Retail Changes

It used to be that retail was based upon what people are buying.  People may go to Best Buy for electronics, Safeway for groceries, or Shoe Carnival for shoes.  Today what people are buying is now matched with how people are buying as determining the success of a store. 

Melina Cordero, the head of global retail research at CBRE captures this when she said, “Twenty years ago, when you wanted to buy something, you had to go to the store—it wasn’t a choice, it was an obligation.  But today, the store is no longer an obligation; it’s a choice.  We can choose to buy online as well as in the stores.  In addition, we have more choices than ever about where and from whom we buy.” 

How people are buying is forcing companies to look at brick-and-mortar storefronts.  Traditional stores are now creating a web presence to increase their reach or may be partnering with companies like Amazon or Etsy to get their product more exposure.  Online strategy must be considered when a retailer wants to increase business.  I have found that ordering items online and not having to go to the store, go through lines and haul all back home is a pain at times. 

On the other hand, strictly on-line retailers are finding value in strategically placed storefronts.  Some online stores like Casper, Untuckit, and Warby Parker are now opening physical locations.  Online shopping gives customers convenience, a vast selection, painless purchasing, and home delivery.  In-store shoppers can feel and interact with products.  They can take the product home right away and not have to worry about the time involved in shipping.  They also can develop the relationship with the retailer in terms of good service and advice.  

JLL notes that e-commerce retailers have plans for 850 physical locations in the next five years.  What many of these companies are finding is the customers prefer an omnichannel approach to buying.  Sometimes they want to purchase all online.  Sometimes apps are used to make a purchase.  Other times orders with convenient car pick ups are done.  Maybe the buyer wants to go in and experience the physical shopping experience where they can see and feel the product, develop a relationship with the sales people, and gain superior service after the sale.  A successful retailer today will be actively pursuing multiple channels in the sales experience. 

Cost is a factor driving the online retailer to consider the physical.  Marketing with Facebook and Google ads can only take you so far.  The spending may get higher than $10 per click just to push traffic to your website.  Then there is no promise that people will buy.  Now imagine an online retailer opening a physical location at the Mall of America, or any other place that will attract people from around the world to physically interact with their brand. 

This physical opening of a store by an online retailer produces “The Halo Effect” as dubbed by the International Council of Shopping Centers.  A physical store increases the overall traffic to a retailer’s website by 37%.  Emerging brands have a higher increase at 45%. 

I contributed to this when I was stranded in Minneapolis during a blizzard back home and needed to get clothes.  I stopped at an Untuckit store.  Now I have seen the commercials but never considered buying off their website.  The attentive staff helped me find my correct “Untuckit size” and I sent pictures of the various choices to my wife to pick.  I purchased a shirt and will consider buying something from the company online now that I have an experience with the product. 

For the retail real estate owner, these new trends present some challenges to the traditional methods of retail.  Landlords may move to shorter and more flexible leases to attract tenants that will drive traffic to their location.  Build out costs can be tricky as an online retailer may not have the capital to complete the work.  Measuring sales from a location is a challenge since the online retailer is offering an experience and may end up completing the sales transaction online later.  This may move rent overages from a hard and fast sales/sf to maybe a combination of sales + traffic/sf.  The mix in a shopping center is a challenge.  Do you just go for the solid credit tenant or focus on the cool new guys who may drive traffic but are not as financially sound? 

The lender may find a center that can cater to multiple channels of buying more attractive to others than those who only offer the traditional store experience.  This may become a factor to note when assessing the financial creditworthiness of the real estate or the retailer.