The old adage says, “There is a recession when your neighbor loses his job, but it is a full-blown economic depression when you lose yours.” Much the same can be said about the “retail apocalypse” that many have predicted. For those who adapt and innovate, the changing retail market will be a correction. But for those who don’t, the changing retail market will indeed be an apocalypse.
A look at the state of retail real estate explains. Those in the industry know that the United States has an over-abundance of retail real estate. Estimates are that the U.S. has approximately 24 square feet per capita of retail real estate, while Australia has approximately 11 and the United Kingdom has approximately five.
Today, e-commerce represents about 14 percent of all retail sales. To add to the this, changing demographics have made traditional retail space less desirable as younger Americans are more interested in enjoying “experiences” than material goods. And to top it all off, many retailers have crushing debt loads from being taken private. All these factors have resulted in established businesses such as Payless and Gymboree declaring bankruptcy and fueling the argument that there’s a retail apocalypse gathering steam. But the reality is much more nuanced.
For example, Dollar General is scheduled to open 975 new stores this year alone. Nordstrom’s, a traditional anchor-tenant mall retailer, has experienced significant growth and appears poised to survive retail’s recent challenges through its physical stores combined with an “omni-channel” approach. The Irvine Spectrum Center is unveiling a $200,000,000 renovation and re-investment in retail.
And of course, Amazon—the king of e-commerce with 40 percent of all online retail sales—bought a bricks and mortar retailer (Whole Foods) and is opening distribution centers nationwide. The answer is that physical retail is not dead, it is just going through a transformation into a new phase. This transformation is driven by changing demographics but constrained by the limits of the internet and the demographics themselves.
To put it another way, no one has yet figured out how to get a haircut over the internet. And unless virtual reality headsets become much more sophisticated much sooner, no one has figured out how to enjoy an evening at a restaurant over the Internet. It is these experiences that the Internet cannot deliver, and this limitation is driving many retailers and property owners to change their approach.
The Irvine Company has made no secret that it is positioning Irvine Spectrum to be an “experiential” mall. Many retailers have found success with smaller stores that are “experiential” in approach that deliver the brand’s look and feel directly to the consumer. And many consumers enjoy the convenience of returning on-line purchases at a retail store where the consumer can interact with a human being and can receive immediate credit.
And a retail space can deliver the retailer’s “social consciousness,” now a key decision making factor to many consumers, much more effectively than a website can. Obviously the environment has changed, but how does one adapt to the changing environment? The story of the $6 dollar haircut answers the question.
The story goes like this: there was a barber in a small town who had a sign that advertised $10 haircuts. His business was booming until a competitor opened across with street and started advertising $6 haircuts. The barber’s business started suffering and he didn’t know what to do until he hit upon a genius idea. The next morning he put up a sign that said “We fix $6 haircuts” and his business returned. This story summarizes the current state of retail because bricks and mortar retailers understand that it is impossible to compete with online retailers on price, but there are other ways to compete and succeed with online retailers. And these other ways to succeed present opportunities for those who serve the bricks and mortar retailers.
First, retailers have come to learn that Omni-channelling, i.e., selling both online and in physical stores, works well. Some products, including many luxury items, don’t sell well online but sell well in physical locations because part of the product’s appeal is the experience one gets from buying the luxury item in the store. Some products have to be inspected quickly and easily before making a buying decision and these products have to be “show-roomed” in stores so that consumers can physically touch the product before its purchased.
Moreover, the loss of some retailers presents “we fix $6 haircut” opportunities as landowners realize the retail space can easily be converted to restaurants, offices, workout centers, and in some cases, residential units closely attached to malls or other locations where shopping and entertainment are close by. And just like the retailers who have learned to pivot quickly and effectively to the new reality, those in the construction industry must do so as well.
First, the physical nature of retail real estate has changed. Instead of being warehouses themselves containing huge amounts of inventory, retail real estate is now smaller (less space for inventory), more “experiential,” more socially-conscious and “Omni-channel.” Many successful projects have become destinations because of their mixed-uses of residential, office and retail, and also because their owners have recognized that appearances matter more in this social media world where “checking in” at a physical location is how many communicate with friends.
And because of a recent Supreme Court decision, online retailers have lost a tax advantage they had over physical retailers—so expect the push for more online retailers opening physical space to increase. And of course, those large physical spaces no longer being used for retail can often become the distribution centers that online retailers need to deliver “online sales” more quickly to their consumer’s homes.
Bad retail is dead, but those retailers that are flexible and adaptable will survive. Likewise, those providers who are flexible and adaptable to their customer’s needs will also survive and will learn to thrive “fixing $6 haircuts.”
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Manny Farach, a member of the McGlinchey Stafford law firm, is board certified by The Florida Bar in the areas of Real Estate Law, Business Litigation, and Appellate Law (one of only 15 members of The Florida Bar who are simultaneously certified in three areas of practice) and focuses his practice in these areas. With more than three decades of both transactional and litigation experience, Farach combines legal knowledge with a practical understanding of the business community.