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Navigating Change: Transformation of Retail
BY: EL WARNER
SHOPPING CENTERS SEEK STRATEGIES TO NAVIGATE CHANGEWhen Charles Dickens wrote, “It was the best of times, it was the worst of times,” he was referring to London and Paris, the economic powerhouses of his time. But the quote is well-suited to the retail landscape in the U.S. today.
THE BEST OF TIMES..... After the Great Recession of 2008, the U.S. economy is chugging along with eight straight years of growth. At just over two percent, the U.S. growth rate is hardly spectacular or as good as it was during the boom years of the 1990s, but the American economy is performing better than that of most advanced economies of the world.
The nation is adding hundreds of thousands of jobs each month, unemployment is under five percent, gas prices are low, and middle- and lower-income Americans are benefiting from 18 consecutive months of wage growth. The stock market is at an all-time high. It’s no wonder that consumer confidence is in positive territory.
Retail centers entered 2017 coming off a record holiday season, posting
sales of $196.1 billion and a 3.8 percent gain over the previous year and the strongest rate of growth since 2011. Online channels grew as well, up 17.1 percent over Q4 2016 holiday season figures.
THE WORST OF TIMES....While retail has clear winners in today’s economy –Class A shopping centers are faring better than B, C, and D centers, and online sales are strong– the casualty list is growing at an alarming rate. Some of the best-known names in the business, stores that often serve as traffic-producing shopping center anchors, are struggling mightily. Macy’s, Sears, J.C. Penney’s, Payless, and Barnes & Noble’s are shutting stores by the hundreds, and a record number of shopping centers and retail chains are declaring bankruptcy.
NAVIGATING TODAY’S TURBULENT SEAS REQUIRES IDENTIFYING THE SHOALSFor property owners, devising a strategy means first identifying the issues that are making today’s retail environment so challenging. Matthews™ has identified some of the primary changes.
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OVERBUILDING The industry has added 16 million square feet of mall space since 1990, according to the International Council of Shopping Centers (ICSC), leading to more than 1,200 malls in America. However, changes in the behavior of the primary consumer of today –the Millennial– mean more online shopping and less-frequent mall visits. Experts forecast the number of malls will decline to 900 in the next 10 years. According to Greenstreet Advisors, nearly 25 enclosed shopping centers around the country have closed since 2010, and another 75 are in danger of failing.
MILLENIAL PREFERENCESAs the new generation reaches majority in numbers (80 million strong) and buying power, they seek either low prices, or luxury and “authentic experiences.” As evidence, the Wall Street Journal reports that Class A malls, which account for 3.5 percent of all malls, represent 22 percent of all mall revenues.
Millennial preferences include spending less onclothing. Apparel sales have declined by 20 percent since 2000. Especially hard-hit are logo-driven brands like Abercrombie and Hollister.
Instead of clothes, millennials are spending money on experience-creation. Travel and restaurants are big winners. Since 2005, spending on food services and drinking places has grown twice as fast as all other retail spending; in 2016, Americans spent more on restaurants and bars than groceries, a first. Expect this trend to continue, as millennial consumers put a premium on experiences that can be shared on social media: consumers are much more likely to share a post of their time at a restaurant, rather than talking to a clerk in petites.
E-COMMERCEBetween 2010 and 2016, Amazon’s sales in North America quintupled from $16 billion to $80 billion. Sears revenue last year was about $22 billion, which means Amazon has grown by three Sears’ in six years.
But Amazon’s merchandise alone is not responsible for the dramatic changes in retail. After all, online orders have been strong for years for books, music and other
categories. The Biggger challenge for brick-and-mortar is to match the policies that online retailers are increasingly offering.
• Half of all U.S. households are Amazon Prime subscribers and have free shipping as a feature of their membership
• Online retailers who market on the Amazon platform now match Amazon’s risk-free return policies, and non-Amazon e-tailers are following suit
• The no-risk return policy has had the greatest impact in apparel, which has grown to be the largest e-commerce category
• E-commerce retailers like Casper (bedding), Bonobos (clothes), and Warby Parker (eyeglasses) offer steep discounts, low- or no-cost shipping and other services
• Mobile shopping, once devilishly difficult, is now much easier with the rise of shopping apps and faster computing response times. Since 2010, mobile commerce has grown from two percent of digital spending to 20 percent
Even brands moving aggressively online have struggled to match the growth of market leader Amazon.com Inc. The Seattle-based company accounted for 53 percent of e-commerce sales growth last year, with the rest of the industry sharingthe remaining 47 percent, according to EMarketer Inc.
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“Retail is no longer a brick and mortar business; it is a brick and mobile business,” said Michael Glenn, manager at the
Stony Point mall in Richmond, VA.
THE FALL OF THE MIDDLE Class B malls in secondary markets with sales of $300-$500 per square foot are hard hit by the changing environment, with tenant occupancies dropping to 60-70 percent and revenues down to $200 per square foot.
THE RISE OF DISCOUNTERSConsumers found themselves forced to shop at discount houses during the Great Recession. TJ Maxx, Target and other discount chains responded with more fashionable merchandise, and gained a permanent following among millennials during their first real experiences in buying based on their own paychecks. Now these discount outlets are preferred destinations for both the budget-conscious and millennials, replacing traditional anchor department stores like Macy’s and J.C. Penney as go-to locations. And as anchors falter and traffic declines, the collateral damage can be a critical blow to a mall, especially if tenants have co-tenancy clauses.
THE DISAPPEARING BUDGET CONSUMERWhile the image of shopping centers has always been happy consumers merrily choosing trendy merchandise, the reality for commercial property owners is that many centers cater to the less well-
heeled. These Class B and C shopping centers and shadow centers took a drubbing during the Great Recession.
Unfortunately, millions of these budget consumers never recovered from hard times. The number of Americans living below the poverty line has doubled since 2008. Unless the economy shifts in such a way that business or government provides more opportunities and financial support for these people, they will continue to be no-shows at the mall, and these categories of commercial property will need to re-invent themselves.
“According to the Census Bureau and NRF, there are more than 1 million retail establishments across the U.S., and retail sales have been growing at almost 4% annually since 2010.”
RETAIL ISN’T DYING, IT’S CHANGING AND PROPERTY OWNERS MUST RE-STRATEGIZE THEIR FUTURESMost property owners are well aware of the approaches that have proved successful in the past are no longer working. The challenge is to devise a strategy that will not only meet the needs of the times, but also pave the way to greater opportunities in the future.
The good news: despite the focus on e-commerce, most Americans continue to do shopping in person. Customers prefer physical stores 75 percent of the time, according to Cowen research. The key is to create the right experience, whether it’s online or off. Retailers should “re-focus on customers,” said Oliver Chen, an analyst at research firm Cowen & Co. “Management needs to be fixated on speed of delivery, speed of supply chain, and be able to test read and react to new and emerging trends.”
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Matthews™ has examined a number of moves that shopping centers are making to re-imagine their shopping centers. Since centers can vary considerably by class of property, region, and resources, not every new approach will prove fruitful. Our goal is to provide our clients with an array of tactics to consider in devising a strategy for their client makeovers.
1. RESTAURANTS RE-IMAGINEDRestaurants are core elements of many malls making the transition to millennial preferences. Innovations include updated versions of the multi-cuisine food court, and establishments that feature locally-sourced foods and beer.
2. MOVIE THEATERS RE-IMAGINEDMultiplexes outfitted with deluxe features
like adjustable seats, tray tables, and apps to order meals for in-theater consumption.
3. MORE SERVICESMore malls are incorporating tenants that once were primarily found in shadow centers - spas, dental offices, cleaners. By developing the services appropriate for a center’s target audience, management can attract traffic that can easily become recurrent visitors. For example, Saks Fifth Avenue has launched an assortment of wellness services at its Manhattan flagship store, including massage and salt baths.
4. PROPERTY UPGRADESMillennials are not the ‘mall rat’ generation like Xers; drawing them to a shopping center requires a physical makeover to include open spaces, garden rooftops, and community and performance spaces.
5. EXPERIENCES FOR ADULTSCommunity-engaging and immersive events targeting millennials - wine tastings, movie nights, art shows, farmers markets, yoga demonstrations, running clinics, and culinary arts centers.
For assistance, contact your
Matthews™ Shopping Center expert.
(949) 873-0507
6. EXPERIENCES FOR KIDSKiddy playgrounds, children’s lending libraries, art fairs engage the family side of a community and burnish the center’s brand.
7. RE-PURPOSINGAbandon the traditional retail shopping center concept and repurpose the property into office space, residential apartments, sports facilities, medical facilities, and other uses.
8. IMPROVE YOUR SHOPPING CENTER ONLINE EXPERIENCEShopping center marketing has always been a crucial factor for retail sales offers. However, property owners need to adapt the reality of online marketing. “People who have a bad digital experience immediately go to a competitor – often with no switching cost at all,” noted Peter Blair, vice president of marketing for digital marketing agency Applause. “There will be further integration of our online and physical worlds, especially as users expect brands to engage with them through the digital channel of their choice, not the other way around,” Blair said.
9. ENLIST AN EXPERT WITH OUT-OF-THE-BOX THINKING The Dickens quote from “A Tale of Two Cities” goes on to say: “It was the age of wisdom, it was the age of foolishness.” Property owners are well advised to ignore the doom-and-gloom hype and focus on realistic strategies.
Matthews™ has been closely monitoring shopping centers in every part of the country, as well as trends that emerge from international markets. Using a mix of data and experience, we are able to assist our clients in developing successful strategies.
