Retail Centers Continue to Evolve

Retailer stock prices recently jumped, as many of them saw strong quarterly results.  Yet retail centers are currently subject to several market trends, some of which are seemingly contradictory.  These dynamics should be examined as part of any investment decision.

Retailers Have Been Seeing a Boost

A host of retailers recently issued strong results or forecasts.  Discount chain Ross Stores, shoe store Foot Locker, and clothiers Gap and Abercrombie & Fitch all saw their stock prices recently soarEven J.C. Penney surprised to the upside.

Kristina Hooper, a global market strategist with Invesco, recently said the companies were giving a double dose of good news: consumers are spending more, and there are some signs that some retailers are figuring out how to survive even as purchase are increasingly made online.

What’s Driving This Trend?

One of the drivers of these recent successes is that Americans are increasingly optimistic about the economic outlook. A measure of consumer sentiment, released in October ‘17 by the University of Michigan, rose to its highest level since 2004. The U.S. unemployment rate has hit a 17-year low, and wages have ticked up in recent months. Some observers believe that those drivers should boost spending and broaden economic growth in the coming months.

The reasons, too, could be reflective of a recent strategic change seen across much of retailing.  Many retailers seem to be “aiming higher” in becoming a desirable place to shop. “People don’t have to go to stores anymore; they have to want to go,” said Lee Peterson, an executive vice president at WD Partners, a strategy, design and architecture firm. “And that goes a long way when thinking about what retail has to become.”

Apple, with its chic showroom-style retail stores, was a pioneer in “experience” retailing.  And increasingly, some believe that other physical retailers will need to be less about facilitating the pickup of a product and more about providing unique experiences. Many brick-and-mortar retail chains are trying to lift sagging sales using this strategy: cozier spaces that sell very little of anything. And showrooms — a retail model popular with bridal designers, car dealers and, recently, online apparel start-ups — are now inspiring mass-market heavyweights like Nordstrom and Urban Outfitters.

Will Showrooms be the New Retail Experience?

Department store retailing generally is not out of the woods yet.  Macy’s announced the closure of 68 stores nationwide and cut 10,000 jobs early this year, and comparable sales — those at stores open at least a year, a key gauge of retail performance — fell 4% in the quarter ended Oct. 28 compared with a year earlier. The company forecast a comparable-sales drop of 2.2% to 3.3% for its full fiscal year.

But the new “experience” strategies are interesting. Retailers are experimenting with small showrooms with few or no products, but often with impeccable customer service, as they try to compete with e-commerce companies.

Nordstrom recently opened its first showroom-style store, called Nordstrom Local,  on an upscale section of Melrose Place in Los Angeles. The store was designed as a kind of neighborhood services center, where customers can get manicures, have clothing alterations made, pick up goods that were bought online, or even or sip wine from the store’s bar. Customers do not just come to shop — at least not as we normally think about shopping. Instead, customers may work with personal stylists, for example, to use tablets or phones to put together clothing ensembles. The individual clothing articles are often requested from a nearby full-size Nordstrom store and promptly (within hours, sometimes) delivered for customers to try on amid the comfortable decor in Local’s dressing area.

The issue with the showroom model is that the approach runs somewhat counter to the usual practices mall-based retailers, which are typically known for providing lower prices, higher volumes and impulse purchases. Many retail chains, then, are exploring the model cautiously.

But other retailers are also trying out the model.  Urban Outfitters opened a temporary showroom in Los Angeles last year, displaying furniture, artwork and decorations that shoppers could order online at kiosks. This fall, the company, which is known mostly for its apparel and beauty offerings, put furniture showrooms in several of its stores; its sister company, Anthropologie, did something similar with scenes of living and dining rooms.

Other Strategies Are Also Being Tried

Showrooms are just one experiment.  Major chains are trying everything to adapt to market pressures — a wardrobe-in-a-box subscription service from Gap for babies, a personal shopping option from Walmart, shrinking stores from Target and Kohl’s.

The way we choose to shop, and the way retailers decide to sell us things, is an ever evolving relationship. And as new ideas emerge and come to dominate (“It’s one place with everything — a department store!”) they inevitably fall out of favor and give way to the next brainstorm (think Amazon’s 1-Click).

One reason for the success of some retail operations are property owners who can “pivot to meet market demands,” said DJ Busch, managing director at Green Street Advisors. “Those are the ones that can weather the changes in the marketplace.”

For many owners of retail properties, the current strategies often involve more emphasis on dining and entertainment. For other properties where that approach is insufficient, owners may be looking at sacrificing mall space for office or residential development.

Yet Online Retailers Are Moving the Other Way – Into Malls

The crossover need seems to work both ways.  As e-commerce grows, even previously online-only retailers like Amazon have ventured into brick-and-mortar solutions to add to and enhance their online operations.  The brick-and-mortar retailer isn’t dead – it’s just evolving.

Many retailers are converting empty mall space into pick-up or returns facilities, where customers can (for example) return goods that may have been purchased online.  At the same time, some online merchants are heading the other direction – opening brick-and-mortar locations either through short-term leases of pop-up stores or long-term tenancies like Amazon’s move into Manhattan’s Time Warner Center.

More retail centers, including those at town-center locations in smaller cities, are housing Amazon Lockers, which allow Amazon’s online customers to pick up and return packages at their convenience. Other online retailers without any physical stores are looking to provide options for their customers to drop off unwanted purchases in person in shopping centers where they can get immediate refunds. Such developments could provide needed relief to shopping malls across the U.S. as they grapple with a rise of e-commerce and some retailer bankruptcies.

Columbus, Ohio-based landlord Washington Prime Group in November started rolling out Amazon Lockers in 50 of its retail centers, and is looking to add digital screens that offer coupons and promotions to draw shoppers to restaurants and apparel stores nearby.  “We have to be creative,” said Lou Conforti, Washington Prime’s CEO. “People are so hungry in Middle America for interesting products.”

And “Hands-On” Still Counts

Online data, ironically, points to the continued relevance of physical retail stores.  Searches for “locations near me” are on the upswing, indicating that consumers want “hands on” before they buy.

Brands are expected to continue to open their own locations. The physical presence concept holds real appeal for any brand that wants to effectively tell its story (not to mention control its sales, inventory, and service ethos). For online-only brands retailers, a pop-up storefront offers an opportunity to connect with customers face-to-face.

Amazon, Google and Facebook have rolled out numerous pop-up stores and roadshows around the country showcasing their gadgets, such as speakers with the latest intelligent voice functions (Amazon Echo and Google Home) or virtual reality goggles and wireless controllers (Google’s Daydream View and Facebook’s Gear VR). Amazon has been the most active, with 31 pop-up stores in shopping centers around the U.S., and it plans to roll out grocery stores.

Malls are in Transition

The traditional mall is being redefined as a multi-purpose space that showcases not only traditional staples such as clothing, fashion accessories, home goods, and food but also neighborhood-style shops and services. In the new mall, you’ll find everything you need to live—from doctor’s offices to schools and libraries, hair salons, grocery stores, real estate and business offices, restaurants, movie theatres, and, yes, residential apartments. (Once you’re in, you’ll never want to leave!) Hudson Yards (in Manhattan) may provide the new standard.

Grocery and drug store anchored centers, too, remain productive and in high demand. “Daily needs” traffic is a powerful force.  In general, though, households are spending more on services than on goods, according to Jack Kleinhenz, chief economist of the National Retail Federation.   “Experiential”shopping, with a focus on eating and being entertained, does seem to be key these days.

Lawrence Fassler
Corporate Counsel
Lawrence has over 15 years' experience as a corporate attorney and has also run a real estate construction business. He previously worked with Realty Mogul, AVE (acquired for over $4 billion), Shearman & Sterling in NYC, and Cooley in their Sand Hill Road office.
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