites in parking lots to create additional revenue.”
What’s often another part of the new strategy for old malls is just what the larger real estate market is calling for, which is often housing and often of the multi-family variety. “That allows shopping closer to home,” he said, “within a project with a more urban feel.”
Also expressing faith that the retail market will continue along its steady uptick is Bill Clements, partner with The Retail Companies, in Birmingham, Ala. “Retail leasing continues to be active, though land costs, interest rates and new construction prices make it hard to develop new product at a reasonable lease rate, thus reducing/eliminating spec space,” he said. “Therefore, that forces expanding retailers to consider existing product.”
Make Your Own
Mark Millman is also ready to sit down to eat, so to speak, and can do so just about anywhere.
“The market for food is very strong,” said the CEO of Millman Search Group, in Owings Mills, Md., “and that goes for any category: grocers, restaurants, fast casual, fast food and meal preparation, as well as Door Dash, Uber, etc. They’re all doing very well.”
But that surge isn’t just about people wanting to get out more as the pandemic has waned, Millman said. It concerns inflation, too.
“As food prices have gotten more extreme, people are finding that basic commodities are close enough or equal to what you pay when you dine out,” he said. “That’s why new concepts expansion are coming online all the time.”
In many cases, those new concepts might not be as new as one might think. “Many are similar to Chipotle, where the diner selects their own ingredients and items for their meal,” he said. “They include Chipotle wannabes like Qdoba; pizza chains where you select your own toppings, like MOD Pizza; and other entries in the market, such as World of Hummus.”
As for leasing, he agreed that there always seem to be multiple suitors for most any opening, be it small for an eatery or another specialty stores or of the big box variety.
“Leasing space is never a problem today because the landlords can section off a former BB&B space, for instance,” Millman said, “into three places and charge more per square foot than they were charging one tenant in the first place.”
Outside of food, he cited other hot markets that are often subsectors of the health industry, like urgent care centers; medical services, notably with specialties like orthopedic services and dialysis centers; fitness centers and facial spas.
“Retail firepower is being felt in all areas of the commercial real estate industry” said Millman, and is extending to industrial, where more expedient access to products is part of the rule of today has resulted in the aforementioned rise in MFCs and return bars. And while online shopping may have slowed, its relationship with brick and mortar seems to be strengthening as the retail universe evolves.
The route to success “is omnichannel all the way,” Millman said, and that will remain the case “as we see more backfilling with the rise of more power centers anchored by big box category killers like Home Depot, Best Buy, Dick’s Sporting Goods, Ulta,” etc., “as well as neighborhood grocers as the U.S. population (which stands at 334.4 million, according to the U.S. Census) continues to explode.”
The above is not to say that there aren’t ample challenges today in retail, for obvious reasons.
“I would say that the industry is still holding steady, though there is still some uncertainty due to inflation and the possibility of a recession,” said Aaron Farmer, president of The Retail Coach, in Austin, Texas. “What we’re seeing is retailers and restaurants for the most part, still expanding and adding locations.”
Farmer said The Retail Coach works with many shopping center owners that now (or soon will) have empty BB&B spaces in their centers, “but know that as soon as some of the closings were announced, they had two potential new suitors an hour later. Literally,” he said. “There is such a dearth of available space that it almost always gets snapped up immediately.”
That can be a bigger issue, however, at the local mall. Given the amount of “de-malling” going on in the industry and the ensuing smattering of “Space Available” signs, Farmer thinks that’s all part of the lesson learned in the wake of COVID-19. “It changed people’s behaviors about shopping and eating. They want to do it closer to home,” he said. “What that’s meant is a great deal of new mixed-use and retail in the suburbs and sometimes even the rural areas.”
Farmer also noted the slowing of the online sales revolution, which some observers seemed to think would never ebb and continue to flow. “Retailers are now realizing that they have to take “an omni-channel approach” that includes not only in-store and online,” he said, “but sometimes pick-up and delivery, too.”
Shrink to Grow
As the Deloitte study revealed, taking that omnichannel approach is part of the industry’s future.
“Retailers and brands have realized that true scale isn’t achieved in a single channel, and that includes digital,” said Spieckerman. “That’s why so many digital-native brands have become clicks-to-bricks converts. Stores drive brand awareness that helps power digital sales.”
That means developers are getting on board. They “will continue to swoop in to re-envision shopping centers and malls that have grown musty,” she said. “Rather than operating as a collection of brands, these properties will operate as brands, with apps and offers that unify the shopping experience.”
While pointing out that “supply chain snags and inflation seem to be easing,” Spieckerman added that, “‛consumers’ budgeting habits will be hard to break. They’ll be more discriminating with their purchases and the shift toward spending on experiences will continue to accelerate. Scrutiny around sustainability and the backlash against conspicuous consumption will add pressure.”
The retailers have to get in sync with a key demographic, too that are more aware than their elders concerning the climate, environment, recycling, etc.
“The younger generation shoppers that are critical to retailers’ long-term success expect action and retailers and brands will respond by ramping up next-level sustainability and circularity initiatives,” said Spieckerman, who added that “In many cases, they will employ third-party enablers to get the job done.”
Back on the street, Farmer said to look for smaller brick-and-mortar locations to changeover to new tenants that are striving to offer more locations that, hopefully, more consumers will be easier to reach.
That approach is “especially effective with the online element, because small store sizes means less maintenance is required and fewer employees are needed. In addition, they do not require as much inventory/stock,” he said, “and if a customer can’t find the item in question at the store, they can most likely locate it in another store, the warehouse and/or online,” said Farmer. “They won’t need to lease 100,000 square feet when 30,000 square feet will do just fine.”
Following that general advice looks like it will work for all concerned as the market moves forward.
“All told,” Farmer said, “the industry will stay strong.”