First came ecommerce and prophecies of brick-and-mortar’s inevitable demise; then came the COVID-19 pandemic, and the forced shutdown of retail stores and centers. Scads of retailers were bankrupted by ecommerce competition, and many of those strong enough to survive the electronic onslaught were sufficiently weakened to fall prey to the coronavirus.
In combination, that one-two punch created a “Darwinian environment” in the retail sector during the past decade, says Dags Chen, U.S. head of real estate research and strategy at Barings, and that situation forced tenants and landlords to adapt to changing consumer behavior and expectations.
It was enough to spook many real estate investors to limit their involvement in the property type or abandoning it altogether. In the meantime, though, surviving retailers have been vulcanized by the experience and find themselves not only stronger, but also facing a less crowded field of competitors.
The sector is now reaping the benefits of that culling, according to Chen, who points to reporting from CBRE-EA showing national grocery-anchored centers sporting a vacancy rate of only 7.6 percent as of first quarter 2022, the tightest it has been since 2005. What’s more, investors, long wary of changing consumer habits, are returning to the space, with retail center transaction activity up 320 percent for the trailing 12 months ended March 31, according to Real Capital Analytics. That compares with a 228 percent activity increase for all commercial real estate during the same period.
One of the key shifts made by retail real estate property managers has been a more strategic approach to what occupies their available space.
“Retail centers — excluding malls — have been able to be selective in terms of tenancy, no longer focusing on soft goods and apparel, but even more on services and experiences that can’t be easily replicated online,” explains Chen. “Owners of well-performing centers now have their pick of tenants, and it isn’t necessarily the one with highest credit that is selected.”
For example, Chen says, there’s a limit to how many yoga studios and pet grooming services a retail center should accommodate, as asset managers realize that maximizing shopping center performance requires achieving the right balance of retailers to optimize the flow of customers. In some instances, those restrictions are specified in the anchor tenant’s lease.
Though store closures during the pandemic proved a boon to ecommerce — as many people averse to online shopping were forced to participate and were impressed by the convenience of home deliveries — consumers also became keenly aware of the limitations of online shopping, including fatigue induced by the trial-and-error approach of ordering multiple versions of same item to find right fit, says Chen. This drove many customers back to physical stores.
DYING AND LIVING BY THE SWORD
Having been thoroughly lacerated by their cyberspace competitors, traditional retailers have battled back by taking up the same weapon, building out ecommerce capabilities of their own, with this added advantage: dozens or hundreds of physical outlets where shoppers can pick up their online orders, maybe even placing their hands on some versions of the products they are ordering via the internet.
Now, it seems, traditional retailers are teaching the ecommerce cohort a merchandising lesson.
“More and more retailers realize their business cannot be profitable with only an online channel,” says Lauren Holden, head of retail asset management at Clarion Partners. “The importance of allowing customers to touch and try a product, as well as the significant increase in shipping and return costs, has highlighted how online and offline channels are working together today. Physical footprints help digital sales, and digital footprints help physical sales.”
Even direct-to-consumer brands have taken note and advantage of this reality by opening their own physical stores, says Holden, pointing to the omnichannel strategies being pursued by the likes of AllBirds, Away luggage, Bonobos, On Cloud and Warby Parker. They have been joined by long-established powerhouse brands, such as Nike and Levi, in cutting department stores and other third-party marketplaces out of their retail distribution process and focusing on going directly to consumers through their own ecommerce sites and physical storefronts.
Consider that Amazon, the most vaunted of all ecommerce players, has opened physical stores, as well as striking a deal with Kohl’s and its more than 1,000 U.S. stores to process returns for Amazon customers. The Kohl’s deal offers convenience to Amazon shoppers because Kohl’s packages and processes the returns for them, and Kohl’s benefits by having Amazon shoppers parading through its stores and getting exposed to the immediacy of its product lineup.
“Retailers are repurposing their stores as dual retail and fulfillment spaces,” says Holden. “Target noted in its fourth-quarter earnings call that it fulfills 96 percent of online sales through its stores. This trend is here to stay and may accelerate as industrial rental rates continue to rise.”
Chen adds: “Brick-and-mortar retail provides customers the ability to interact, buy and, importantly, return items in person.”
It pays to have a visible presence and consumer access.
FLOODING THE ZONE
Omnichannel has become the operative strategy in modern retailing, for players large and small — and they’re just getting started.
“Retailers will continue to invest in the convergence of digital, virtual, and brick-and-mortar retail to engage customers through multiple channels,” says Ana Leon, retail property specialist at DWS.
And they are heading well beyond the point-and-click ecommerce site, according to Leon. Several luxury brands (Gucci, Prada) and traditional retailers (American Eagle Outfitters, Forever 21, The Gap) are diving into the metaverse to design unique experiences and products for the virtual universe. Though still nascent, she says these branding efforts are creating a new dimension for retail.
Holden reports several home furnishing retailers are using 3D technology to help sell their housewares and personalize the buying experience.
Add another couple of channels to the omnichannel repertoire.
Less aspirational efforts are also being made by retailers that are deploying technologies to enhance the customer experience and improve efficiency. Grocers, such as Albertson’s, are fielding frictionless checkout options by using smart shopping-cart technology, says Leon. Amazon’s new apparel concept, Amazon Style, will employ an app to guide and personalize the in-store shopping experience. In addition, augmented reality and virtual reality-based technology will help apparel shoppers find the proper fit, cutting down the volume of returned items.
Another strategy paying dividends is the integration of services into retail space, according to Holden. Traditional pet stores are incorporating veterinarian services within their stores, and eyeglass retailers are conducting eye exams onsite. Neil Blumenthal, CEO of Warby Parker, has noted 70 percent of consumers buy glasses or contacts in the same location as their eye exam.
Such in-store services allow retailers greater control over the customer experience, says Holden.
“Customer experience” is yet another catch phrase of the new retailing environment, notes Leon, who says store formats will gradually transition from a transactional environment to a more immersive consumer experience. Akin to a showroom, stores will become more customer-centric with a focus on product education, service inquiries, and micro-fulfilment for shoppers who wanto to buy online and pick up their orders in store.
“The biggest challenge for shopping center owners is maintaining a relevant tenant line up that satisfies the ever-changing needs and wants of consumers,” says Leon. “Data and analytics hold the key to a successful asset management strategy. The implementation of market research, consumer insights, and location data can inform landlords on the consumer journey and lead to better merchandising decisions.”
Chen adds that retail centers can also function as “town squares” by spending meaningful capital to create public spaces on their properties for social gatherings, live entertainment, and other community-related events.
Though retail development has been scarce since the global financial crisis, Holden says excess square footage is getting redeveloped, reimagined, even demolished. In some cases, multifamily is being incorporated into projects in the place of a large anchor tenant, or where excess parking exists.
“Development is likely to remain muted in the near-term, especially given the significant increase in construction costs,” she says.
To drive shoppers and other community members to those reimagined spaces and events, Holden says retailers and brands are exploring livestreaming and metaverse technologies as additional marketing channels. Livestreaming, which might come from either a salesperson or influencer, has already gained considerable traction in China. In the United States, the major platforms are Instagram, TikTok and YouTube. Another form of marketing is private traffic, where brands and retailers can communicate directly to consumers via text and have two-way conversations. Several luxury retailers and brands have already adopted this form of direct outreach to consumers, with some accelerating this mode of communication during the pandemic.
“The space is moving fast between the confluence of the digital and physical worlds,” says Holden, “and the retail winners are going to be the ones that continue to innovate and adapt.”
Like Leon, Holden references frictionless or self-checkout as a key component to positive customer experience, because it saves customers from standing in checkout lines, while incrementally driving more store visits and higher sales, which is why the biggest retailers are investing heavily in such technology. Add to that an expansion in payment options, giving consumers more choices and increased conversion from online to offline shopping.
NEXT STAGE RETAILING
Retailers have gotten better about opportunistic outreach too. It’s no surprise to shoppers to receive text messages from a shopping center or individual retailer while in its vicinity.
The use of such geolocation/mobile-device-tracking technology has become more widespread among owners and tenants, says Chen. Owners are using the data to optimize flow into centers and across different times of the day, and sharing it with prospects and existing tenants. The technology continues to evolve, with some centers creating mobile apps that allow customers to order online and pick up from multiple stores at the same time.
Then again, innovations don’t have to be technologically sophisticated to make an impact, says Chen. One example is parking lot indicator lights that guide shoppers to available spaces to minimize the time spent looking for a slot.
What next for retailers?
“A few years ago, it seemed ecommerce was the preferred retail channel, while today a combination of physical and digital is serving the consumer,” says Holden. “The next challenge is how to make the journey seamless, so consumers can move cohesively between channels.”
Mike Consol (m.consol@irei.com) is senior editor of Real Assets Adviser. Follow him on Twitter (@mikeconsol) and LinkedIn (linkedIn.com/in/mikeconsol) to read his latest postings.