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The faultlines in retail real estate

By Daphne Howland, Retail Dive, October 1, 2018

The American retail landscape is different now: Malls are losing anchors and big boxes are in decline. But e-commerce is hardly the only reason.

As Armageddons go, the retail apocalypse is turning out to be short-lived. After a few years of headlines blaring about devastation and the scourge of e-commerce for physical stores, retailers in recent quarters are posting healthy comps and increases in foot traffic. “The term ‘retail apocalypse’ has been misused for years,” said Michael Brown, partner in the retail practice of global strategy and management consultancy A.T. Kearney and author of the report The Future of Shopping Centers.
“Throughout the whole shifting dynamic in retail, the one thing that has never changed is the need to have compelling goods and services offered with convenience and a price people are willing to pay. Retail, in general, is not a physical or digital world.”

And retail generally appears to be on the rebound. Retail comp sales in the second quarter were up 4.2% year over year (4% excluding retail giant Walmart), the highest level since 2007, according to a Retail Metrics report emailed to Retail Dive, which noted that 19 retailers to date have reported negative Q2 comps, “down dramatically from Q1 when 38 chain[s] turned in negative same store sales and 1Q17 when 60 companies did so.”

It’s still not a pretty picture on the ground, however. Second quarter mall rents fell 4.6% from the first quarter and 7.1% year over year, hit by major store closures from Toys R Us, Sears and J.C. Penney, according to a trend report from commercial real estate firm JLL. Mall vacancy rates hit 4% during the period, JLL said. The retail sector suffered its worst quarter in nine years with net absorption of negative 3.8 million square feet, which pushed the regional mall vacancy rate up by 0.2% to 8.6% as the average mall rent increased 0.3%, according to another report from commercial real estate firm Reis emailed to Retail Dive.

All in all, retail consolidation will continue to make headlines in 2018, but regional mall defaults are unlikely to reach the levels seen last year, according to Morningstar Credit Ratings, LLC. That’s partly because so many big store closure plans (like Macy’s, Toys’ and J.C. Penney’s) will have been mostly executed. Plus, shopping centers are filling their vacancies, though often with non-retail tenants. Architect Stan Laegreid, a principal at Field Paoli Architects and the designer of several high-end malls, says we’ll soon notice that new mall designs will increasingly be hospitality, rather than retail focused, from the jump.

But it’s also because the remaining chains are doing better, as they’ve overhauled both stores and merchandise, in part with proceeds from last year’s tax windfall. “A number of our retailers are getting better and healthier. And I think the tax cut on their business gave them more earnings to invest or replenish their merchandise,” David Simon, CEO of Simon Property Group, Inc. told analysts last month, according to a transcript from Seeking Alpha. “We’re working through a number of the bankruptcies and replacing them with better retailers. We’re upgrading our mix.

Is it e-commerce?
As thousands of U.S. stores have shuttered in recent years, falling sales were being attributed to everything from bad weather to a still-hesitant consumer, yet e-commerce kept humming. It’s a two-fer that’s led to store closures and tactical shifts.

Toys R Us threw in the towel, Macy’s contracted its massive footprint, and Sears and J.C. Penney have struggled, and all that precipitated significant store closures. Legacy retailers, meanwhile — department stores like Macy’s, mass merchants like Target and specialty retailers like Best Buy and teen apparel chains — have all turned their attention to boosting digital sales. Walmart has demonstrated the most dramatic shift in focus, scaling back store openings in previous years as it bought up online outdoor retailer Moosejaw for $51 million in cash, vintage-inspired online women’s apparel site Modcloth and menswear site Bonobos for $310 million (all three in 2017), just months after its $3.3 billion acquisition of Jet.com.

It’s a process that may involve retail chasing its own tail. Digital sales are outpacing retail growth in general, and legacy retailers are scrambling to notch gains in that channel. That in turn is fueling yet more e-commerce growth. “In the midst of an e-commerce revolution, retail remains a mixed bag,” according to a report last week from global commercial real estate services firm Cushman & Wakefield emailed to Retail Dive. “While well-located Class A properties continue to thrive, bolstered by a stronger economy and wealthier consumers, Class B and C retail properties continue to face challenges as e-commerce grabs an increasing share of the retail sale pie. The forecast for shopping centers (which excludes urban, standalone and mall retail properties) calls for net absorption to taper off over the coming years, with vacancy rising from a low of 6.6 percent in 2018 to 6.8 percent in 2020.”

It’s not e-commerce
The phenomenon of e-commerce tends to get credit for all the disruption in physical retail, but the reality is much more complex.

“We all know that even today no more than 12% of all retail sales are done online,” Kearney’s Brown said. “E-commerce is an important part of the ecosystem, but brick and mortar retailers also have the lion’s share of e-commerce. It’s those brand and experiences that they know is what people gravitate to. With the exception of Amazon and Wayfair, there’s not many of the online retailers that have reached any scale that makes them a dominant player.” Indeed, several once pure-play retailers are opening stores, fulfilling Gartner L2 analysts’ prediction a couple of years ago that physical stores are an inevitable tactic in any startup’s growth strategy. In recent weeks, mattress startup Casper announced plans for 200 stores in North America and lingerie e-retailer Adore Me unveiled plans for as many as 300. Meanwhile, a brick-and-mortar record chain in New England that specializes in media that can be streamed or bought for less at Amazon is expanding the number and size of its stores. All see stores as critical to making connections with customers.

“Online is fast, it’s frictionless and it’s probably cheaper,” Bob Phibbs, CEO of retail consultancy The Retail Doctor, told Retail Dive in an interview. “But brick and mortar can do something that online, by design, can’t. Physical stores are still the drivers of revenue — the goose that lays the golden egg is the brick-and-mortar store. Maybe they start in the store and they finish it online, but it’s in the store environment where there are about 15 touchpoints that happen, and those ‘yeses’ collectively make a sale.”

Beyond the limits of e-commerce, (which include not just a lesser ability to connect with customers but also higher costs and slimmer margins), the shifting sands of the physical retail environment are trends that go back decades, according to retail analyst Nick Egelanian, president of retail development consultants SiteWorks. “E-commerce is the loudest voice in the room, but it’s the least disruptive,” he told Retail Dive in an interview. Like others, Egelanian does see e-commerce as significantly upending retail in recent years, but he doesn’t place it in the top three. Foremost is the overbuilding of stores going back several decades, plus the fact that two major types of retailing, mall stores and big-box stores, have reached their growth limits, he said. “As of the end of last year there was 8.5 billion square feet of retail space,” he said. “I’m guessing 3.5 billion of it needs to be eliminated.”

Even more ominous, perhaps, is the way that many retail companies now approach their strategies as financial instead of retail enterprises, he said. “It’s a financially driven industry now rather than a retail-driven industry,” Egelanian said. “Every earnings call these days has to do with some kind of financial engineering. You have this ill-fitting financial world that looks for growth at three to seven years when in retail it’s more like 25 years.” Toys R Us is a good example, according to Egelanian. “There’s no inherent reason why a toy store operating in today’s world can’t be successful,” he said. “It was loaded up with debt and doomed from the start because the way the debt was set up, there was no incentive to save the company, the incentive was to liquidate. It’s oversimplifying somewhat, but in a nutshell what we’re talking about.”

What comes next for retail is happening now, he also said, but the picture isn’t all clear just yet.
For grocery stores and other big retailers selling commodities, it could mean fulfilling e-commerce orders using robots, to conquer the efficiencies. For specialty retailers, showrooms, like Nordstrom’s Local and Bonobos’s Guideshops, allow the best of both worlds, connections in stores with the ease of online shopping. But not enough retailers are taking such approaches, according to Lee Peterson, executive vice president of brand, strategy and design at retail design firm WD Partners. “Showroom stores – where are they?” he told Retail Dive in an email. “Specialty retail isn’t trying what they know Bonobos was successful at. I was at a new ‘lab’ store recently and voila! It’s a store, same as the old store, only smaller, with [gimmicks]. That’s a lab?? Has no one heard of ‘fail fast’ in specialty retail??”


Amazon Go Isn’t The Only Game In Town When It Comes To Autonomous Retail

By Dees Stribling, Bisnow, August 19, 2018

During the eight months since Amazon opened its cashierless retail operation in Seattle, interest has been high among other retailers to test and even roll out their own automated systems.

Not all cashierless stores are going to be near the nation’s tech hubs like Amazon Go. In Indiana, for instance, convenience store chain Ricker’s is rolling out what it calls “frictionless checkout technology” in its 56 locations. The system is facilitated by an app called Skip that allows customers to scan items as they shop, and then pay by way of a linked credit card as they exit, without the assistance of a clerk. Skip calls the system a “hybrid of mobile pay and Amazon Go.” The system is slated to be fully operational by September at all Ricker’s convenience stores, which are owned and operated by Ricker Oil Co.

Closer to the beating heart of the tech world in Mountain View, California, the considerably more upmarket Inokyo (rhymes with Tokyo) is launching a prototype cashierless store more like Amazon Go. “Cashierless stores will have the same level of impact on retail as self-driving cars will have on transportation,” Inokyo co-founder Tony Francis told TechCrunch. Shopping at Inokyo also involves downloading an app and a linked payment method. Customers receive QR codes, and then cameras in the shop track shoppers (without facial recognition software) and what they pick up. Customers scan the QR code before they leave the store, completing the transaction. In earlier versions of the system, customers didn’t need to scan before leaving, but TechCrunch reports that the psychology wasn’t right. The process was so seamless that customers felt as though they were stealing.

Ricker’s and Inokyo and Amazon Go are only glimmers of bigger things to come for cashierless retailing, according to estimates by Juniper Research. Amazon Go and other “invisible payment” technologies aimed at reducing or removing physical checkouts from the retail experience will process more than $78B in transactions by 2022, up from $9.8B in 2017, a study by Juniper found. The technology, currently in only a few locations, will be in over 5,000 stores nationwide within five years, the company predicts. The number of checkout apps will grow from 4 million to over 30 million over the same period.


Household enthusiasts’ spend 50% more than millennials

By Dan O’Shea, Retail Dive, June 5, 2018

Dive Brief:
• “Household enthusiasts,” a group defined as savvy millennial or Gen X shoppers in charge of most purchasing decisions for a household, spend 51% more than the broader segment of millennial shoppers, according to a study from digital coupon company RetailMeNot.
• The study, based on a survey of 531 household enthusiasts, further noted that this group makes purchases in brick-and-mortar stores at least five times per month and shops online an average of 3.6 times per month. However, 84% also shop on mobile devices, with 72% saying they do so because it allows them to shop anywhere at any time.
• About 67% of those surveyed reported they would give retailers and brands more information about themselves to gain access to a more personalized shopping experience, which 53% admitted would help that seller earn their loyalty.

Dive Insight:
Retailers and brands are getting to know the heads of households all over again. Younger shoppers these days are more likely to be interested in mobile shopping. The study also found that 87% of household enthusiasts multitask while they shop online, and 82% do so while in physical retail locations — presumably with much of the multitasking occurring on mobile in both scenarios.

But this demographic also desires a personal bond with retailers and brands and are more comfortable with the notion of trading their own personal data for a more personalized shopping experience. According to RetailMeNot’s study, they also like curated e-mails, with 67% of those surveyed saying they enjoy personalized e-mail reminders from brands and retailers that highlight previously viewed products, and may also contain personalized offers. In fact, 76% say an offer or discount is the largest factor in their purchase decisions.largest factor in their purchase decisions.


US specialty apparel retailers can’t quit discounts

By Daphne Howland, Retail Dive, May 14, 2018

Dive Brief:
• American apparel retailers in the first quarter continued to be forced into discounts. American Eagle Outfitters’ discounting in April hit a seven-year high after trending lower in March, and Gap Inc.’s discounting also hit seven-year highs in February and March, though they ended the quarter in April slightly lower, according to a Q1 U.S. Apparel Discounting Index from Morgan Stanley.
• Abercrombie & Fitch’s discount activity trended higher each month of the quarter, according to the report. Department stores also saw a lot of discounts in the quarter, with Nordstrom promotions trending higher each month and J.C. Penney’s promoting more in April after five-year lows in February and March.

Dive Insight:
The holidays are a high-pressure time for retailers to meet consumer expectations for blockbuster sale prices, and discounts often continue into the first quarter to clear inventory. But U.S. apparel retailers have been buffeted by the low prices found at fast fashion stalwarts like H&M and Forever 21 and at off-price retailers like T.J. Maxx, and that is squeezing margins.

“We want to keep our customer excited and engaged all year round,” American Eagle CEO Jay Schottenstein told analysts in March, according to a transcript from Seeking Alpha. “We are confident and know we can do that in the first three quarters of the year with less promotional activity. And Q4 is just a highly promotional time period … just like any other brand, we have to play to win in that quarter. And that’s what we did. We played and we won.”

The specialty retailers called out in Morgan Stanley’s report say they are working to get their merchandise mix right in order to avoid over-stacking sale racks. Much of that involves righting the supply chain, speeding up production and employing analytics to ensure that supply meets demand.
“What we’re really trying to do is to make sure that we build a plan around the product that we have and that we don’t over-discount product even if it comes in late relative to its out dates,” Gap Inc. CEO Art Peck told analysts in March, according to a transcript from Seeking Alpha. “So again, traffic is strong and we’re working to make sure the rest of the levers in the box don’t move negatively as well, but we do expect there to be some promotional pressure.”

“We have proven to be able to step away from promotional activities as we see the customer responding to our assortments and it’s really the combination of getting the voice, the marketing, the product and the experience all aligned,” Abercrombie CEO Fran Horowitz said in March, according to a Seeking Alpha transcript of the company’s first quarter call with analysts. “And as those things fall into place, we have been able to in the past and we expect to continue to be able to step away from promotional activity and drive that regular priced business back into the business in 2018. And then in terms of driving traffic, there are a number of levers that we’re using to drive traffic. And we’re moving away from having promotions be the only lever.”

Promotions do continue to be a lever for retailers, although Morgan Stanley analysts did note that, overall, they are abating.


More than half of retail sales are influenced by digital

By Daphne Howland, Retail Dive, April 2, 2018

• Last year, just over half of retail sales in the categories studied by Forrester Research — online sales plus digital-influenced offline sales — were impacted by a digital interaction, according to a study emailed to Retail Dive.
• After years of surging, mobile commerce growth is easing up, and is now no greater than e-commerce growth, according to the report. Last year, 65% of U.S. online adults accessed the internet from a mobile phone daily, versus 71% the year before, Forrester found. Just 28% said they made purchases on mobile at least monthly in 2017, down from 35% who said they did so in 2016.
• Only a little over a third (36%) of retailers Forrester surveyed had buy online, pickup in store in place by 2016, and just 7% implemented it last year, according to the report. Yet, according to another Forrester report emailed to Retail Dive, multi-touchpoint consumers are very valuable, and, by 2021, digital touchpoints will influence 41% of U.S. and 38% of E.U. offline retail sales.

The mixed picture painted by Forrester comes from a natural peaking in growth in digital interactions, especially on mobile considering there are only so many phones to be had. But the wall that retail is apparently hitting also comes from the fact that many retailers have yet to embrace omnichannel services. Specifically, the massive grocery market remains by and large offline.

Customers need opportunities in both the digital and physical realms, both Forrester research teams said in their reports. That has led not just to omnichannel services and the revamping of mobile apps and websites on the part of legacy retailers, but it also seems to have made brick-and-mortar stores an inevitability for pure-play e-commerce retailers.

In addition to customer-facing services, though, retailers must improve how they collect and analyze the information that they’re already collecting. “Most organizations collect customer data from various sources, but only a few effectively translate this data into actionable business insights,” wrote the team led by Forrester e-business and channel strategy analyst Michelle Beeson. “In fact, 63% of global data and analytics decision makers are implementing or upgrading initiatives to improve the complete view of the customer across channels.”

Retailers must work to drive traffic to stores even if transactions eventually happen online, according to Kodali’s team. “It’s not a bad thing that so many sales remain digitally uninfluenced,” according to Kodali’s team. “Retailers should be careful to not pursue digital strategies just for the sake of it because shoppers may not always care about digital tactics or touchpoints.”


Chef David Chang: Restaurants are replacing retail as anchor tenants, and ‘everyone wants one’

By Kellie Ell, CNBC, February 18, 2018

For better or worse, new eateries and the attention they attract have turned the restaurant business into a boom town, restaurateur David Chang told CNBC in a recent interview.

Chang, who owns 23 restaurants around the globe in such cities as New York City, Los Angeles, Sydney and Toronto, recalled a time when it wasn’t always this way. He spoke to CNBC from Pyeongchang, South Korea, the site of this year’s Winter Olympics. “I remember trying to find leases and people were like, ‘No. We don’t want a restaurant in our building. It’s going to decrease the value because of problems with smells or whatever,'” Chang said of the first restaurant he tried to open back in 2004 in New York City. “And now, everyone wants a restaurant. Restaurants now are anchor tenants in buildings. That’s a joke.”

Today, restaurants and food establishments might occupy between 20 and 40 percent of a shopping center. A decade ago it was closer to 10 or 15 percent, according to commercial real estate and investment giant CBRE Group. Gone are the days when the public embraced a (now largely debunked) myth that the overwhelming majority of new restaurants fail in the first year. “The problem is, there are too many restaurants,” Chang said. “The whole idea that food is hotter than ever before because people just realize that with the younger generation, that’s where marketing dollars, real estate dollars, everything is coinciding with how people eat,” the Korean-American chef told CNBC.

‘Destination restaurants’

Department stores and other big-box chains, once considered the anchor stores of malls and shopping centers, are closing up at record pace as shopping shifts online. Yet in the last decade, the same locations have become hotbeds for food, as consumers move toward a quest for the experiential. “In the old days, food courts had indistinguishable food,” said Jerry Storch, chief executive officer of Storch Advisors, a retail advisory firm. “Now they have destination restaurants, upscale and fine dining restaurants. People go for the food.” Storch added that “there’s been a permanent shift in consumer behavior.” He said having a photo of your food on social media is almost better than actually buying it.

The multimedia experience inherent in contemporary dining is one reason why Chang’s latest venture is a Netflix docuseries. The show, ‘Ugly Delicious,’ is available on Netflix later this month. It follows the chef and founder of Momofuku Group as he travels the world in an attempt to experience delicious — albeit sometimes ugly — cuisines. Ugly Delicious tries to bring a culture of food to scale, he said. Chang described the docuseries as an honest conversation about what food trends people are talking about right now, amid an over saturation of food options.

“It’s a weird time to be a chef, because you have opportunities that weren’t presented before,” Chang said. Still, “you can only worry about making the best quality product possible and hope that that’s still going to win out, through word of mouth or however,” he said. “You hope someone watches it, just like a recommendation at a great restaurant. You hope someone that eats or watches it, says, ‘Hey, you have to watch this. You have to eat this.’ That kind of enthusiasm is infectious,”Chang added.


Treasury Secretary tells Congress that the administration supports uniform taxation

By Mark Huffman , ConsumerAffairs, February 16, 2018

President Trump supports legislation allowing state and local governments to collect sales tax on all internet purchases. Addressing a hearing of the House Ways and Means Committee, Treasury Secretary Steven Mnuchin says the president “feels strongly” that consumers should pay the same sales tax on online purchases that brick and mortar retailers collect.

When ecommerce began to take off in the 1990s, online retailers for the most part did not collect sales tax. It was a break for consumers, but brick and mortar retailers complained about unfair competition. State governments fretted that they were losing tax revenue.

Today, many retailers – but not all – collect state sales tax when a consumer completes an order. In most cases, online retailers charge sales tax if they have a physical presence in the state. Last year, Amazon started collecting sales tax in all 50 states and the District of Columbia, although it does not always charge tax on purchases from third-party vendors. Mnuchin told lawmakers the President believes sales tax should be collected on all purchases, no matter how they are made. Trump has previously said that not collecting state sales tax gives an unfair advantage to online retailers.

Any internet sales tax law would have to take a 1992 Supreme Court ruling into account. More than a quarter century ago, the high court ruled that requiring out-of-state retailers to collect sales tax for the jurisdiction of each and every customer would be an unreasonable burden. At the time, however, internet sales were minuscule. It’s a different story today, and many states feel they are leaving millions of dollars on the table. According to the U.S. Census Bureau, ecommerce sales in the U.S. in just the fourth quarter of last year were estimated to be $119 billion. There is no data showing how much of that revenue was not taxed.