Retail is no longer just about what people buy - today the focus is also on how they buy. While e-commerce has proven to be a formidable challenger to traditional retailing, brick-and-mortar is rising to the challenge. The key to success for real estate professionals will be understanding changing elements tied to physical stores, from lease terms to sales metrics to build-out options. It will also require the ability to understand technology and, most importantly, the changing preferences of American shoppers.
Twenty years ago, when you wanted to buy something, you had to go to the store - it wasn't a choice, it was an obligation,” says Melina Cordero, global head of retail research at CBRE. “But today, the store is no longer an obligation; it's a choice. We can choose to buy online as well as in the stores. In addition, we have more choices than ever about where and from whom we buy.”
This change has forced retailers to take a hard look at brick-and-mortar storefronts, and in the process, they've discovered physical stores can offer things the internet can't. Online shopping gives customers vast selection, painless purchasing, and convenient delivery. But in-store shoppers can see and interact with products. They can take their purchase home right away, and, increasingly, get extras in the way of service and experience.
Opening one new physical store increased overall traffic to a retailer's website by an average of 37 percent, according to the ICSC Halo Effect report.
“We know from data and surveys that customers prefer omnichannel,” says Cordero. “They want the ability to browse online, go into the store, and try it on, but then make the purchase on their phone and have it delivered to their home.” Omnichannel shoppers have buying power as well. “The Halo Effect,” a recent study by the International Council of Shopping Centers, reports that 52 percent of omnichannel shoppers have an annual income of more than $50,000, with 16 percent earning $100,000 or more.
Online Goes to the Store
The newcomers moving onto the real estate stage are clicks-to-bricks retailers - online-only businesses who open physical stores. In a recent study, JLL noted that e-commerce retailers plan to open 850 stores in the next five years. High-profile names in the field include eyeglass retailer Warby Parker, men's clothiers Bonobos and Untuckit, fitness apparel maker Fabletics, and mattress merchant Casper.
Cost is one factor driving the migration. “At the end of the day, in the online world, you can only go so far with marketing,” says James Cook, director of retail research for the Americas at JLL, an author of the study. “You can only do so many Facebook and Google ad words buys, and they're expensive now - you might be spending $10 a click just to get customers to come to your website. Now imagine the same digital brand opens a pop-up in SoHo in New York. For a similar amount of spend, they get well-heeled shoppers and travelers from around the world physically interacting with their brand. It's a huge marketing advantage.
“Online retailers realized that opening stores is a necessity, both to grow revenue past a certain point and to protect profit margins,” Cook says.
The stores tend to start as pop-up locations in urban areas. “When that works,” he notes, “they start to develop and open up a physical location, and after that there's a rollout.” Most of them are apparel and accessories retailers - although furniture and housewares have entered the market as well - located on either coast. The study found that New York and Los Angeles are the most popular cities for these pop-ups. Things may not stay that way for long, though. “Once they've hit the major markets, if they're looking to continue to grow, they're going to be looking at secondary markets as well,” Cook says.
“It's really dependent on the retailer. If you're a fashion brand, you may only want to open a few physical locations, be it SoHo or downtown L.A. But a lot really want to break through and have more mass appeal. Warby Parker started out in SoHo, but now they're in Class A malls across the U.S.”
Opening a physical store can also benefit a retailer's website traffic as well. The ICSC “Halo Effect” report studied the relationship between the two and reported that opening one new physical store increased overall traffic to a retailer's website by an average of 37 percent. Emerging brands - those less than 10 years old - experienced a 45 percent bump in website traffic after opening a store.
One characteristic many of the stores share is their quest to add standout elements to the shopping experience. “I think all of them are trying to do unique things, because they're digital native retailers that didn't start in stores. They're not interested in doing a normal, boring store,” says Cook. He cites the SoHo pop-up opened by shoemaker Allbirds that features a human-size hamster wheel to let customers try out shoes by taking a spin. He also applauds Winky Lux, an online cosmetics seller who opened the Winky Lux Experience in SoHo last year. Customers stroll through seven decorated rooms where they can sample cosmetics and - more importantly - take social media-ready photos of themselves in whimsical settings. “It's targeted at younger women who are heavy users of social media,” says Cook. “It's a perfect way to market yourself.”
The Benefits of Experience
Emphasis on the experiential element of shopping is gaining traction even for traditional retailers, covering a broad spectrum of features and services aimed at letting customers interact with merchandise. It's a valued advantage that online-only merchants don't have, notes Cordero. Lululemon offers in-store yoga classes, and Samsung opened three stores that let customers try out virtual reality headsets.
Another component of retail not available to online shoppers: services. Stephanie Cegielski, vice president of public relations at the ICSC, notes that Nordstrom, for example, has opened Nordstrom Local - small locations that, rather than offering products, focus on services such as manicures, tailoring, and personal stylists. Office Max and Staples offer coworking spaces in their big-box stores with Wi-Fi, coffee, and access to the stores' products. Drugstores CVS and Walgreens have unveiled concept stores that focus more on health and wellness, including additional space devoted to medical products and services, nutrition seminars, and health screenings. Other retailers use technology to make the shopping experience run smoothly and offer smart dressing rooms and mobile payment options. “Technology plays an active role in retail, from social media to coupons and mapping centers on Waze and other platforms,” says Cegielski.
Still, long-established retailers are adopting practices that take advantage of online convenience, making it easier, for example, to order online and pick up in stores. Cegielski points out that Walmart has established dedicated click-and-collect areas inside stores and in parking lots. Other retailers are adopting a showroom model, where customers can browse displays, chat with sales associates, order online in the store, and have their purchases delivered. In that vein, IKEA is opening five “city center” stores in the U.S. - smaller, more convenient urban spaces - with this approach.
Leases and Lending
While all these innovations offer opportunities for commercial real estate professionals, issues can arise over the physical layout of retail space to lease terms and financing.
Take the proliferation of clicks-to-bricks stores. Since many start out as pop-ups - and many don't have a long-established credit history - the stores are often suited for shorter-term leases. “There's a huge amount of flexibility required when these brands are in the beginning stages of this process where maybe they only want to do a three- or 12-month lease,” says Cook. “If you're an agent representing an owner who's not used to short-term leases, there's an educational process that's required.” Cegielski concurs. “It's important for landlords to be open to creative leasing solutions such as temporary and short-term contracts,” she says. “It's difficult for brands that haven't existed for 10 years to commit to 10-year leases.”
When landlords move toward shorter or more flexible lease terms to attract traffic-driving tenants who have less credit, the lending community can be resistant. “When it comes to retail, they're going to need to relax some of those standards and be a little more open to the changes that are taking place,” says Cordero.
Build-out costs can also be a sticking point, particularly with retailers requiring unconventional spaces for an experiential component. “The retailers may go to the landlord and ask for some help financially to build out these spaces, with the argument that this is ultimately going to drive traffic to the center,” says Cordero. More challenging, though, she says, is measuring sales. “You may have a store offering yoga classes, but if they're free, they can be encouraging online sales that aren't captured in the store. Does the landlord see the financial benefit of supporting this experience?”
One possibility, she says, is that there won't be one hard-and-fast metric, such as sales per square foot. “It may be a combination of traffic and sales; it may be having a more holistic view of sales, that combines both online sales in a marketplace and sales in that store,” Cordero says. “It's an evolving space, but one we've got to all figure out together.”
Landlords also need to consider tenant mix. “The tug of war in retail right now is what we call credit versus cool,” she says. “You can get in all-credit tenants, but if they don't drive traffic to your center, are you winning? Or you can get in cool tenants who drive traffic and have decent sales, but because they don't have credit, are you saying it's an underperforming center?”
One solution, she says, is pursuing a balance of both types of tenants, although, “even that's challenging in some cases, where you have to justify to investors or boards and say that we should take a risk on this digital brand or this up-and-coming restaurant because it's going to drive traffic to the credit tenants. It's a hard argument to make, but it's happening.”
Some have addressed the issue head-on. California-based developer Macerich Co., for example, has introduced BrandBox, a clicks-to-bricks showplace in its Tysons Corner Center in Northern Virginia near Washington, D.C. It's a pop-up paradise with movable modular walls and shelving, technology to help measure foot traffic, and, of course, flexible leases for digital retailers. The Shops & Restaurants at Hudson Yards in Manhattan feature the Floor of Discovery, a space dedicated to digitally-native retailers and experiential retail.
Other developers have redeveloped centers into properties with a specialized or service focus - such as health care, fitness, or food - or have added more mixed-use elements such as residential, grocery, or office, depending on the market. “Many communities are seeing a shift in demographics who are looking to live and play where they work and vice versa,” says Cegielski. “This has led to a rise in mixed-use properties, but the tenant composition will vary - it's important for shopping centers to respond to the needs of their communities.”
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